February 2015

February 28, 2015 04:45 p.m.
Your Retirement Finance Week in Review

You still can attend my talk tomorrow to the local Washington, D.C. chapter of the AAII (American Association of Individual Investors) You can find details here.

Greece finally was on the backburner this week. The country presented some reform proposals to European officials that were acceptable. That means the debt extension deal from last weekend is in place. We don’t have to go through all the drama again for another few months.

The data from the U.S. this week was decidedly mixed. It is important to view it correctly.

We saw slower manufacturing. This no doubt is part of the second phase of the oil price decline. The first phase was mostly positive with consumers and businesses enjoying the benefits of lower energy prices. The second phase is when sustained lower prices cause reductions in the energy production sector and related industries. A number of energy companies have announced reductions in capital investment, shutdowns of production, reductions in exploration, and lay offs. This affects not only energy companies and their employees but also manufacturers that build drilling equipment and other firms.

Fed Chairman Janet Yellin recognized this in her testimony to Congress this week. Though many economists were convinced earlier this year that the Fed would raise interest rates in June, Yellin indicated that isn’t determined yet and could easily slip to later in the year given the weakness in the economic recovery and fragility of some sectors of the economy.

We remain in the later stages of the economic recovery and bullish stock market. There’s no telling how long this will last. The Fed seems determined to err on the side of maintaining easy monetary policy too long instead of tightening too soon. While the markets try to assess when the next change in policy will come, expect a lot of uncertainty and volatility.

The Data

Let’s look first at manufacturing. There were several reports this week, and they were dramatically different from the strong reports of the last year or so. As I said above, I believe this is largely the fallout from lower energy prices. Another factor is the strong dollar. This is lowering overseas sales by U.S. companies, including manufacturers. Several, especially Caterpillar, mentioned this in their recent earnings reports.

Now, for the details. Both the Dallas and Richmond Federal Reserve Banks in their regional manufacturing surveys found that there essentially was no growth in their regions. The Kansas City Fed found slight growth in its region. Durable Goods Orders were a positive surprise this month after a decline last month. This data point is volatile month to month, so it’s wise to look at the trend over several months. That trend indicates modest growth.

The Chicago Purchasing Managers Index took a sharp drop to 45.8. Readings under 50 are supposed to indicate a reduction in the economy. The reading was the lowest since July 2009. But the report itself attributed the decline to a combination of bad weather and effects from the labor problems in west coast ports. This report is inconsistent with other reports that show modest growth and slowing growth but not a reduction in activity.

There were several housing reports this week, and they indicated still positive bur weak growth in housing. Sales of existing homes are struggling. They overwhelmed new home sales early in the recovery, because new homes couldn’t compete with all the foreclosure and distress sales. Now, existing home sales are suffering largely from a lack of homes available for sale. Last month the number of sales declined 4.9% from the previous month and are up only 3.2% for 12 months.

New home sales on the other hand came in above expectations and matched last month’s sales. Price reductions might have helped with the median price declining over 2%. But over 12 months the median price is up 9.1%.

The S&P Case-Shiller Home Price Index improved with the sharpest monthly price increase since last March. Price growth has been slow recently, so the 12-month increase is only 4.5%. It was in double-digits a year ago. The FHFA House Price Index reported similar numbers. Pending home sales rose 1.7%, which was about what was expected.

The PMI Services Flash Index increased sharply to a four-month high. But the outlook component of the index was at a four-month low.

Consumer Confidence as measured by The Conference Board dropped a bit after a sharp increase in January. The level still is a good one, but it’s important that the component with the largest decrease was for expectations. But Consumer Sentiment as measured by the University of Michigan increased sharply from the mid-month reading. In this survey, the expectations component increased.

Inflation still is well below the Fed’s expectations and was negative for the month. Over 12 months the headline CPI is -0.2%. Excluding food and energy it is 1.6%. No doubt the sharp price declines in energy and other commodities are a major reason the CPI is negative. But the deflation problem could be worse than indicated. The housing component of the CPI, which is a large one, is based on rents. Because of the problems in the single-family home market, rents are rising. The importance of rents in the CPI could be overstating the inflation that’s actually occurring.

New unemployment claims rose sharply, and the four-week average also increased.

