September 2015

September 25, 2015 04:50 p.m.
Your Retirement Finance Week in Review

This was another volatile and mostly negative week in stock markets. It also was a little confusing.

There wasn’t much news to move stock prices, but they moved anyway. But the big news was Fed Chairman Janet Yellin’s Thursday night speech accompanied by a detailed written version that made the case for the Fed to raise interest rates before the end of 2015. I think most people would have expected such a headline to cause stock prices to decline. Instead, stock prices rose for most of Friday. Apparently, Yellin made such a strong case that the U.S. economy was healthy that many investors were convinced. They became more optimistic about the economy and stock prices. Despite the rally Friday, major stock indexes are down almost 2% since before the Fed announced that it would not raise rates.

Also interesting was that long-term bond prices rose on news that the speech was coming, but they declined Friday morning after the speech was given. But they recovered a bit and rose gradually the rest of Friday.

Stock prices in the U.S. didn’t hold their early Friday gains. They lost ground late in the day. It might have been that many traders didn’t want to go into the weekend holding too many stocks. News reports attributed Friday’s late-day decline to “a rout in biotech stocks” and the selling that biotech-focused exchange-traded funds had to do to handle redemptions.

A major biotech stock index was down 14% for the week. This generally is attributed to some news reports this week about high prices for some prescription drugs and calls by some politicians to put lids on prescription drug prices.

Another surprise this week was that the visit of China’s president to the White House didn’t result in any market-moving news.

The Data

The data this week didn’t register any changes from recent trends. Manufacturing is weak. Housing continues to grow steadily. The service economy also is doing well.

This week’s manufacturing reports were negative. The Richmond Fed Manufacturing index was down after being flat last month. The new orders component of the index was down even worse than the main index, indicating the index could be worse in coming months. The PMI Manufacturing Index Flash for the first half of the month was somewhat positive. It came in at about the same level as last month and still indicating growth. But this is as low as the index has been since October 2013, and key components of the index were weak.

The Kansas City Fed Manufacturing Index was a negative 8, only one point better than last month. The Kansas City Fed’s region is where most of the oil fracking has taken place, so it is subject to declines from lower oil prices. Durable Goods Orders were down 2%. But when the volatile transportation sector is excluded, it was down 3.9%. That’s another negative reading for manufacturing.

Existing home sales were down in August, but the level still is considered healthy. Sales increased 6.2% over 12 months. The FHFA Home Price Index recorded a price gain of 0.6% for the month of July. That results in a 5.8% 12-month increase. New home sales increased sharply, and the previous month’s number was revised higher. It was the highest number since February 2008.

New unemployment claims rose a modest 3,000. The four-week moving average now is down to 271,750. That is a very low number in any economic environment.

The PMI Services Flash increased modestly and in line with expectations. This indicates the service sector of the economy continues to grow at a healthy rate despite the problems in manufacturing and in many other countries.

The third estimate of GDP for the second quarter was revised slightly higher to a 3.9% annual growth rate. Though this is a backward-looking number, it shows the U.S. economy has been growing at above the long-term average lately.

Consumer sentiment as measured by the University of Michigan increased slightly from the mid-month flash reading. The mid-month reading was substantial decline from the previous month because of the stock market volatility. This final reading for the month is only a modest improvement and is the worst end-of-month reading for consumer sentiment since October 2014. The report is the first indication of how households will react to September’s stock market decline.

The Markets

Stock indexes were down across the board for the week. The worst performers, with 4% declines, were emerging market stocks and the Russell 2000 U.S. Smaller Companies Index. The All-Country World Index lost 3%, while the S&P 500 did a fraction better. The Dow Jones Industrial Average was the best of the major stock indexes, losing 1%.

Most bonds also had a bad week. The exception was long-term treasuries, which finished with a 0.5% gain. But they were up 2% during the day Thursday and gave up most of those gains. Investment-grade bonds lost a fraction. Treasury Inflation-Protected Securities (TIPS) lost 0.66%. High-yield bonds fared worst, losing over 2%.

