September 2011
September 27, 2011 10:45 p.m.
Your Retirement Finance Week in Review
You probably noticed that I changed the delivery date of this week’s e-mail. I plan to move our weekly discussion to Tuesdays and Wednesdays. Many of you told me that your e-mail inboxes are crowded on Mondays and Fridays. Tuesday and Wednesday are better days for reading the reports. This gives me time to have the full week’s events in the reports. Now, on to the report…
There’s no place to hide in the markets now. Gold joined the great global sell off on Thursday and Friday, falling about 10% over the two days. This is what happens in financial panics. Investors sell all assets except the safe havens. It’s likely that a lot of the gold sales were forced sales. Investors needed to raise cash to meet margin calls on other investments. They chose to take some of their gold profits to raise the cash. Friday’s decline triggerd the sell signal for iShares COMEX Gold Trust in our recommended portfolios.
Longer term I think gold will remain a good investment. I believe central banks and pension funds will continue adding the metal to their portfolios and investors generally will want a hedge against paper currencies. I expect to return the metal to our portfolios in the future.
An anomaly in the selling panic last week evident in WisdomTree Dreyfus Chinese Yuan. The ETF should fairly closely track the value of the Chinese currency against the dollar. But investors were raising dollars indiscriminately on Friday. China’s central bank controls the value of the currency within China. But the currency trades on markets outside China, and the price there isn’t controlled by the central bank. Usually the ex-China price is very close to the official price. But last week, especially Friday, the prices deviated as investors sold all assets except traditional safe havens. That’s why CYB declined. On Monday, the Chinese central bank increased the official value of the currency again to a record high against the dollar, yet it fell again in markets outside China. I expect China to steadily increase the value of its currency against the dollar to stem inflation and emerging bubbles. While there will be periods of disparity, over time CYB will reflect these changes.
The Data
Last week was a light one for economic data. It wouldn’t have mattered, because events in Europe and Washington are the major drivers of markets these days.
Housing data indicated we’re likely still bouncing along a bottom. The Housing Market Index fell a bit, while housing starts were mixed. Housing starts declined some, while new permits increased. More mixed news: Existing home sales surged for the month of August, but new mortgage applications for purchases declined 4.7%. Applications for home refinancings increased, indicating lower interest rates might be having some effect.
Weekly retail sales declined, but that could be weather-related.
There were two other significant reports. Weekly jobless claims declined 9,000 from the previous week, but the number of 423,000 was higher than higher expectations and much higher than the rate needed to reduce unemployment. The number continues to show a stagnant labor situation. The Leading Economic Indicators was mildly positive, but the details aren’t positive. The major positive in the LEI was an increase in the money supply, and this resulted from investors selling stocks and putting the proceeds into cash. Early indicators are that next month’s LEI could turn negative.
Among the non-government reports worth watching is the Economic Cycle Research Institute weekly indexes. On Wednesday the ECRI updated its leading indices and reported that all of its indicators are negative. The ECRI concluded this means an acceleration of economic growth is not near at hand. It also stated that the current state of the data usually is sufficient to justify saying a recession is on the way and summarized is data as “a compelling recession signal.”
The Markets
It’s easy to summarize the last week’s market action. Almost everything was down. I covered gold and the Chinese currency above. You know that stocks globally are down, because of the large decrease on Tuesday, Wednesday, and Thursday.
There are a couple of bright spots in our portfolios. Treasury bonds are doing well, because of the general flight to safety. Long-term treasury bonds received a boost from the Fed’s announcement of Operation Twist, in which the Fed will buy long-term bonds and sell short-term bonds and notes. Vanguard Long-Term U.S. Treasury Bond is up almost 25% over two months, before including interest payments. Also prospering is Hussman Strategic Growth. Its hedges are paying off, with the fund up almost 10% over two months. DoubleLine Total Return Bond is holding a steady asset value while paying an annualized yield of 8% in month distributions.
Two of our funds are losing value. Cohen & Steers Preferred Securities & Income is declining modestly in the general flight to safety. PIMCO All Asset All Authority is hurt primarily by the flight to the dollar. The fund positioned itself to bet against the dollar. Based on fundamentals, that’s a good position. But in the last few weeks investors decided the dollar is the best of a bad lot. The dollar is rising. I’m watching these funds closely. For now, I think it’s best to ride out this period.
Some Reading for You
There was a fair amount of negative commentary about Europe, stock markets, and the economy last week. John Hussman, Mohammed El-Erian, Barton Biggs, Nouriel Roubini, and others all were speaking essentially from the same text.
