September 2012
September 28, 2012 04:30 p.m.
Your Retirement Finance Week in Review
First, a scheduling note. I’ll be traveling next week and probably won’t post a weekly summary. There also will be light posting on my public blog. I’ll be back in full gear the week of Oct. 8.
A number of events caused markets to jump this week, and markets were unable to establish a trend because of the mixed news. Most of the week was to the downside, but it wasn’t all bad news.
It seems that the Fed’s latest QE program was anticipated well in advance, so markets received only a one or two day spurt from the final announcement. Markets already priced in positive effects from QE3, and now investors are worried the program won’t be able to deliver enough growth to justify current prices. So far, it doesn’t seems to be affecting interest rates or other markets much, though it’s still early.
The latest news from Europe seems to overshadow and overcome the European Central Bank’s monetary stimulus. The ECB’s program isn’t nearly as big as the Fed’s, and it has a lot more to overcome. Riots and demonstrations in several places in Europe indicate that populations still aren’t likely to sit still for the austerity and other restrictions imposed by the programs policymakers approved. Also, the ECB’s policy came with restrictions, and leaders of Spain and other countries aren’t jumping at the restrictions. Many expected Spain to apply for benefits by now and agree to be subject to the restrictions. But it hasn’t done so yet and doesn’t seem likely to do so any time soon. So, it’s not clear how much good the ECB program will do. In fact, interest rates for Spain and some other countries already are back to the levels of before the ECB policy was announced.
My view is that markets right now generally reflect current conditions and the likely outlook, but there still are substantial negative risks. China’s growth is in question, and most of Europe is in a deep recession. Japan doesn’t get much attention, but it’s declining again. These trends are hurting profits and growth in the U.S. and other countries. I think we are close to significant buying opportunities, but it’s still time for balance and diversification.
The Data
This was a fairly quiet week for data, but there were some reports that moved markets.
Friday’s personal income and outlays report showed the precarious state of the economy in August. Personal income barely rose by 0.1%. This was below expectations. In addition, the previous month’s income growth was revised down. At the same time consumer spending increased by 0.5%, which was in line with expectations. But spending can’t continue to outpace income at that rate, and the increase was due mostly to higher prices for gas and autos. Despite higher prices for gas and a few other items, inflation remains under control and below the Fed’s target of 2%. The bottom line is there’s a lot in this report to encourage the Fed to keep pumping money into the economy.
There were several manufacturing reports, and they were mixed. The big one was Thursday’s Durable Goods Orders. It was down significantly and across the board, and new orders were down over 13%. The only good news is that the data is for August, and more recent Fed surveys are a bit more positive. For example, the Richmond and Dallas Fed surveys indicated improvements in manufacturing from August. The Chicago Fed National Activity Index, however, was weak but also reflects August activity. The Kansas City Fed report, which reports for September, was down. The Chicago Purchasing Managers Index was below 50.0, which is supposed to indicate a decline in activity and is the first negative reading since the recovery. The bottom line is that manufacturing-related activities will grow only as fast as demand, and businesses don’t see much of an increase in demand.
The housing data for the week generally was good, but there was just enough negative news to temper the optimism. The big report was the S&P Case-Shiller Home Price Index. It showed six months of price increases and increases across the nation. The year-to-year rate also was positive and the highest gain in nearly two years. The FHFA House Price Index also was positive, but was below expectations. On the negative side was a decline in new home sales, despite homebuilder reports of significantly higher traffic and prospects. One factor might be a significant jump in prices of new homes. Pending home sales also declined. It’s important to note that even the positive elements of the home reports are from very low levels. It appears that low interest rates aren’t really boosting housing activity much, merely helping them find a bottom. Also, low inventories of homes for sale and rising prices are keeping a lid on sales activity.
Consumer Confidence had a big, unexpected jump, but optimism faded after analysts examined the details. The numbers still are at recession levels, and plans to buy homes actually decreased. The University of Michigan Consumer Sentiment Index also was a good number. It was the second highest reading during the recovery. But it’s only approaching the level of late spring, and the positive reading was based entirely on better future expectations. The current conditions measure didn’t change much.