The dollar gained just over 0.5%.

Commodities were very volatile and finished the week with small gains. Energy-based commodities were up almost 2% early in the week, down more than 1% on Thursday and closed with about a 0.2% gain. Broader-based commodities traded in a narrower channel but in the same pattern and gained about the same amount. Gold was down 1% early in the week but finished the week with a 1% gain.

Some Reading for You

This post explains why sometimes the smartest thing an investor can do is nothing.

Here’s an interesting contribution to the active vs. index investing debate.

Psychics, astrologers, and the like are thriving as business and investment consultants. See here.

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

September 18, 2015 12:40 p.m.
Your Retirement Finance Week in Review

The Federal Reserve finally had its long-awaited September meeting. This is the meeting that was supposed to result in the first interest rate increase and end a lot of the uncertainty about Fed policy. Instead, on Thursday the Fed chose not to raise interest rates but again used strong language to give the impression it will raise rates before the end of the year.

The market reaction probably was the opposite of what most would have forecast. U.S. stocks initially rallied, but then declined. Bonds increased in value as interest rates declined. Commodities didn’t change much, though gold increased on the news.

Most analysts attribute the market reaction to Chairman Janet Yellin’s media conference after the announcement. Yellin stressed that the Fed was influenced by weak economic growth in the emerging markets. She also said the Fed wanted to see if the recent turmoil in the markets would have a negative effect on the U.S. economy. The worries about lower growth and problems in emerging markets raised concern among the analysts and investors. I heard several ask the question, “What does the Fed know that we don’t?”

I suspect that the market reaction was more the result of understanding how the Fed is analyzing this decision. It’s no secret that the economic forecasts from the Fed frequently are well off the mark. Last year’s forecasts expected the U.S. economy to be fairly robust at this point, robust enough that the Fed would have raised rates in June.

What’s clear from the week’s events is that the Fed uses analytical tools that are dated and probably irrelevant today. The Phillips’ Curve and the notion that higher employment leads to higher inflation, and vice versa, clearly don’t apply in today’s economy.

Ray Dalio of Bridgewater Associates made the point in an extended interview for Bloomberg Television. He says that the Fed is focused on the short-term or cyclical aspects of the economy. That made a lot of sense when the long-term or secular aspect of the economy was one in which more debt would lead to more growth. In that cycle, lower interest rates lead to more borrowing and more growth. Now, the economy has too much debt. Zero interest rates still don’t stimulate a lot of borrowing, and growth is around average. But the growth is precarious. If the Fed raises rates too far, too fast, the economy will stumble. The Fed won’t have many tools available to reverse an economic slowdown. Interest rates already are low. Quantitative easing became less effective with each iteration.

The Fed also has confused people with its series of public statements indicating it was likely to raise rates soon. The Fed didn’t want to surprise investors and businesses with an unexpected rate increase. Unfortunately, it went in the opposite direction. Most Fed members were confident a year ago that the economy would be strong enough in 2015 to raise rates. Now, they’ve changed their minds, and investors and businesses are confused and uncertain.

I think the increase in uncertainty explains much of the sharp drop in stock prices after Chairman Yellin’s media conference.

The Data

There wasn’t a lot of economic data this week, but the reports are worth reviewing.

Manufacturing dominated the week’s data, and the news wasn’t good.

The Empire State Manufacturing Survey registered another sharp drop and was well below expectations. Last month’s report was the weakest since April 2009, and this month’s number was only a fraction better. The report was negative almost across the board. Industrial Production also was negative, reversing last month’s nice gain. The manufacturing component of the report declined more than the headline number. On the plus side, last month’s report was revised even higher. Also, a decline in motor vehicle production accounts for all of the decline, with other industrial production flat after excluding autos.

