November 2014

November 26, 2014 03:00 p.m.
Your Retirement Finance Week in Review

Happy Thanksgiving to each of you.

Since there isn’t going to be significant data reported Friday and markets will close early on Friday. I’m doing the weekly summary on Wednesday.

A lot of data was reported in this holiday-shortened week. Markets took a break from the strong rally that followed the October 16 bottom. Also, the data for the week generally was weaker than expected, in contrast to the last few weeks. Even the weaker data, however, still indicates decent growth in the U.S.

The main risks to the U.S. economy and the markets continue to be from outside the U.S. Europe, in particular, remains a potential flash point. A leading German official made a clear statement in opposition to the plans of European Central Bank President Mario Draghi. It’s clear that France, Spain, and Italy remain in dire economic straits with few signs that things could turn around. As in 2011, I’m starting to see analysts say there’s a real possibility that Greece, Italy, and perhaps some other countries could withdraw from the European Union in the next year or so.

Nothing is likely to happen in Europe imminently, but the first part of 2015 could be interesting.

The Data

Let’s start with the week’s manufacturing data. Manufacturing has been a very strong sector of the economy most of 2014 and had a surge recently. This week’s data indicated manufacturing slipped into a lower gear in the last month.

The Dallas Fed Manufacturing Survey indicated good growth again. This survey’s been the strongest of the Fed regional bank surveys for some time. But the report indicated the growth rate slipped a notch or two. The Richmond Fed Manufacturing Index was positive but well below the strong reading last month. Again, growth but at a slower pace than in the previous month or two. The Chicago Purchasing Managers Index was more of the same. It was a big dip from last month’s number, but still at a level indicating healthy growth.

Durable Goods Orders were a mixed bag. The headline number indicated a nice jump in orders. But a lot of that was due to aircraft, especially military orders. Exclude transportation and the report indicated broad-based weakness. The ex-transportation new orders declined in the last month.

Consumer Sentiment as measured by the University of Michigan improved from last month’s final number but slightly declined from the mid-month flash number. But Consumer Confidence as measured by The Conference Board declined from last month’s number, which was the high for the recovery period. Even so, the decline isn’t a major worry. Last month’s number was a sharp spike higher from previous months, and details of this month’s report still are pretty good.

Personal Income continued its steady, slow increase. It now is up 4.1% for the last 12 months. Consumer Spending also increased after being flat last month. But both Income and Spending were a little below expectations. As usual, inflation as measured by the PCE Price Index was well below the Fed’s 2% target.

Several housing reports taken together indicate an uneven but probably still improving housing market. The S&P Case-Shiller Home Price Index had another modest monthly increase. That brought the 12-month increase down to 4.9% nationally. Not long ago, the 12-month increase was well into double digits. The FHFA House Price Index had a similar 12-month increase of 4.3%. But it showed no increase for the last month.

New home sales showed a slight increase from last month, but that’s because last month’s number was revised lower. This month’s 458,000 sales number was well below expectations. But the report also revealed that the average selling price increased by 16.5%, which explains why fewer units would change hands. This report is very volatile from month to month. On a longer basis, it showed that over the last 12 months new home sales are up 1.8%.

The Pending Home Sales Index (which covers only existing homes) declined 1.1%. Over 12 months, the index is up 2.2%. Overall, it appears that the housing market is slightly positive over the last 12 months after a red hot 2013.

New unemployment claims unexpected increased by 21,000, putting them above 300,000 for the first time in a while. It’s the highest number since early September. We’ll have to wait to see if this is a one-week anomaly or a reversal in trend.

The second estimate of third quarter GDP was an increase to 3.9% from the 3.5% first estimate. I don’t put a lot of emphasis on the number, because it is backward-looking and subject to significant revisions. But it reflects what we saw in data the time: Economic growth increased most of the third quarter to perhaps the highest rate of the recovery.

The Markets

There wasn’t much happening in the stock indexes this week. Most U.S. indexes took a pause from their rally of the previous four weeks. The leader was the Russell 2000 U.S. Smaller Companies Index with a 0.8% gain. The All-Country World Index increased about 0.4%. The S&P 500, Dow Jones Industrial Index, and emerging markets all gained less than 0.5%. Emerging market stocks were down Monday and Tuesday but had a strong recovery on Wednesday.

Bonds had a strong week. Long-term treasury bonds increased 1.4%. Investment-grade bonds increased just under 1%. High-yield bonds and Treasury Inflation-Protected Securities (TIPS) each rose about 0.3%.

The dollar tumbled after its recent strong rally, losing 0.8%.

Commodities were mixed. Energy-based commodities continued their bear market since June, losing another 2%. Broader-based commodities and gold both were around break-even for the week.

Some Reading for You

Here’s an article on how to make a late-life career change.

This post gives a very dark view of Europe’s economy and the European Union.

This purports to be a letter from a big-name broker employee listing all the ways big brokers need to change.

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

November 21, 2014 05:00 p.m.
Your Retirement Finance Week in Review

There was plenty of news and data this week, and most of it was positive for investors.

The biggest news came from policymakers. I’ve said that the biggest risks to the U.S. economy and markets these days are from outside the U.S. The problems in Europe and the engineered lower growth in China could reduce growth in the U.S. The European situation could spiral into a global crisis.

This week Mario Draghi of the European Central Bank again said what he could to make investors more confident that the ECB will do the right thing. The ECB still is far short of taking action similar to what the U.K. and U.S. did, but it plans to do much more than it has the last few years. For now, Draghi’s words were enough to inspire investors.

