September 2014

September 25, 2014 04:20 p.m.
Your Retirement Finance Week in Review

I’m going to be out of the office most of Friday, so I’m wrapping this report and posting it on Thursday this week.

A lot was weighing on the markets early in the week. After hitting new highs last week, stock indices could be considered due for a pause. Also, early in the week economic reports from Europe and China showed slower growth in both regions. The new round of military conflicts in the Middle East didn’t sooth investors. The Treasury Department didn’t help when it issued new rules designed to reduce corporate mergers that are considered tax-motivated inversions. Whatever you think of inversions, anything that impedes mergers is a short-term negative for the markets. Finally, most investors don’t understand the home sales data and reacted negatively to Monday’s report showing sales below expectations.

Markets turned around on Wednesday after China indicated it would replace its central bank chief and new home sales in the U.S. were very positive.

On Thursday, markets turned down again very sharply, largely because some U.S. data was below expectations. Investors apparently viewed the latest data as support for Fed officials who want to raise interest rates sooner and faster than indicated in last week’s Fed statement. Investors also were worried about reports that Russia might seize some foreign assets.

This week’s action is evidence that we’re in or past the middle of the market cycle, a time when data can be contradictory and confusing. It’s also a time when markets become more volatile.

The Data

Existing home sales were lower than last month and are more than 5% lower than 12 months ago. But new home sales surged 18% over last month and 33% over 12 months ago. So, what’s going on?

Existing home sales are going down because of reductions in the number of deep discounts from foreclosures and distress sales. There’s also a reduction in the number of investors willing to buy homes for cash at prices significantly higher those of a year or more ago. The existing homes market is shifting from one supported by cash investors to a more normal one that primarily is occupied by owner/occupants.

New home sales, on the other hand, were held back in recent years by a lack of supply and competition from the deep discounts on distressed existing homes. There’s more of a parity between prices of new and existing homes in many areas, and the supplies of new and existing homes are closer to parity because large numbers of distressed homes no longer are coming on the market.

The housing market still isn’t in great shape. It’s slower than in late 2012 and most of 2013. It’s making a transition. But it still is solid and is contributing to economic growth.

In other housing news, the FHFA House Price Index increased marginally for the month and is only 4.4% higher than a year ago. This index has steadily declined from its peak in mid-2013.

Manufacturing recorded another generally good week. The Richmond Fed continued the string of positive regional manufacturing reports, a report that included a good increased in new orders. The PMI Manufacturing Index Flash held steady but the report noted that details of the index such as output and new orders were very strong.

In fact, manufacturing is doing too well for some investors. The headline number for Durable Goods declined significantly but in line with expectations. But new orders increased significantly. More importantly, after the volatile transportation sector is excluded durable goods orders rose much more than expected. Orders for business equipment were significantly higher, which led a number of analysts to say the economy might be strong enough for the Fed to accelerate its tightening schedule.

The Kansas City Fed Manufacturing Survey rose significantly and continues to indicate a healthy growth rate in that region. The survey also indicated some pressure for higher wages as some employers were having trouble finding qualified employees.

New unemployment claims were below expectations again, leading some analysts to forecast that the next monthly Employment Situation Reports will be better than expectations.

The Markets

The five days ending with Thursday’s close were good for some bonds and the dollar but bad for stocks and commodities.

The best-performing of the major stock indices was the Dow 30, which lost 2%. The S&P 500 lost a little less than 2.5%, and the All-Country World Index lost just over 2.5%. Emerging market stocks lost 3.5%, and the Russell 2000 U.S. Smaller Companies Index brought up the bottom with a loss of almost 4.5% for the five days.

Long-term treasury bonds did well, gaining 2.5%. High-yield bonds as usual followed stocks more than bonds, losing 1.5%. Investment-grade corporate bonds and Treasury Inflation-Protected Securities (TIPS) each gained around 0.75%.

The dollar also gained around 0.75%.

Broad-based commodities lost almost 1% while energy-based commodities lost 0.5%. Gold finished the five days with a marginal gain.

Some Reading for You

The late author Tom Clancy inadvertently made a mess of his estate. See details here.

Your 60s are what one actuary calls “the glory decade.” You should take advantage of it and look to extent it, he says here.

This report argues that we should make significant changes in end-of-life care, which mostly involve reducing the amount of it.