John Hussman, in his latest weekly commentary, says Greece must default on its debt.
PIMCO’s Mohammed El-Erian said that the euro and European Economic Union must be saved, and the only way to do that is to have Greece and perhaps a few other countries leave the Union and the currency.
Nouriel Roubini also advised Greece to exit the euro. Roubini approached the issue for what’s best for Greece, while El-Erian was arguing that having Greece leave the euro is best for the rest of the global economy.
Also FEDEX, often a bellweather of the economy, reduced its outlook or the rest of 2011.
Finally, it looks like the CLASS program won’t go forward. This program was part of the Affordable Health Care Act (health care reform) and is supposed to pay people about $50 per day when they need long-term care. It’s also supposed to be self-sustaining. Several actuaries who looked at the data said the program couldn’t be made to work. It looks like that’s the case, with the government terminating the actuary in charge of the project and assigning the rest of the office to other tasks.
September 16, 2011 10:45 p.m.
Your Retirement Finance Week in Review
The European sovereign debt crisis and possible banking crisis were the market movers this week. There was some important data released in the U.S., but investors still are more concerned about the possible contagion that could occur if Greece or another government were to default on its debt.
The market took as good news that the major central banks announced together that they would provide dollar loans to any European bank that needed them. But this is a sign of how bad the problem is at the banks, especially French banks. Rumors have abounded that global creditors were no longer lending to these banks and possibly leading to the kind of liquidity squeeze that caused Bear Stearns, Lehman Brothers, and others to fail. The central bank actions indicate that really was happening. The lending program is only a short-term solution. It doesn’t make either the banks or the government debtors solvent. The only good news in this action is that the central banks learned from 2008 and now will be pro-active in preventing a disorganized failure such as happened with Lehman Brothers.
The other good news related to the crisis is that the principals seem to recognize finally the scope of the problem and are working toward a real solution that would involve the solvent governments coming up with capital to shore up the lending banks after the debtor governments restructure their loans (which would effectively be a form of default). But putting the solution in place still is at least several weeks away, and there’s no guarantee each of the governments will approve it.
Should there be some kind of solution in Europe, that leaves investors to worry about the steady decline in global economic growth and how the solution is likely to contribute to slow growth.
Late-breaking news on Friday is that Jeffrey Gundlach, manager of DoubleLine Total Return Bond, lost a lawsuit filed by his former employer, TCW. But no damages were awarded by the jury. The judge can decide later whether or not to impose damages on Gundlach. Gundlach also won a countersuit for unpaid wages of over $67 million.
It’s hard to tell at this point, but I don’t expect this to affect the operations or performance of DBLTX. I would expect a problem only if the judge makes an award that is so high Gundlach and DoubleLine have to file for bankruptcy liquidation. I’ll re-evaluate as we get more information.
The Data
Some interesting data were issued on Wednesday and Thursday. The monthly retail sales data from the Census Bureau came in below expectations, showing no sales growth in August. This is part of a continuing trend of data showing consumers are cautious and less confident.
The inflation data were mixed. The Producer Price Index was unchanged, but expectations were for a slight decline. Higher food prices offset declines in energy prices. The year-to-year change in the index, however, was high with a 6.5% one-year change in prices. Consumer Price Inflation, issued Thursday, came in above expectations. The CPI rose 0.4% in August and 3.8% for 12 months.
While these are high, I am not worried about inflation. There’s a lag, usually of more than a year, between changes in the economy and changes in the CPI. The inflation numbers continue to reflect the higher commodity prices from the 2009-2010 economic growth. Growth has been slowing for only a few months, so it should take a while for the CPI to decline. I think inflation is due to fall absent a sudden revival in the economy, and that leaves room for interest rates to fall some more.
There were other signs that the economy remains weak. Industrial production increased, but at a modest rate. New jobless claims continued to rise for the fourth straight week. The Empire State Manufacturing Survey and Philadelphia Federal Reserve Survey also continued to report economic decline.
The University of Michigan’s Consumer Sentiment survey showed a slight gain, due to a gain in the current conditions part of the survey. But the expectations for the next six months are at their lowest level since the Iranian hostage and oil crisis more than 30 years ago.
The Markets
Stocks and the dollar had a good week. Stocks will rise about 4% for the week. The dollar rose sharply early in the week but declined the last few days to record a modest gain for the week.