The Markets

It was a positive week for most stock indexes, though they gave up some gains on Friday. The leader was emerging market stocks, which gained 1% after being up 1.6% early on Friday. Next with a 0.8% gain was the Russell 2000 U.S. Smaller Companies Index. The Dow Jones Industrial Average gained 0.4%, while the All-Country World Index gained about 0.3%. The S&P 500 was the laggard this week, registering no gain or loss.

Bonds finally had a good week. Long-term treasuries led with a 1.6% gain, after being up more than 2% at midweek. Treasury Inflation-Protected Securities (TIPS) gained 1.3%. Gaining around 0.6% were investment-grade bonds and high-yield bonds.

The dollar lost value early in the week but rebounded sharply Thursday morning to close with a 0.7% gain.

Energy commodities had a volatile but positive week, closing with a 2% gain and near their high for the week. Broader-based commodities rose about 1.2%. Gold gained about 0.5%.

Some Reading for You

This article offers explanations of why new homes sales are doing well but existing homes sales aren’t.

Here’s an article in which some mutual fund managers explain how the Fed distorted the stock market in recent years and made it difficult to pick stocks.

There’s a new book on money lessons for children that’s worth a look if you have young children or grandchildren.

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

February 20, 2015 04:40 p.m.
Your Retirement Finance Week in Review

One of my presentations at the Orlando World MoneyShow earlier this month still is available for viewing, along with the others, on the conference’s web site. You can view it free by clicking here. If you haven’t already registered with the eMoneyShow, point to the upper right side of the page and click on “register free.”

Last week I told you that I’m scheduled to give a presentation to the local Washington, D.C. chapter of the AAII (American Association of Individual Investors) on Feb. 21. Because of the adverse weather forecast, that talk is rescheduled to Feb. 28. You can find details here.

Most of the financial news this week concerned the negotiations, if you can call them that, between Greece and other European officials. You’re probably aware there was a lot of name calling and posturing but not much negotiating. An interesting development was this article in The Wall Street Journal arguing that Greece can pay all of its debt, but that its leaders aren’t willing to bear the burdens that would be required. (A subscription might be required.)

The week ended with leaked news that there had been an agreement in principle to extend the current debt deal for another four months. This doesn’t end anything. It continues the European practice of kicking the can down the road and hoping that somehow things improve without officials having to decide anything.

The Greek debt turmoil overshadows another important series of events. The dollar has been soaring against most other currencies for a while. This is starting to hurt revenues and profits of U.S. multinationals who earn a large percentage of their revenues and profits outside the U.S. These companies benefited the most in the years immediately after the financial crisis. Foreign sales were much stronger than domestic sales. Now, the reverse is happening. That’s hurting the stocks of these high profile companies as their earnings reports disappoint. That’s probably as much of a drag on the major stock indexes as the Greece situation.

The Data

The relatively small amount of data issued this week all indicated continuing growth but at a slower pace than late in 2014.

For example, the Empire State Manufacturing Survey came in at the average for the last five months but a bit below last month’s number and expectations. The reading is interpreted as indicating moderate growth. Likewise, Industrial Production was up modestly after decreasing 0.1% the previous month. But the number was less than expectations, and the previous month was revised down. The Philadelphia Fed Survey also was modestly lower than last month. An interesting development in both the Empire State and Philadelphia Fed surveys is a sharp drop in the outlook for the next six months in both surveys. Finally, the PMI Manufacturing Index Flash increased very modestly, indicating continued moderate growth.

There were two housing market reports. The Housing Market Index from the National Association of Home Builders declined modestly, indicating the home builders remain confident about new home sales in coming months. Housing starts declined 2%, but that follows a more than 7% increase the previous month. But that still is an 18.7% increase from 12 months ago. The decline was concentrated in single family homes. Multifamily home starts were higher.

Leading Economic Indicators as compiled by The Conference Board increased modestly and at a lower rate than the previous month. Plus, last month’s number was revised down slightly.

The Markets

Stock markets surged late Friday after news was leaked that European leaders agreed to a four-month extension of the Greece debt deal. The surge was enough to generate positive returns for the week for all major indexes and to push the S&P 500 and DJIA to new record closing highs.