GDP growth for the second quarter was reduced to 1.3% from 1.7%. This was unexpected and a negative surprise. While this is backward-looking, reflecting the second quarter, it showed that economic activity was less than previously reported, and the weakness was widespread. Corporate profits for the second quarter also were reported to have grown less than in the first quarter.
New unemployment claims dropped below expectations. It was the best number since July, but the claims number is volatile week to week, and the four-week moving average still is around 374,000.
The Markets
It was a good week for safe investments and not so good for risky investments. The positive effects of the central bank actions earlier in September already seem to have worn off and been overtaken by other events.
Long-term treasury bonds had the best week, but the finished well below their highs. They were up over 2% on Wednesday and closed the week up 1.5%. The dollar often tracks treasuries but wasn’t nearly as volatile this week. It closed with a gain just over 0.5%.
The different commodities closely tracked each other until Friday. Gold started the week down and had a 2.5% loss at its low. It recovered after Wednesday and closed with a 0.5% loss. Energy-related commodities closed with a 1% gain while broader-based commodity indexes gained 1.5%.
Emerging market stocks were the leading stock indexes for the week, but lost a little over 0.5%. They were down 2% at the low point on Wednesday. Small U.S. company stocks rode down with emerging markets but didn’t recover as much to close the week, ending with a 1.5% loss. International stocks measured by the All-Country World Index matched the U.S. small company stocks for the week. The large company U.S. indexes followed the trend but with less volatility. The Dow 30 lost a little over 0.5% while the S&P 500 lost over 1%.
High-yield bonds stumbled mid-week over concerns about a slowing U.S. economy and also a recommendation from a large investment firm to sell them. They closed with a loss over 0.5% for the week. Investment-grade bonds seem to be the haven of choice for many investors. They rose steadily all week for a 0.5% gain. Treasury Inflation-Protected Securities didn’t do much and about with a slight gain.
Some Reading for You
Former FDIC Chairman Sheila Bair came out with a book describing her view of what happened behind the scenes during the financial crisis. You can find links to reviews and comments on the public blog.
AARP was a strong advocate of Obamacare, though its membership consistently opposed it by a large margin. You can read one explanation why here.
The European Central Bank’s liquidity plan isn’t igniting markets and economies in Europe. For a summary of why the plan isn’t enough and what’s holding this up, read this.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
September 21, 2012 04:30 p.m.
Your Retirement Finance Week in Review
This was a week for investors and markets to take a step back, review, and digest the flood of recent events. There wasn’t much economic data issued, and policymakers didn’t have anything on their agendas.
The main news came late in the week from Spain. First, the country was able to issue a new round of bonds at a decent interest rate. In fact, yields on bonds for the troubled countries declined. These are indications that the program announced by the European Central Bank in early September is working, at least initially. In addition, leaders in Spain and Italy indicated they won’t request bailouts and be subject to the restrictions imposed under the ECB program unless they have to. As long as yields on their bonds don’t surge or they aren’t able to sell bonds, they will try to solve their problems without outside help or controls. You can read details here.
European stocks and bonds have been moving higher. The European economies still are in bad shape, and the ECB’s program really isn’t much more than an announcement so far. But it’s having some psychological benefits and indicates European leaders realize they have to take more substantive actions than they have in the past and that austerity measures are self-defeating.
The Data
There wasn’t much data for the week. The data that was issued painted the same picture we’ve had for some time. The economy is growing but at a very slow rate and for the most part shows signs of slowing further.
The manufacturing sector continues to decline. The sector was a major support in the recovery since 2009, but recently it’s been weakening. Part of the weakness is because the sector simply can’t keep expanding at the rapid 2009-2010 rate from the severe lows. It’s also partly because slower growth in Europe and China is reducing demand. The major manufacturing report for the week was the Empire State Manufacturing Survey. It was decidedly negative and below expectations, reporting both lower new orders and slowing shipments. The PMI Manufacturing Index Flash wasn’t as bad. It was at expectations and slightly below the previous release. The Philadelphia Fed Survey, by contrast, was still negative but above both expectations and the previous month. The report generally was negative but had a sharp rise in new orders.
The Index of Leading Economic Indicators from the Conference Board declined. It was below both expectations and last month’s number and also was the third contraction in five months. The biggest negatives were a sharp decline in new orders and consumer expectations. Other data indicate these factors might turn around for next month’s report.