The Philadelphia Fed Business Outlook Survey, which generally is a measure of manufacturing, also turned negative after a positive report last month. There were some positive elements in this report, including new orders and employment.

Overall, it appears that the hope manufacturing was forming a bottom was premature.

Retail sales rose a modest amount. When autos and gas are excluded, factoring out the effects of lower gas prices, the sales increase was slightly higher. It appears that domestic demand still is reasonably strong.

New unemployment claims declined another 11,000. The one-week number is among the lowest in 40 years. The four-week average remains around 275,000, also a lower number.

Housing starts were down a bit, but permits for new housing were higher. The Housing Market Index rose slightly, indicating home builders continue to be optimistic about their businesses. The data indicate housing continues to chug along at a modest clip, providing some growth to the economy.

Overall the Consumer Price Index declined. After excluding food and energy the CPI rose slightly. Inflation still is nowhere near a problem in the U.S. and isn’t likely to be one for a while. Deflationary forces outside the U.S. are overwhelming whatever inflation forces are in the U.S.

The Leading Economic Indicators from The Conference Board increased slightly after a small decline last month.

The Markets

We had a wild week in the markets that basically ended where it started.

Stocks started the week with gains and built momentum right through the Fed’s announcement on Thursday. After Chairman Yellin’s media conference, stock prices declined. Emerging market stocks led the way with a 2% gain after being up 6% at Thursday’s peak. The Russell 2000 U.S. Smaller Companies Index gained 1%, while the All-Country World Index gained slightly less. The S&P 500 and Dow Jones Industrial Average gained around 0%.

Bonds did mostly the opposite of stocks. Bonds declined early in the week and recovered sharply at week’s end. Investment-grade bonds led with a 1% gain. Treasury Inflation-Protected Securities (TIPS) and long-term treasury each gained a fraction. High-yield bonds lost about 0.5%.

Gold had a good week, gaining 3%. Other commodities lost ground. Energy-based commodities lost over 0.5%, and broader-based commodities lost 1%.

Some Reading for You

This is an interesting mental exercise: What is today’s best investment idea.

This links to two articles in which people who make extreme investment forecasts are taken to task.

This post explains why it is important to be consistent in your investment strategy, even when it isn’t working.

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

September 12, 2015 12:40 p.m.
Your Retirement Finance Week in Review

This week was quieter than recent weeks in both the data and market action. With the Labor Day holiday behind us professional investors are back to work full-time and digesting the recent events. The sharp declines that we saw recently usually result from a combination of forced selling and automated trading systems. I think it’s likely that most of those changes are behind us. There will be additional forced selling if there’s another big surprise. For now, portfolios have largely been adjusted to recent events.

We’re not making changes in our portfolios. We made sufficient changes earlier in the summer. You should have sold Tweedy, Browne Global Value by now. In the October issue of Retirement Watch, which will be posted on the web site this week, I’ll recommend how to reinvest the proceeds from that sale.

The big news this week really was speculation about the Federal Reserve. Will it follow through and raise interest rates this coming week as it all but promised to do a few months ago? Or will the recent market and global events cause enough members to change their minds and wait? The Fed officials who’ve spoken publicly in the last week or so seem genuinely undecided.

I think most market participants would like the uncertainty to end. They’d like the Fed to raise rates a fraction and end the speculation. The greatest risk today remains that the Fed could raise rates too far too fast, hurting the economy. It wouldn’t be good for the Fed to initiate an extended tightening and restore rates to normal levels. But uncertainty about the next move paralyzes investors and businesses.

The Data

Small business optimism increased a bit, according to the NFIB. The good news in the survey of small business owners was an increase in job openings and in earnings. Small business owners have been very positive in 2015. That’s one indication that the U.S. economy maintains modest growth and is doing better than the global economy.

The Labor Market Conditions Index is a compilation by Fed staff of 19 labor market indicators. It is more comprehensive than single factors, such as the unemployment rate and is said to be closely watched by Fed members. I mention it because it was issued this week and was sharply higher than recent reports and than expectations. It is at its highest point in 2015 but not as high as in 2013 and 2014.

