October 2012

October 26, 2012 04:30 p.m.
Your Retirement Finance Week in Review

The markets had bumpy rides the law few weeks.

One cause of the market swings is earnings season. Investors should have been prepared for lower earnings and revenue because of the poor economic data since last spring. But they apparently were used to corporations being able to produce good numbers despite a slow economy. Many were caught by surprise the last couple of weeks when companies not only missed expectations but also made cautious forecasts about the future.

Investors also are wondering if the positive economic surprises in the economic data of the law few weeks are sustainable. There’s good reason to wonder with the wide array of problems and headwinds out there. You know what they are, so I won’t repeat them here. Some of the recent good news appears to be due to temporary or one-time factors, and other positive trends could be overwhelmed by the headwinds.

Most importantly, it appears investors became complacent about the power of the Federal Reserve to boost asset prices. In the past episodes of monetary stimulus, the Fed didn’t act until stocks had declined significantly. This time, investors anticipated Fed action, so stocks didn’t decline. When the Fed finally did act, the actions seem to be anticlimactic and already factored into market prices. That could mean flat or declining markets until earnings and economic data catch up with stock prices.

The Data

The most important economic data this week were the earnings reports, many of which from key companies were disappointing on both revenues and earnings.

The first estimate of the third quarter GDP came in at a 2% annual rate. That is higher than the previous quarter’s 1.3% and slightly above expectations. It shows we’re still bumping along at 1% to 2% GDP growth, which is not enough to reduce unemployment. But the number was not as positive as first appears. It was led primarily by personal consumption and residential investment. I’ve reported that personal consumption increases are stronger than personal income increases. Households are reducing savings to increase spending, and that’s not likely to increase. Federal spending also provided a boost. Business spending was flat. That’s consistent with other reports and is negative for the prospects of higher future growth.

The GDP price index rose 2.8%, which is a sign of higher inflation. But after excluding food and energy, price increases actually were less than in the previous quarter.

Consumer sentiment as measured by the University of Michigan is above a month earlier but slightly below the surprisingly high number of two weeks ago. For some reason, consumers had a burst of optimism early in the month, and it held steady for the last part of the month. Sentiment now is at its highest level since just before the last recession began. But it still is below average and at typical recession levels.

There were a number of manufacturing reports during the week. Overall, they continue to indicate that manufacturing is slowing from the burst it had in the 2009-2011 period when the sector carried the economy. The slow down reflects slow global growth, especially in China and Europe. Business investment is down, and that’s not good for future growth or reductions in unemployment.

Durable goods orders initially were positive. But after excluding the volatile transportation component, they were close to expectations. Importantly, they had negative year-to-year growth. This hasn’t happened many times in the past, and most of the times it happened was before recessions.

The Richmond Fed Manufacturing was negative again, after a surprising positive number last month. The Kansas City Fed Manufacturing Index also was negative after a positive number last month. The Chicago Fed National Activity Index was flat, after a negative reading last month. But the three-month average still is negative for the seventh consecutive month. The PMI Manufacturing Index Flash report was about flat, indicating that nationwide manufacturing expanded modestly in October. The number’s been in a very narrow range since July.

Housing had a positive report with new home sales up 5.7%. This was in line with expectations and the best reading since 2010, when government incentives fueled home buying. But prices of new homes declined 2%. This is why residential construction finally is making a positive contribution to GDP after several years of being a drag. But it still is a modest amount of activity compared to normal times and is a small contribution to GDP. A cautionary report, however, came from the Mortgage Bankers Association. It reported that applications for both home purchases and refinancing declined over the last week. This could reflect a rise in mortgage rates. Pending home sales were flat. New home sales have been outpacing existing home sales for a while.

In summary, the data reveals continued slow growth. Housing is improving a bit, but manufacturing continues to slip. Businesses are holding back investing in new equipment or employees. Without new business investment and expansion, the economy is unlikely to rise above the modest 1% to 2% growth rate and could slip below that if one or more of the economic headwinds becomes too strong.

The Markets

Stocks didn’t have a good week, highlighted by a big loss on Tuesday. Small U.S. company stocks as measured by the Russell 2000 fared best with a loss of less than 1%. Emerging economy equities and the Dow 30 tied for the worst week with a loss close to 1.75%. The S&P 500 and global stocks as measured by the All-Country World Index both finished with losses of about 1.5%.

Most commodities also had a tough week. Gold did best. It battled back from a big drop on early Tuesday to only a 1% loss for the week.  Energy commodities did the worst of all assets for the week with about a 3% loss. Broader-based commodities closed down a little more than 2.5%.

Bonds fared better than riskier assets, but it still wasn’t a great week for bond owners. Long-term treasury bonds scored a 1% gain after being down earlier. Investment-grade bonds were even after a strong rise on Friday. High-yield bonds were down almost 1%.

The dollar had about a 0.75% gain.

Some Reading for You

Is the weak economic recovery an unavoidable consequence of the financial crisis, or could it be stronger with different policies? Several economists are debating that publicly, but it’s not an academic question. If the elections change policies, it could change economic growth. Read one economist’s views with links to others here.