Gold had a wild week, routinely moving up and down $30 to $40 within a day. It looks like gold bottomed for the week Thursday morning and will finish the week with a slight loss. Treasury bonds also had an up and down week, but mostly down. Vanguard Long-Term U.S. Treasury Bond declined from $13.18 to about $12.95. Most of the move came after investors became excited that the central bank move on European debt would solve the problem. I think this is a pause in a bull rally and there’s plenty of room for interest rates to fall.
Investment grade corporate bonds increased slightly for the week, and high-yield bonds declined 1% and more. Corporations have had trouble issuing new bonds or stocks lately, and that continued this week.
The rest of my recommended portfolios were quiet. PIMCO All Asset All Authority continued a modest recent decline. I attribute this to poor performance in what’s been its major holding, PIMCO Total Return Bond.
Some Reading for You
The Federal Reserve issued its quarterly survey of U.S. household wealth, known as the Flow of Funds survey, late on Friday. It showed a 1% annualized drop, after rising 7.4% in the previous three months. The decline was due to falling stock and home prices. This negative wealth effect is likely to decrease spending in coming months.
The poster child for municipal bond defaults, Jefferson County, Ala., reached a deal with creditors to avoid bankruptcy. Creditors will lose about $1.1 million on the $3.14 billion in debt. Residents of the county also will see their sewer rates rise considerably in coming years.
Don’t buy any stocks, yet. That’s the message in this Bloomberg.com summary of market action. It shows that correlations among all stocks and stock markets are extremely high. Stocks now are trading up and down based on how things are going in the European sovereign debt crisis. Fundamentals of individual companies and countries don’t matter until the debt problem is resolved.
September 9, 2011 10:45 p.m.
Your Retirement Finance Week in Review
Currencies, debt, and government policies continued to dominate the headlines and influence the markets. The week started with the Swiss National Bank announcing that it would buy an unlimited amount of Swiss francs in the markets to keep the franc’s price down. The franc’s been rising parabolically with the price of gold. The rise in the franc is hurting Swiss exports, raising the risk of deflation, and creating problems for upcoming debt repayments.
The European debt crisis, of course, still is far from resolved. Fears grow that it will result in one or more countries leaving the European Union or with a series of defaults and restructurings that will damage the capital positions of European banks. The European debt situation overhangs the markets and will continue to do so for some time.
U.S. equity markets seem to rise and fall with the latest rumor on what the Fed will do next. When investors become convinced the Fed will start a new quantitative easing or some alternate strategy, equities rise. When the Fed seems likely to stay in the background, stocks stumble.
Capping off the week were speeches from the President and Ben Bernanke that disappointed investors. The speeches indicate something that underlies the fear and uncertainty of most investors: Policymakers are running out of options. The short-term and quick-fix measures they resorted to in the past have been tried, didn’t work, and won’t work if tried again. Until policymakers in the U.S. and Europe recognize the seriousness and unique nature of the current economic and financial problems, we’ll continue to struggle with slow growth and too much debt.
The Data
There wasn’t a lot of data released in the holiday-shortened week. The week started with a positive surprise. The ISM Non-Manufacturing Index rose to 53.3, above the consensus forecast of 51.0 and last month’s reading of 52.7. Unlike other data for July and August, this index indicates modest economic growth in the service sector.
Retail sales data for the week were mixed, but neither of the readings points to strong retail sales growth. Also, low interest rates aren’t helping the housing market, because applications for new mortgages and refinancing applications remain low.
There was a lot of news from Europe. The Bank of England held interest rates steady, a departure from its recent policy of tightening monetary policy. England’s economy is fading rapidly due to austerity and tight money, so the BOE is considering a change. The European Central Bank also held interest rates steady, after raising them last month. ECB President Trichet also indicated in a speech that economic growth slowed in the last month and that the bank would consider changing to an easier monetary policy.
The U.S. employment picture remained bleak. New unemployment claims rose by 2,000 to 414,000. That’s in the range claims have been in for some time. It indicates employers still aren’t hiring people at a high enough rate to bring down the unemployment rate. Unemployment likely will stay in its current range for some time, and that also will keep a lid on incomes, spending, and economic growth.
The Markets
It was another volatile week in the markets that generally was negative for growth assets (stocks, industrial commodities) and positive for gold and treasury bonds. U.S. stock indexes were down, though they had a big surge on Wednesday. The one-day rise wasn’t nearly enough to offset the sharp losses of the other days.
Gold also had its ups and downs, but it had a good net gain for the week. Gold still hasn’t returned to the peak it reached on August 22, though it is getting close.
Strong gains also were earned by investors in long-term treasury bonds, such as Vanguard Long-Term U.S. Treasury. Long-term interest rates are near modern lows. A slowing economy, declining inflation, and a flight from Europe’s debt problems fuel the purchasing of treasury bonds.