The All-Country World Index led the way with slightly more than a 1% return. The Russell 2000 U.S. Smaller Companies Index rose 1%. The S&P 500 gained just under 1%. The Dow Jones Industrial Average gained 0.5% while emerging market equities were a fraction behind it.

Bonds didn’t do as well. High yield bonds, as usual, followed stocks with a gain of about 0.4%. Investment grade bonds lost 0.2% while Treasury Inflation-Protected Securities (TIPS) lost about 0.4%. Long-term treasuries had a tough week, losing about 1.5%. They were down more than 2% early in the week.

The dollar was up 0.2% for the week.

Gold had the worst week, losing about 2.5%. Energy-based commodities lost 2%. Broad-based commodities lost just under 1.5%.

Some Reading for You

Here’s a good review of the latest back and forth between Greece and European financial leaders.

Medicare and its payment system can distort your medical care. Here’s how.

This is one view of what likely would happen if Greece were to leave the European Currency Union.

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

February 13, 2015 04:50 p.m.
Your Retirement Finance Week in Review

Thanks to all of you who came to the Orlando World MoneyShow last week and especially to those who came by our booth to talk. I enjoyed meeting so many of my readers and hearing their experiences and feedback. We’ll next be at the Las Vegas MoneyShow in May.

Some of you tried to tune in to the live web cast of my presentation and others. I’m told that the feeds weren’t very good. But I’m also told that the replays, which are available through March 1 are clean and good. You can find them here.

I’m also giving a presentation to the local Washington, D.C. chapter of the AAII (American Association of Individual Investors) on Feb. 21. You can find details here.

The markets and economy cooperated while I was on the road by being fairly stable. We also didn’t have major news events. Investors mostly are waiting to see what happens in Europe after January’s Greek election. After a lot of public back-and-forth, the new Greek government and the European financial leaders seem to have retreated to back rooms to try to work out a deal. While some of the Greek leaders want to leave the currency union so they can adopt a looser monetary policy, there would be negative effects on that country and the rest of Europe.

For now, we have steady, sustainable growth in the U.S., and we are the world economic leader right now. China is slowing, and Europe is weak and in turmoil. The emerging economies are mixed. Those that depend on commodities, especially energy, are in trouble. In big trouble are the commodity-based economies and companies that borrowed heavily during the boom times.

The main issue now is the next phase of the oil price decline. The first phase, which is mostly positive for the U.S., is winding down. Lower prices boost consumer optimism and spending. Now, the energy sector is cutting back, and that is eliminating some jobs and income. Energy prices aren’t likely to fall much from here, and certainly not as much as they have already. So, we’ll see what balance develops between the lower business investment in energy and the higher consumer spending elsewhere.

Also worth watching is how the sharp decline in oil and commodity prices affects those who borrowed heavily during the boom. This will include both countries and companies. Some of these debtors won’t be able to repay on schedule unless prices quickly spike higher. Some emerging economy countries and key companies (often owned or backed by the governments) borrowed heavily. There’s the potential that this debt problem could rival the Latin American debt problem of the early 1980s, though the odds are it won’t be that bad. The good news is that many of these countries accumulated more dollar reserves in recent years than they did before the early 1980s crisis. The countries with the biggest problems are Russia and Brazil.

The U.S. domestic economy remains strong relative to the rest of the world and the last few years. The question going forward in 2015 is to what extent the problems in the rest of the world will affect the U.S.

The Data

There wasn’t a lot of important data issued the last two weeks, but there were several headline-grabbing reports.

The latest employment situation reports last Friday did cause a big stir. The previous month’s number of new jobs was revised sharply higher from the initial estimate, and this month’s number of new jobs was higher than most forecasts. The average workweek stayed steady, but average hourly earnings took a big jump after declining last month. Also, the labor force participation rate increased, indicating that some discouraged workers are optimistic enough to look for jobs again.

Even so, the report should be considered mixed or moderately good news. A major reason for the increase in wages might be a round of new minimum wage increases taking effect. Also, while the number of people working is steadily increasing, a lot of the new jobs are part-time or relatively low wage positions. While some analysts viewed the higher earnings number as an indication the Fed will increase interest rates soon, I think all the factors taken together point toward a slow, steady recover in the labor market. Household incomes are increasing primarily because more people in a household are working instead of because workers are seeing healthy pay increases.