The JOLTS (Job Openings and Labor Turnover Survey) report also was fairly strong. It revealed a substantial increase in job openings by 3.9%. Despite this, the number of new hires was lower than the previous month. Also, the quits rate was unchanged and remains around normal levels.

New unemployment claims declined by 6,000. This keeps the four-week average just above 275,000, which is a very low level.

So, the last labor market reports the Fed will see before its vote on interest rates all were positive.

Inflation at the wholesale level still isn’t a problem. The Producer Price Index was unchanged, and the 12-month rate remains at negative 0.8%. The decline is mainly due to falling energy prices. Excluding food and energy, producer prices are up a modest 0.3% for one month and 0.9% for 12 months.

The week ended with the University of Michigan reporting a significant decline in consumer sentiment. This brings the index down to its lowest level since September 2014. Consumer sentiment is fairly good at forecasting retail sending a few months down the road. But this is only one reading and is the mid-month flash reading. So, we shouldn’t read too much into it.

The Markets

Stocks finally had a good week. The Dow Jones Industrial Index rose 2.1%, its largest weekly gain in almost six months. The S&P 500 rose the same percentage. International stocks did better. The All-Country World Index was up about 3%, and emerging market stocks were up around 2.5%. The Russell 2000 U.S. Smaller Companies Index was slightly ahead of the U.S. large stock indexes.

I wouldn’t read too much into this week’s returns. The major indexes have flipped between positive and negative weeks for about 10 weeks, according to Barron’s.

Bonds had another mixed week. Long-term treasury bonds lost about 0.6% as investors reduced their panic. Investment-grade bonds did slightly better. Treasury Inflation-Protected Securities (TIPS) gained a fraction. High-yield bonds gained 0.6%.

The dollar lost about 1.2%.

Broad-based commodities had a good week, gaining about 0.6%. Energy-based commodities lost about 0.8%. Gold lost over 1%, but was down 2% earlier in the week.

Some Reading for You

This is an interesting story about a classic investment book.

Technology is good for older minds. Read here.

Here are some good reasons not to be too excited about this week’s rally in stocks.

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

September 4, 2015 04:20 p.m.
Your Retirement Finance Week in Review

It was another wild, volatile week in the markets. The week ended with a strong move into negative territory after the release of Friday’s Employment Situation reports.

What’s worth noting is that in the last month the correlations between different types of assets and investment styles are very high. Most assets and funds are moving down in price by about the same amount. In the table below I compiled recent returns from ETFs representing different stock indexes.

You can see that in the last week and last month, the direction and magnitude of the returns have been very similar. The main exception is small value stocks, represented by the Russell 2000 Value and to a less extent by the Russell 2000 held up well this week. But that could be because they lost more earlier in the year. But the year-to-date column shows more dispersion. That means earlier in the year stocks were trading primarily on their individual fundamentals.

In the last month there’s been a general move to sell risky assets across the board, regardless of fundamental factors. That typically happens when there’s either a financial crisis or a crisis atmosphere. There seems to be a fear among many that China’s problems will spread and become something of a contagion similar to what happened in 2008 after the U.S. had its problems.

I don’t think China is a large enough factor in the global economy for that to happen. China’s problems have a negative effect on countries that rely on commodity exports. But others are benefiting, especially countries that primarily import and consume commodities.

Yet, there are risks in each region around the globe. Europe’s economy is slowing. In recent years its policymakers have been both slow to respond and responded with measures of a much lesser magnitude than what was needed. Japan continues to struggle with its long deflationary depression. Emerging economies with commodity-based economies are struggling. The U.S. has self-sustaining economic growth. But the Fed wants to tighten policy and will have few effective measures left if it tightens too much, too fast or if the slowing global economy drags down the U.S.