New unemployment claims declined only a small amount and came in worse than expectations. It’s a continuing sign that businesses aren’t hiring.
Three housing reports for the week indicate the sector continues to bounce a little above the bottom. Existing home sales were decided higher for the second months in a row, though prices were down slightly. Housing starts were down a little. The homebuilders’ Housing Market Index was higher, as builders continue to report strong traffic in new homes.
The Markets
Despite the lack of data, there was sharp moves in some investments, and the movements different from trends of the last few weeks.
Commodities generally tumbled for the week. Energy-based commodities were down about 4%, which is better than the greater than 5% loss they had at mid-week. Broader-based commodities declined slightly more than 2% and were down more than 3% in mid-week. Gold was flat for most of the week but rose about 1% on Friday. The dollar had a bounce late Wednesday and finished the week with a gain of under 1%.
Stock markets didn’t repeat their gains of last week but recovered from big losses late Wednesday and early Thursday. Emerging market stocks were the most volatile. They were down 2% through early Thursday but recovered for a loss of over 0.75% for the week. The Dow was the best performer for the week, losing about 0.25%. Small U.S. company stocks were next best with a 0.50% loss. The All-Country World Index was down 2% earlier in the week but recovered for a loss of just over 0.75%. The S&P 500 was less volatile but finished with about the same loss.
Long-term treasury bonds had a good week. They were up 2.5% at mid-week and finished the week with a 2% gain. Investment-grade corporate bonds rose steadily for the week, ending with a 0.5% gain. High-yield bonds declined a little for a 0.5% loss.
Some Reading for You
Now you can read a transcript of Bridgewater Associates’ Ray Dalio’s interview before the Council on Foreign Relations. The video is longer than an hour, so you might prefer the transcriopt.
Sheila Bair, former head of the FDIC, has a new book describing her experiences in the center of the financial crisis. You can read an excerpt here.
We’re in a global currency war. One effect, perhaps a goal, of all the central bank easing is to reduce a currency’s value against other currencies. Read about the global race to the bottom here. It’s a good reason to own some gold.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
September 14, 2012 10:15 a.m.
Your Retirement Finance Week in Review
I’m out of the office for most of Friday afternoon and evening, so I’m wrapping up this week’s summary early Friday morning. Anything that happens after mid-morning eastern time won’t be reflected in this note.
Two forces are working against each other, especially the last few months. One force is weak economic data. The global economy is slowing, and so is the U.S. economy. The data have been weak and often weaker than expectations. The U.S. data doesn’t indicate a recession yet, but John Hussman of the Hussman Funds repeated this week that he believes the economy is sliding and that ultimately when we look back at this period it will show a recession began in June.
The other force is monetary policy, or the threat of monetary policy. Central bankers, especially the Federal Reserve and the European Central Bank, have hinted or promised substantial monetary stimulus is on the way. Markets responded as though the stimulus were in place.
The Fed finally took some action on Thursday. It took a while the markets to figure it out. At first, it appeared to be less than was expected. But it turned out to be quite a powerful package. Instead of putting a date limit on its actions, the Fed announced it will continue liberal monetary policies until unemployment improves substantially. It also announced it will buy mortgages, not treasuries. The purchases potentially are open-ended, plus the Fed will continue to reinvest the proceeds of its existing stockpile of treasuries as interest and principal payments are received. Finally, the Fed said it is prepared to use “other measures” if employment doesn’t improve.
The key points are that the Fed acknowledged the economy turned down in recent months; inflation isn’t a problem, and the Fed won’t worry about it; and the Fed is willing to pump money into the economy until employment improves.
This follows last week’s announcement from the ECB that it will do more. But it’s program isn’t as robust as the Fed’s and doesn’t involve simply printing money. The big news from Europe this week is a German court approved the European bailout fund, with some qualifications.
We’re not out of the woods yet. The Fed emphasizes that it can’t solve the problems alone. Congress and other fiscal policymakers have to act. The same is true in Europe. There’s now a path to solving the crisis, but a lot of things have to be agreed to if Europe is to stay on the path.