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

September 19, 2014 04:55 p.m.
Your Retirement Finance Week in Review

It was a good week for many investors, as most stock indices pushed to record highs on Thursday’s close. Most indices slid from their highs on Friday, and the final results for the week were mixed.

A highlight for many investors was the Federal Open Market Committee meeting announcement. This is the group that sets the Federal Reserve’s interest rate and monetary policies. Before the meeting, a number of analysts were forecasting that the Fed would change the language to make it seem interest rate increases were more imminent. Instead, the committee retained the assertion that interest rate would remain low “for a considerable time.”

The Fed also made clear that any interest rate and other changes would be gradual. It won’t suddenly shift policies and try to return interest rate and its balance sheet to normal levels.

These actions didn’t surprise us, but apparently there were many investors who believed the Fed would act suddenly and by surprise, as it did in 1994.

Most data for the week provided evidence for those who argue that the Fed shouldn’t change policy suddenly or soon.

The week closed with the news that Scotland won’t be separating from the U.K., despite recent polls indicating the vote would be closer. But some news media continue to fan the flames of the independence movement, pointing out that there are other efforts to split countries around the globe and generally making the case for uncertainty and chaos.

I expect volatility to be fairly high through the end of the year. The U.S. is nearing a turning point in its cycle. There’s a lot of uncertainty about whether the European Central Bank and other policymakers will take the actions necessary to help the continent out of its depression. Of course, there remains a lot of uncertainty over geopolitical issues around the globe. Uncertainty and volatility are not reasons to change portfolios. Instead, stay with established trends until there is clear evidence they will change.

The Data

It was a fairly light week for data.

Manufacturing had several strong reports that indicated continued strength and growth for the most part. Industrial Production actually declined. But the decline is attributed largely to automobile manufacturing. The auto industry went through its annual shutdown-and-retooling exercise, which accounted for much of the decline. Industrial Production is a volatile number that needs to be viewed over several months instead of one month at a time.

The Empire State Manufacturing Survey rocketed higher. But details of the report, while positive, are not as strong as the headline number. New orders rose slightly while employment growth actually declined, to give two examples.

The Philadelphia Fed Manufacturing Report was the opposite. There was a decline in the headline number from last month’s very high level. But the details of the report were stronger, including new orders, shipments, and employment.

The Index of Leading Economic Indicators from The Conference Board rose slightly, but last month’s already high number was revised higher.

New unemployment claims declined sharply to 280,000, the second lowest level since the recovery began.

Two pieces of housing market data were mixed. The Housing Market Index, which is a survey by the National Association of Home Builders about what the home builders believe and forecast, rose sharply. The biggest component increase was in traffic in new homes of potential buyers. This component has lagged recently while the index rose overall. Yet, new home starts declined slightly and remain in the range around 1 million per month that they’ve been in. There should be a lag between the HMI and housing starts. If the HMI is accurate, starts should increase in a few months.

The Consumer Price Index declined 0.1%, and the Producer Price Index was flat. Both indicate there is no reason for the Fed to consider inflation as a reason to tighten policy.

Overall, this week’s numbers indicate continues growth but they could be pointing to slower growth than we’ve seen the last few months.

The Markets

Friday was especially volatile and significantly changed returns for some assets for the week.

Stocks in general had a good week. The Dow 30 led the way with a gain of just under 1.8%. The S&P 500 gained 1.2%. The All-Country World Index returned just over 0.8%.

Emerging market stocks didn’t fare as well. They were up 1.6% at one point on Tuesday but declined steadily the rest of the week. They ended with a weekly loss of just under 0.4%. The Russell 2000 U.S. Smaller Companies Index started the week down, recovered to a 1.2% gain by early Friday, but declined sharply the rest of the day to close with a 0.2% loss for the week.

Bonds had an interesting week. Long-term treasuries were down most of the week, bottoming with a 1% loss. But they recovered sharply on Friday to close with a 0.5% gain. High-yield bonds were strong all week and closed with a 0.6% gain. Investment-grade bonds followed the pattern of long-term treasuries without the extreme highs and lows. They closed with a 0.1% gain. Treasury Inflation-Protected Securities (TIPS) declined sharply on the low inflation reports and closed with a 0.8% loss.

The dollar did well the last half of the week and closed with a 0.7% gain.