Last week I said that if you haven’t sold Tweedy, Browne Global Value I would hold it and wait to see how things play out. The fund rose, declined, and rose again so that as of Thursday’s close it was above our “sell below” price of $25.50. Now that the panic is over, I would sell if it closes below $25.50 again.

In the September issue of Retirement Watch I wrote that there are fewer margin-of-safety opportunities for investors now than at most times. That continues to be the case. The recent declines haven’t been enough to significantly change values. They’ve also raise the specter of a shift in economic trends.

The funds in our recommended portfolios were selected because they are likely to hold their value better than the most and even increase in value in this kind of environment. Those that might not perform this way have “sell below” prices on them. I recommend holding our positions and waiting for further developments.

The Data

This was a week of major economic data releases, and the markets responded to them.

As usual markets overreacted to the employment reports. Longtime readers know that these are based on estimates and subject to major revisions. This month’s reports had something for everyone. The headline employment rate dropped again to 5.1%. That’s the lowest level since April 2008 and is what many economists consider to be full employment. Only 173,000 jobs were created. That is well below estimates and the number for recent months. Yet, the average work week increased, and average hourly earnings increased above expectations.

Despite the disappointing jobs number, the reports show the labor market continues to improve at a steady rate. The improvements in hours and earnings are important, because the economy is largely going to grow at the same rate as household incomes.

The ADP Employment Report, unlike in recent months, was a good foreshadowing of the employment situation reports. Also, new unemployment claims increased by 12,000. That’s well above recent weeks, but still keeps the four week average at a very low 275,000.

The non-manufacturing sector of the economy continues to look healthy. The PMI Services Index increased above last month and more than expectations, indicating growth in that sector. The ISM Non-Manufacturing Index declined a little from last month but also was above expectations and indicates good growth.

Manufacturing didn’t fare as well in the week’s reports. Manufacturing is more susceptible to global declines in demand, a strong dollar, and the sharp decline in energy prices.

The Dallas Fed Manufacturing Survey, once the strongest part of the economy, took a sharp drop after appearing to stabilize for a few months. This report and the Kansas City Fed report reveal most of the effects of declining energy prices on U.S. manufacturing. The Chicago PMI Index declined only fractionally, but the details of the report were less positive. New orders, production, and other key components were weak.

The PMI Manufacturing Index declined a little again, but that brought it down to its lowest level since October 2013. The ISM Manufacturing Index also dropped and by more than expectations, bringing it down to its lowest level since May 2013.

Factory Orders were more complicated. They headline number was a small increase and was lower than expectations. But last month’s number was revised higher. Also the durable goods segment, which excludes most energy-related activity, was sharply higher. Vehicles sales were a major part of that move.

Overall, the data for the week are consistent with what we’ve seen in recent months. The exception is a new decline in manufacturing. The unknown is to what extent the recent market turmoil will reduce economic activity by causing households and businesses to reduce economic activity.

The Markets

Stocks rallied late Friday so that they didn’t close at their lows for the week. Even so, the returns were decidedly negative. Emerging market stocks did the worst, losing about 3.25%. The All-Country World Index lost about 2.6%. The S&P 500 lost about 2%. The Russell 2000 U.S. Smaller Companies Index and the Dow Jones Industrial Average each lost about 1.75%.

Bonds were mixed for the week. Treasury Inflation-Protected Securities (TIPS) lagged, losing about 0.8%. Long-term treasuries lost a fraction less. High-yield bonds actually had a slight gain of about 0.1%. Investment-grade bonds gained just over 0.2%.

The dollar rallied, gaining about 0.4%.

Commodities for the most part had a good week. Gold lagged, losing about 0.3%. Energy-related commodities gained 2%, though they were up 6% early in the week. Broad-based commodities gained 1%.

Some Reading for You

Is this global slowdown different from others? This article explores.

This article explains why most investment forecasts fail.

Will mergers of insurers make Medicare Advantage plans less competitive? The hospitals say so.

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