This was a quiet week for data but a big week for other news that moved markets.
The Data
The week started with the Consumer Credit report, and it was not good. Outstanding consumer credit declined. In addition, student loans, which are subsidized by the federal government, are the only consumer debt sector showing growth. Mortgages, the largest and most powerful consumer debt sector for economic growth, still are dormant. Low interest rates aren’t enough to spur borrowing. This is important, because businesses won’t hire or make capital investments unless they perceive consumer demand. While retail sales were reported higher recently, consumer apparently dipped into savings to make the purchases, because they weren’t borrowing to do it. That means the growth isn’t sustainable.
On Tuesday we had a weak Optimism Index from the National Federation of Independent Businesses. There was a rise in the index, and it was due mostly to plans to hire more employees. But the index remains at a low level. Small businesses also don’t have much confidence in rising revenues and earnings. The NFIB index remains at recession levels.
Retail sales initially appeared to be strongly positive, jumping higher than last month’s number and expectations. But the rise was due mostly to auto sales. Take out the volatile autos and the increase due to higher gas prices and retail sales were weak. If gas prices remain high, consumers are likely to reduce spending on other items.
Another worrying sign was industrial production. It declined 1.2% for the month, well below expectations and the previous month. Capacity utilization also declined. Manufacturing has been the driver of most of the growth the last few years, so this additional sign of a decline in manufacturing is important.
Consumer sentiment as measured by the University of Michigan jumped to 79.2 from 74.3. Expectations were for a decline. It’s not clear what spurred sentiment higher. But it still only matches the high of last spring and sentiment in general is at recession levels.
New unemployment claims spurted higher, but analysts believe that was an effect of Hurricane Isaac.
Recent boosts in food and energy prices now are affecting inflation data. The producer price index jumped 1.7% for the month. But minus food and energy the PPI was up 0.2% as expected. The Consumer Price Index also jumped 0.6% for the month, but only 0.1% when food and energy are excluded. The year to year change is only 1.7%. The Fed in its statement made clear it wasn’t worried about inflation and won’t be for some time.
The Markets
It appears that the Fed’s big move on Thursday wasn’t fully anticipated and priced into the markets.
The week began with some big moves. Late Monday and early Tuesday international investments (emerging market stocks, the All-Country World Index) surged. The Dow also did well. But the dollar declined, the S&P 500 was down slightly, as were long-term treasury bonds. Most commodities and high-yield bonds rose, but gold was flat.
Wednesday and early Thursday were fairly quiet as investors awaited news from the Fed. After the announcement was digested and understood, treasury bonds dropped. They were down almost 4% for the week by early Friday. The dollar was down about 2%, and TIPS were about even.
Risky assets did especially well in response to the new money printing. Emerging market stocks surged the most, racking up more than 5% through early Friday. Gold and broad-based commodities were close behind with a 2.5% gain. Energy commodities shot up earlier in the week on troubles in the Middle East, and were up more than 2% by early Friday.
Developed country stocks also did well. The S&P 500 and the Dow were up over 2%. while the Dow surged 2%. The All-Country World Index was up over 3%. Small company U.S. stocks were leading all the indexes the last month and actually slid a bit toward the end of Thursday. They finished with a gain of just over 2%.
Some Reading for You
Jeff Gundlach of DoubleLine Total Return Bond gave a web presentation this week. You can see the slides here for now and eventually a replay will be on the DoubleLine web site.
A lot of people worry that China could damage the U.S. economy if it sold or even stopped buying treasury bonds. I’ve always been skeptical of that view. Here’s a post from FTAlphaville that provides some detail on why not to worry.
Income inequality has become a major policy issue, and I’ve been concerned that the data used in the arguments isn’t presented well. Here’s a post that takes a contrary look at many popular arguments.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
September 7, 2012 04:45 p.m.
Your Retirement Finance Week in Review
The slow summer season finally ended with a series of bangs late this week. The first couple days of the week remained slow, but Thursday and Friday contained enough events to keep everyone hopping and thinking for a while.