Commodities had a poor week. Energy-related commodities did best, losing only 0.2%. Gold lost just under 1.4% and broader-based commodities did a little worse, losing just under 1.6%.

Some Reading for You

Which is better for your brain: Scrabble or Crossword puzzles? Read this.

This article will tell you about grit and its importance in success.

Certainty and bold predictions are entertaining, but they usually don’t increase your wealth, concludes this piece.

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

September 12, 2014 04:30 p.m.
Your Retirement Finance Week in Review

This was a quiet week in both the data and markets, though all investments except the dollar lost value. What little activity there was this week seemed to be driven by events outside the markets and economy.

The momentum for Scottish independence seems to have a negative effect on many investors. In general investors don’t like changes and surprises. The recent polls showing a majority in favor of independence caused declines in the British pound but also in international markets generally.

Adding to the pessimism is recent news regarding Syria, Iraq, and Ukraine, to name a few.

I also think many investors also are becoming impatient with the European Central Bank and other policymakers. The recent announcement from the ECB that it will step up its stimulus initially created some optimism. But pessimism took hold when investors realized that the ECB won’t even announce details for a month and that real stimulus still faces obstacles from Germany, which voted against the new policy. Its beginning to appear that the only way to end the depression in Europe is for Germany to leave the euro so that the ECB can implement a monetary policy that meets the needs of the rest of the currency union.

The markets already reflect the current state and likely future path of the U.S. economy. The Fed’s been transparent about its intentions, so those are reflected in the markets, too.

Markets are likely to respond to non-economic news and events for a while until there’s a surprise, either positive or negative, in economic data or earnings reports.

The Data

There were only a few data reports this week.

Friday’s retail sales report of paying attention to more than the headlines. Recent retail sales were below expectations and encouraged some bearish comments. But we pointed out that retail sales numbers are volatile month to month. We need to look at trends over several months and also compare them with consumer and business surveys. The surveys tend to be good indicators of where retail sales will go in coming months.

On Friday we learned that July’s flat retail sales were revised upward, and August’s sales rose at a faster rate and in line with expectations. After excluding autos and gasoline, sales rose a bit more than expectations. This growth in retail sales is in line with recent consumer and business surveys and other data showing continuing growth.

Likewise, Consumer Sentiment, as measured by the University of Michigan, rose again and is back to the levels reached in mid-2013. The strongest component of the survey was expectations.

Small businesses also continue to increase their optimism, as measured by the NFIB Small Business Optimism Index. It rose a big from last month and again is at a high of the economic recovery since 2009. But the details of the report weren’t uniformly positive. Job openings increased, but plans to hire more people decreased. There also was a slight decline in those saying this was a good time to expand.

The Job Openings and Labor Turnover Report (JOLTS) showed little change in the labor market. There were about the same number of job openings as the previous month. The rates of those hired and those quitting were about the same.

New unemployment claims rose a little to 315,000. But the four-week moving average continues to decline and is nearing 300,000.

The Markets

Most markets were down all week, but not by a lot.

The big loser was emerging market equities, which had been doing well. They declined steadily all week to close with a 4% loss. The rest of the equity indices I report on regularly were clustered around 1% losses. The S&P 500 was right at a 1% loss. The Dow 30 did slightly better. The All-Country World Index and Russell 2000 Smaller Companies Index declined slightly more.

Bonds also fared poorly. Long-term treasuries took big dips late Thursday and Friday, losing 2.6% for the week. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) both declined 1.4%. High-yield bonds did a little better, losing 0.7%.

The dollar had another good week, gaining 0.3%.

Commodities also lost money. Energy-related commodities did best, losing 1.8%. Gold lost about 2.25%. Broader-based commodities lost about 2.5%.

Some Reading for You

I regularly caution against following storytelling or narratives in your investing. Here’s a good explanation why, which also is a Sept. 11, 2001, remembrance.

Here’s an update on what to expect next from the Affordable Care Act.

Here’s a good piece from Howard Marks of Oaktree Capital on risk and risk management.

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

September 5, 2014 04:35 p.m.
Your Retirement Finance Week in Review

First, a quick reminder to those who didn’t attend the San Francisco MoneyShow or who want to some of it again, my presenatation “Overcoming the Six Critical Threats to Lifetime Income Security” is available for viewing on the MoneyShow web site for a limited time here. You also can see a few photos from the conference on our Facebook page.