Preferred stock continues to recovery from its brief decline in early August. Cohen & Steers Preferred Securities & Income is up 4% for the last month, before considering income distributions.
Hussman Strategic Growth rises modestly as stocks decline. The rest of our recommended portfolios maintain modest increases over the last month.
High-yield bonds remain the most interesting asset. Unlike other bonds, they’ve been declining with stocks the last few months. They leveled recently, but the recent decline indicates investors are concerned about a new recession and rise in default rates.
Some Reading for You
1. John Makin posted one of his regular economic commentaries for AEI. I always recommend these to you. This month’s post is very good, but you also might find it depressing.
2. Sallie Krawcheck was fired this week from Bank of America. She oversaw its wealth management business, which included the Merrill Lynch brokerage. It seems like inside baseball to many people, something that doesn’t affect them. But you have to know what was happening behind the scenes that prompted the change. The details are described here and in more graphic terms here.
The basic issue is that Bank of America wants to change the structure and practices at Merrill Lynch. Management wants the brokers to sell more of the financial products developed within Bank of America to their clients. It also doesn’t want the brokers paid by commission or as a percentage of assets under management. It wants brokers to receive a base salary and a bonus that’s at the discretion of management. Many Merrill brokers apparently fear they’ll be paid in the future based on the amount of Bank of America products they put in clients’ portfolios. Now, they’re paid by assets under management, which means the more they keep customers happy, the more money they make. Merrill Lynch brokers and their clients have a tough decision to make.
Many Merrill brokers see any change as an assault on their independence-and their pocket books. Many do not want senior management to have discretion when awarding bonuses. They suspect that ultimately their compensation level would drop if put under the U.S. Trust system.
Some within Bank of America regard the Merrill brokers as “dinosaurs” and think that the compensation model is out of date.
Another broker concern has been cross-selling-pushing products developed by other parts of the bank on brokerage clients. Many brokers resist this because they feel it can compromise their loyalty to clients. But it is one of the core synergies that drives the creation of a megabank like Bank of America.
3. Investors cycled through a series of emotions through the financial crisis. Early on, most of us were confused, stunned, and surprised by the extent of the debt problem and how it affected a wide range of assets. The way the markets all but seized and stopped functioning in the fall of 2008 surprised even seasoned market pros.
After the initial plunge, investors went through the usual emotions of depression and acceptance. More recently, however, I’ve noticed a very different emotion prevailing, and it’s one I don’t often see in investors.
Many investors now are angry. With some, the feeling borders on rage. In past market plunges, I don’t see this kind of lingering anger. After the tech stock bubble burst, for example, there was anger at some of the executives who perpetrated frauds on investors. But for the most part, investors accepted that they were partly to blame for their losses. They didn’t pay enough attention to valuations and other matters, they realized.
The current crisis is different. A very good explanation of why it is different is in this article.
People are angry because the innocent victims and bystanders of economic malpractice are paying for the price in higher taxes, more government debt, and a slow economy. Taxpayer money is being used to preserve the banks and other financial institutions that created the crisis. It’s especially galling to many Americans, because a lot of their bailout money is going to European bankers.
The bankers are the ones who foolishly made subprime loans to people who had no hope of paying them, and then kept those loans on their books. The banker lent money to irresponsible European governments. The banks and the creditors who foolishly lent money to them and created giant, precarious, leveraged institutions, are the ones who should lose.
Government’s role should be to shepherd these failed institutions through bankruptcy in a way that protects many of the innocent parties. It did this with GM and Chrysler. But with the banks, it seeks to preserve them intact and allow the people who ran them to continue to run them or to gracefully exit with very generous pay packages.
In other words, banks take risks, get paid for the upside, and then transfer the downside to shareholders, taxpayers, and even retirees. In order to rescue the banking system, the Federal Reserve, for example, put interest rates at artificially low levels; as was disclosed recently, it also has provided secret loans of $1.2 trillion to banks. The main effect so far has been to help bankers generate bonuses (rather than attract borrowers) by hiding exposures.
Taxpayers end up paying for these exposures, as do retirees and others who rely on returns from their savings. Moreover, low-interest-rate policies transfer inflation risk to all savers ? and to future generations. Perhaps the greatest insult to taxpayers, then, is that bankers’ compensation last year was back at its pre-crisis level.
September 2, 2011 10:45 a.m.
Your Retirement Finance Week in Review
Happy Labor Day weekend. I hope you have a good time doing what you want and being near those you care about.