The European Central Bank announced its new and long-awaited liquidity program. It’s important to note that it’s a liquidity program. It doesn’t do much to help with the insolvency of various governments. The program should do a lot to help banks and governments have access to cash and keep interest rates from spiking higher. It prevents a crisis. For a country’s bonds to be eligible for ECB purchase under the program, the country has to agree to outside fiscal controls. That should help some with the solvency issue. But ultimately a large amount of these debts have to be written off by someone or inflated away over time by easy money. It’s also not clear how far Germany will go along with the easy money policy. Germany has few options, though, since it is only one vote. It can go along with the majority or leave the euro.
Given the limits of the program and the tough road ahead for Europe, it’s not surprising that the strong returns or Thursday were followed by more modest returns rather than another strong day on Friday.
In the U.S., the employment reports on Friday were the big news and put a damper on Thursday’s enthusiasm.
The Data
There’s no way to put a good face on Friday’s employment reports. The unemployment rate declined, but that’s only because more people left the labor force. The latest month’s data plus the downward revisions of the last few months mean job growth is averaging about 100,000. That’s too low to reduce the number of unemployed and might be too low to even accommodate normal growth of the labor force. Also, wages and hours worked were stagnant. There was nothing good in this report. Some investors said the silver lining was that the report meant the Fed would have to announce a new round of quantitative easing at its next meeting. This initially caused a rise in stocks, but that quickly ended.
There was some modestly good economic data on Thursday that helped spur markets higher when combined with the ECB’s new program.
The ADP employment report, which has a mixed history, said over 200,000 jobs were created over the last month, and new unemployment claims declined by 12,000. These reports gave false hopes that Friday’s employment reports would be positive. Also, on Thursday, the ISM Non-Manufacturing Index rose and was higher than expectations. It delivered its best number since April. These three reports, coupled with the ECB announcement, spurred a strong stock market rally on Thursday.
Earlier in the week the ISM Manufacturing Index was not positive. It was below expectations and also was below 50, indicating a contraction in activity. The PMI Manufacturing Index from Markit, which is not as widely followed, was slightly better but not great.
PMI Indexes from around the globe were released on Monday, and they indicated most countries are in contractions and none are growing strongly. Importantly, the trend in these indexes is negative the last few months.
The Productivity report for the second quarter was revised. It showed greater productivity than in the initial report, but this is a mixed report. Higher productivity might be good for corporate profits. But the productivity was higher because output increased despite fewer hours worked and less of an increase in unit labor costs. Fewer hours and lower labor costs indicate a weak labor market and little or no growth in household incomes.
The economic picture remains unchanged from recent months. We have a slowly growing economy in which the rate of growth is slowing. Markets have increased since their June lows in expectation of stronger monetary stimulus that hasn’t happened. They’re now expecting strong action from the Fed announced at next week’s meeting. If it doesn’t happen, U.S. stock markets will tumble. One thing you definitely can count on are that global interest rates will remain low.
The Markets
Gold is the only market that was lively all week. It rose sharply Monday, and increased further on Thursday and Friday because of expectations of more money printing from both the ECB and the Fed. Gold rose about 5% just for the week and 8% for the month. It’s still below its highs of earlier in 2012 and well below the peak of August 2011.
Energy-based commodities were all over the map and ended the week up about 0.75%. Broader-based commodities did a little better, rising over 1% for the week.
Emerging market stocks also perked up on Thursday and Friday, rising about 3.5% for the week after being down 1% through Wednesday. Small company U.S. stocks were right behind at a 4% gain. The S&P 500 rose about 2%, and the Dow had a modest gain of about 1.75%. The All-Country World Index rose about 2.75%.
Long-term treasury bonds were extremely volatile. They declined sharply on Thursday and made up a lot of those losses early Friday, and then lost them again by Friday’s close. They fell about 1.75% for the week. Investment-grade bonds were about flat for the week, and high-yield bonds rose about 0.25%. The dollar fell sharply on Friday, losing over 1% for the week.
Some Reading for You
A number of economists question Ben Bernanke’s conclusions that the Fed’s quantitative easing programs have been successful and are worth considering again. I collected some of them on my blog here.
Bill Gross of PIMCO repeats in his latest monthly essay that investors should plan on lower returns in coming years than the long-term averages.
A number of analysts argue that the ECB’s program doesn’t warrant the optimism is engendered in some circles. Read one of them here.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