While most analysts focus on the monthly Employment Situation reports this week, I find the Fed’s Beige Book more informative. This is a largely anecdotal survey by the different regional Fed banks. They talk to people at businesses to develop a profile of how the economy is doing in their regions.

This Beige Book was consistent with what we’ve seen in the data the last few months. The economy is growing at a decent rate, probably the highest rate since 2008, and growth accelerated in the last month. The growth is broad-based across both geographic regions and industries.

There’s also an indication that recent disappointments in retail sales and household spending will be temporary. My research indicates that those monthly sales data can be volatile. It’s better to use trends of several months and also pay attention to household and business surveys. These surveys show intentions and also what consumers are thinking and feeling.

Another point worth noting in the Beige Book is that wage growth and income growth continues to be weak. This is both good news and bad news. The bad news is that growth won’t increase if household demand doesn’t increase, and that won’t happen until households have more income and can spend more. The good news is that weak income growth means inflation isn’t likely to be a problem any time soon. Price increases can’t get out of control if people don’t have more money to spend.

I continue to believe that the major threat to the economy is that the Fed might tighten too soon or too fast. The Beige Book reinforces that view. The economy is growing, but there’s still weakness in household incomes. There’s little or no threat of rising inflation for another year or more.

Of course, the big news this week was the European Central Bank’s announcement that it will increase its stimulus efforts. The ECB finally realized what almost everyone else in the world has known for some time. The European economy isn’t going to achieve sustainable growth without substantial policy changes. It’s not going to reveal details until next month, so it’s hard to assess at this point. Some analysts were excited by the moves, but others described it as QE-light and too little, too late. The ECB wasn’t unanimous, with Germany being opposed to further monetary stimulus.

The Data

The first week of the month usually is a big one for data. This month was no different, though it was shortened by the Labor Day holiday. The data was consistent with what we’ve seen in recent weeks.

The overhyped monthly Employment Situation reports were a disappointment to most analysts. The number of new jobs created was about 100,000 below expectations. The multi-month trend still is positive, and the number easily could be revised higher or lower in coming months. Hourly earnings increased a little, but hours worked were flat. The report probably takes away some of the arguments by those on the Federal Reserve who want to tighten monetary policy sooner rather than later.

Several manufacturing reports indicated continuing growth in that sector. The ISM Manufacturing Index, a major report, continued the rise that began in January. It exceeded expectations and now is at its highest level since early 2011. Importantly, the new orders component of the index had a big surge. Likewise, the Markit PMI Manufacturing Index rose again and was slightly higher than expectations.

Factory Orders were a mixed picture. The headline number indicated a sharp increase. But that’s because of a number of aircraft orders in the wake of annual Farnborough Airshow. Excluding transportation, there was a small decline. But there was additional good news in the report. There were solid increases in shipments and unfilled orders.

The rest of the economy also appears to be doing well. The Markit PMI Services Index declined slightly but still indicates strong growth. The ISM Non-Manufacturing Index rose significantly from the strong reading of last month.

Productivity improved in the first quarter after a sharp, weather-related decline in the first quarter. Unit labor costs declined slightly, a sign that the increase in productivity exceeded any wage increases.

The Markets

It was a very quiet week for most stock indices. The leader was emerging market stocks, which increased 2% for the week. The Dow 30 increased just over 0.5%, while the All-Country World Index was just below 0.5%. The S&P 500 broke even, and the Russell 2000 U.S. Smaller Companies Index lost about 0.6%.

Long-term treasury bonds had a bad week, losing about 2.75%. Other types of bonds did a little better. Investment-grade bonds, high-yield bonds, and Treasury Inflation-Protected Securities (TIPS) all clustered around a 1% loss, with high-yield bonds losing about 0.8%.

The dollar rose 1% for the week. All of that came on a surge after the ECB announced its new looser monetary policy. Commodities didn’t have a good week. The best of the group was gold, which broke even. Energy-based commodities lost more than 1.5%, and broader-based commodities lost about 0.7%.

Some Reading for You

Here’s a good summary of the IRA beneficiary mistakes to avoid.

John Makin of AEI agrees with me that there’s a major risk from the Fed tightening too soon or too fast.

Here’s a long piece explaining why key stock index valuation measures show stocks are highly valued and why they’re likely to remain that way for a while.

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