Other job reports also were mixed. Challenger’s Job-Cut Report said that layoffs were increasing, largely due to reductions in the energy industry. The ADP Employment report also showed a declined from the previous month and from consensus. New unemployment claims rose two weeks in a row, ending a long string of weeks below 300,000 new claims. Even so, the four-week moving average declined and is lower than a month ago. Week-to-week the number is choppy, so it is important to look at four-week or longer trends.

The JOLTS (Job Openings and Labor Turnover Survey) report also showed steady improvement in the labor market. The number of job openings increased. The rates of quits and discharges were unchanged. Importantly, the quit rate is about average. Only a few years ago, the quit rate was way down. Workers had little confidence in the labor market and weren’t going to voluntarily leave jobs. Now, they are leaving jobs at the rate that’s prevailed in the past.

The Personal Income and Spending report also was mixed. Income increases at 0.3% again. But wages increased very modestly following a 0.6% increase in November. That gives personal income a 4.6% 12-month increase. Consumer spending actually declined for the month and increased 3.6% over 12 months. Inflation as measured by the PCE Index is well below the Fed’s target.

Retail sales declined sharply, largely because of lower energy prices. Excluding autos and gas, retail sales rose modestly. This indicates that for the most part consumers are choosing to save a big portion of their energy savings instead of spending it on other things. On possibility is that consumers are spending more on services, which aren’t reflect in retail sales.

Consumer sentiment as measured by the University of Michigan declined a bit. It’s still at a high level, the second best in eight years. Last month’s reading was the best in 11 years, so a decline shouldn’t be a surprise.

There were several manufacturing reports that showed continuing but slower growth. Factory Orders were down 3.4%, following a 1.7% decline the previous month and making it five consecutive monthly declines. That’s the worst since the financial crisis. But a lot of the weakness was from the energy sector and from some sectors that typically are volatile month-to-month.

The PMI Manufacturing Index was the same as last month, indicating steady and sustainable growth. The ISM Manufacturing Index declined a little. But it still indicates solid growth, and that index has been above the others for about a year. So, it makes sense that it would decline at some point and become consistent with other readings of manufacturing.

The ISM Non-Manufacturing Index improved a little. It still is indicating good growth in the overall economy but remains below last August’s high reading.

Small Business Optimism as measured by the NFIB declined. But it still is at a positive level and the decline likely was a reaction to last month’s unusually large increase. Last month’s reading was at the highest level since October 2006. Overall, small businesses are doing well, and the decline isn’t anything to worry about. In contrast to a few years ago, small businesses are doing better and have more confidence than larger, global businesses.

The Markets

U.S. stocks neared or broke record highs after doing well in the second half of this week. The Dow Jones Industrial Average was above 18,000 for the first time in 2015 on Friday’s close and was less than 100 points below its record closing high. The S&P 500 reached a new high with its Friday close. The Nasdaq Composite still is less than 5% below the record high it reached in 2000 but is at a 15-year high with Friday’s close.

Emerging market equities, the All-Country World Index, and S&P 500 each gained about 2.5% for the week. The Dow Jones Industrial Average gained about 1.5%. The Russell 2000 U.S. Smaller Companies Index lagged with a gain of about 1.25%.

Bonds didn’t do as well. Long-term treasuries decline steadily most of the week, closing down more than 2.5%. Treasury Inflation-Protected Securities (TIPS) lost about 1%. Investment-grade bonds lost about 0.4%. High-yield bonds managed a positive return of about 0.3%.

The dollar was up early in the week but declined sharply on Thursday. It closed with a loss of about 0.4%.

Commodities had a wild week and closed strongly. Energy-based commodities were down over 3.5% early in the week but closed with a gain of just over 1%. Broader-based commodities didn’t fall as much early in the week but also did well late in the week to close with more than a 1% gain. Gold was down most of the week and lost about 0.7%.

Some Reading for You

New Orleans Saints owner Tom Benson is another example of estate planning gone bad.

You might be interested in lies investors tell themselves, and you’re likely to hear many of them on cable television.

Here’s some important research on how to teach young people to make better financial decisions.

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