A major expansion of Medicare benefits for those with chronic diseases or conditions could be in the works. Read here.

Physical exercise is better at keeping your brain in shape than mental exercises and other methods, says this article.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

October 12, 2012 04:30 p.m.
Your Retirement Finance Week in Review

Most of the market-moving news and data this week was outside the markets. Perhaps the most important news was that corporate CEOs are about as pessimistic as they were during the depths of the financial crisis, according to Bloomberg. The beginning of the second quarter earnings season has been tepid at best, with only 51% of companies reporting revenues above estimates. Analysts were expecting this earnings season to be the worst since 2009.

The problems in Europe continue to mount. Spain’s credit rating was downgraded, and the country still is unwilling to request the financial help it needs. There also was a report that Europe isn’t using its bailout fund aggressively enough, and the IMF said Europe’s problems are endangering the world economy. You can read a round up of European economic news here.

The Federal Reserve released its beige book, and its conclusions were very similar to what we’ve discerned from the data over the last month. The U.S. economy is growing slowly, and that growth generally is slowing. Manufacturing in particular is generating slower growth. Inflation is under control. The labor market isn’t making much progress, as both jobs and wage increases aren’t changing much.

Major CEOs, especially from financial services companies, are sounding the alarm about the impending fiscal cliff. They want Congress and the President to begin working seriously on the problem before the election. If they wait for a lame duck session and engage in brinksmanship through the Dec. 31 deadline, there could be havoc in the markets and economy. In the meanwhile, companies can’t do much planning. You can read details here.

The Data

There wasn’t a lot of data this week. This was one of those rare weeks when there wasn’t any new housing data.

First, let’s take a brief look at last week’s employment reports. Initially there was a burst of enthusiasm and some conspiracy theories as the headline unemployment rate declined. But the decline largely was due to an increase in part-time workers, most of whom would prefer full-time jobs. Overall, the number of new full-time jobs created wasn’t enough to put many people back to work. Also, wages and hours worked didn’t make meaningful progress. The annual tweakings the government does to the overall data probably will be revised again in coming months and change the numbers again.

This week’s new unemployment claims also caused some discussion with an unexpected drop to 339,000. That’s generally considered a reporting anomaly, and next week’s number is expected to be back to the 360,000 to 370,000 range. Against, that’s an improvement from the depths of the financial crisis but reflects slow economic growth.

The NFIB’s Small Business Optimism Index registered a small decline, with the important hiring and capital outlays segments declining. This is consistent with the index’s readings for some time and keeps the index at deep recession levels.

The recession in Europe and slower growth elsewhere showed up in the International Trade report. The U.S. trade deficit expanded. Exports declined because of weak global growth, and imports increased primarily because of higher oil prices. This is another piece of data that reflects slowing global growth.

The Producer Price Index was higher than expected for the second month in a row, coming in at 1.1%. But that reflected mostly a 4.7% increase in energy. Excluding food and energy, the PPI didn’t increase.

The best news of the week was the Consumer Sentiment report from the University of Michigan. It rose substantially to 83.1. Both the current conditions and expectations segments rose, but the expectations segment rose more. This gives the report the highest number in the economic recovery, but it still isn’t at the levels of a strong economy. It could indicate that economic conditions are better than recent data indicate and the Fed’s new stimulus policy is having some positive effects.

The Markets

It hasn’t been a good couple of weeks for stocks and other risky assets.

The top-performing asset for the week was long-term treasury bonds, with a gain of about 1.5%. Most of those gains were on Thursday and Friday. Second best was gold with a gain of about 1.25%. But gold was up 2.5% earlier in the week and gave up some of its gains on Friday. Investment-grade corporate bonds registered a gain of about 0.75%.

Those were the only major investments that gained for the week.

Stocks had a bad week. They had brief bounces Thursday and Friday mornings, but gave up those gains as the days went on. Large U.S. companies did the worst, with the Dow 30 and S&P 500 both losing around 1.75% for the week. This  more than wiped-out last week’s 1.5% gain, registering about a 1.75% loss for two weeks. Global stocks as measured by the All-Country World Index lost just over 1%. Emerging markets did a little better, losing only 0.5%. For two weeks, all the stock indexes lost between 1% and 1.25%.

Energy prices had some wild swings the last two weeks, primarily because of political events in the Middle East. They ended the week with about a 1.25% gain, though they were up over 2.5% on Thursday. Broader commodity indexes were flat for the week, though they were up 1.5% during Thursday.

Both the dollar and high-yield bonds registered small gains of around 0.5% for the week. But the dollar was up about 1% at midweek and retreated, while high-yield bonds were down over 0.5% at midweek and made up ground.

Some Reading for You

Hidden bank fees still are rising, and they’re getting very creative about them. Read more here.

Are you relying on the central banks to maintain a floor under asset markets? Many investors are. Mohammed El-Erian of PIMCO explains why that might not be a good idea.

Variable annuity issuers can change many of a policy’s terms at will. And they’re doing it. Read the latest here.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.