The global investment markets are getting more wild and crazy every day. Investors are depending on policy makers to get this right. You need to position your portfolio for protection now. I’m looking forward to our next investment webinar where I’ll explain events in some detail and explain how I’m investing portfolios. Our next webinar (it’s free) is schedule for Sept. 28 at 3:30 p.m. eastern time, and I’ll be discussing “Investing During Transitions and Turmoil.” It’s free, but participation is limited. You can schedule your slot by contacting TJT Capital at info@tjtcapital.com or 877-282-4609.
It was a slow and quiet week until Friday’s employment reports were issued. The economy in general and the employment sector in particular definitely are weak, and actions need to be taken. We discuss the data and markets shortly, but first let’s review August’s results.
For stock indexes, August was the worst month in a decade. It would have been much worse if it weren’t for a rise of about 7.5% in the last eight trading days of the month. For August, The Dow lost 4.4%, which was the fourth consecutive monthly decline. Most of the damage was done early in the month when the latest crisis over Europe’s debt situation erupted.
Without quantitative easing to distort the markets, there was some diversity in asset returns for August. Especially noteworthy were high yield bonds. New issues of the bonds fell to their lowest level since December 2008, and 15 planned offerings were postponed or canceled. The spread between high yield rates and treasury rates widened considerably.
Our portfolios did well for the month. One benchmark I use is the Vanguard Balanced index fund, which is 60% stocks and 40% bonds. It’s indexed, and expenses are rock bottom. The fund was down -3.23% for the month and is up 0.56% for the year to date. The returns on my recommended portfolios for August ranged from -0.33% for the Retirement Paycheck portfolio to 0.67% for the Income Growth portfolio. For the year, our returns range from positive 7.58% for the Retirement Paycheck portfolio to 3.72% for the Balanced portfolio. Our policy of seeking true diversification, minimizing stock exposure in this environment, and managing risk continues to work.
The Data
Several data reports were issued during the week, but let’s skip straight to Friday’s employment report. Businesses sat on their hands in July, hiring a net zero employees for the month. Private employers hired only 17,000 workers. Even more worrying, both average hourly earnings and the average workweek were down from the previous month. This data will keep businesses thinking there isn’t much demand for their goods and services coming down the pike, so they aren’t likely to expand their operations by hiring more workers or investing in new equipment.
There were two slivers of good news in the reports. Unemployment remained at 9.1%. This indicates businesses aren’t laying off workers and that households (which are surveyed separately for this number) are reporting better news than businesses. Also, the numbers are a little better when adjusted for a strike by Verizon workers.
On Thursday, reported new jobless benefit claims dropped a bit from the previous week, but claims still are at a high level and indicate the employment market is stagnant. More worrying was an indication that corporate productivity declined at a 0.7% in the second quarter, which followed a first quarter declined of 0.6%. Productivity has allowed corporations to maintain high profit margins and earn strong earnings despite the weak economy. If that’s changing, the corporate profits that supported the stock market aren’t going to be maintained. It also means if workers are not as productive, businesses are less likely to increase hiring.
Global purchasing management surveys showed that manufacturing stalled globally. Even in Asia factor output slowed in August, while it contracted in Europe. Asia is being hurt both by slowing economies in the developed world to which they export and measures taken to reduce domestic demand in order to contain inflation.
Personal consumption expenditures rose, but it rose faster than personal incomes. That indicates households reduced saving or dipped into saving to spend. This isn’t sustainable, since households aren’t borrowing the way they did before the financial crisis. It also indicates recent retail sales increases should be viewed skeptically. Retail chain store sales indicate the middle class is in trouble. Luxury retailers report strong sales, as do extreme discounters. But other retailers are a mixed bag.
Other data were not good. Consumer confidence suffered in August, falling to its lowest level since April 2009, according to the Conference Board. Housing prices continued their decline, according to the Case-Shiller Index, and mortgage applications were low despite very low interest rates.
Factory orders rose nicely, largely due to a surge in auto orders and production after being stalled by the effects of the Japanese earthquake. The Chicago Purchasing Managers Index and ISM Manufacturing Index also indicated the manufacturing sector of the economy isn’t doing as badly as the rest of the economy.
Summarizing the data, it remains a weak economy with no catalyst in place to change things in a positive direction. Fading stimulus, falling confidence, and the debt problems in Europe and the U.S. all are forces that could push the economy into a recession soon. It’s still time to be cautious with your portfolio.
The Markets
Stocks rose on Monday and Tuesday, apparently based on hopes