The bigger news this week came overnight on Friday morning when China’s Central Bank announced it would reduce interest rates to increase growth. China’s policies the last couple of years were designed to slow growth, deflate bubbles, and control inflation. Many investors became concerned recently when China’s growth rate was reported to be below 4%.

In the U.S., the Fed released the minutes of its last meeting. Investors who favor easy money and fear a premature Fed tightening were comforted by the minutes. Stocks markets globally were sliding around the time of that meeting, and data immediately prior to the meeting tended to be below expectations. In the minutes, committee members made clear that recent events, especially the problems in Europe and Asia, were headwinds for the U.S. economy and mitigate against tightening policy sooner instead of later. Also, despite the decline in the unemployment rate, overall the labor market is sluggish. That also mitigates against tightening policy soon.

Overall, the news and data this week point to continued growth in the U.S. economy around 3% annualized. In the last month the economy appears to have increased growth a big after slowing some in September. Since the Fed doesn’t have many tools left if growth were to falter again, the smart move is for the Fed to delay interest rate increases as long as possible. If it were to tighten a little prematurely and cause the economy to stumble, there wouldn’t be much it could do to boost growth. Until inflation appears to heat up, the Fed isn’t going to do much.

The Data

There was a lot of manufacturing data this week, and most of it indicated the sector is improving. The main outlier was Industrial Production. It declined 0.1%. But the manufacturing sector of the report increased 0.2%. So even that report indicated growth in manufacturing. The Empire State Manufacturing Index had a solid increase, and the report was positive almost across the board. The Philadelphia Fed Survey had a very sharp increase, which is important because Philadelphia and New York Fed Surveys lagged the rest of the country most of 2014. The Kansas City Fed Manufacturing Index also had a nice increase. The PMI Manufacturing Index Flash for the first half of November had a small decrease. But it still indicated growth, and the flash index usually isn’t in line with the full report for the month that will come in a few weeks.

Inflation remains under control. Producer Prices rose more than expected, mostly due to a sharp increase in final demand services. This was due largely to an increase in a category called trade services. We’ll see if that is a one-month blip or if it continues. Consumer Prices, in the meantime, remain under the Fed’s target. While there are some pressures toward higher prices in the U.S., they are balanced by deflationary pressures from the stronger dollar, weaker commodity prices, and slow growth in Europe and China. The one-year change in the CPI is 1.7%.

The housing data mostly was positive. The weak report was housing starts, which tend to be volatile. They declined and were well below expectations. But the big drop was in apartments, which have been strong for several years. Single-family starts increased modestly, and new housing permits increased, indicating higher starts in a few months.

Existing home sales increased and were above expectations. More importantly, inventories increased and the number of distressed and foreclosure sales continued to decline. Lower interest rates and a reduction in price increases clearly helped home sales. The homebuilders also are more confident, registering an increase in the Housing Market Index to its second-best level in the recovery.

New unemployment claims decreased slightly, indicating the labor market continues its steady healing.

The Leading Economic Indicators as measured by the Conference Board rose sharply, another indicator of a pick up in economic growth.

The Markets

The Dow Jones Industrial Average and S&P 500 rose to record highs again, and closed the week at new records. But emerging markets led the way after the announcement of China’s interest rate decrease. Emerging market equities rose 3.5% for the week, almost all of it on Friday. The All-Country World Index was next with a 1.5% increase. The S&P 500 rose about 1.3%, and the DJIA rose just under 1%. Small companies stocks as measured by the Russell 2000 U.S. Smaller Companies Index continue to lag. They actually lost a fraction for the week.

Bonds had a good week. Long-term treasuries rose almost 0.8%. Investment-grade bonds, high-yield bonds, and Treasury Inflation-Protected Securities (TIPS) all rose around 0.5%.

The dollar had another strong week, rising 0.4%. This should continue as long as Europe and Japan indicate they plan to expand the money supplies.

Commodities were very volatile but finished on positive notes. Gold had a 1.2% increase while energy-based and broad-based commodities were slightly above that.

Some Reading for You

Life expectancy is increasing, and the American Society of Actuaries is updating its tables. Are you planning for a long enough retirement?

Here’s a web post of historic stock valuations from a lot of different angles.

Here’s a good post of guidelines on how to interpret data and avoid data mining mistakes.

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

November 14, 2014 05:30 p.m.
Your Retirement Finance Week in Review

There wasn’t much data for investors to react to this week, but somehow they managed to make it a volatile week in almost all assets. We’ve been through a wild month in which investors quickly sold off stocks after they reached record highs. Then, markets quickly turned and returned many stock indexes to new record highs.

I expect a lot of ups and downs in most markets, especially stocks, the next few weeks and perhaps months before a new trend is established. My guess is that the next trend in stocks will be a positive one. The U.S. economy is doing well, even without the Fed’s quantitative easing. The Fed isn’t going to have to raise interest rates for a while, because inflation will remain low. Before investors agree with a positive outlook, there could be another sell off.

There always are risks, especially from slowing global growth and from Washington. But I don’t think the pessimists are going to find satisfaction for a while.

The Data

The data that was issued this week was mostly positive. Data from the last few weeks is indicating that growth might be increasing in the U.S. again. There was very strong growth late in the summer, and then the economy downshifted a bit in August and September. Since then, growth has increased a bit more.

The Small Business Optimism Index of the NFIB increased a notch. Again the survey of small business owners indicates that current job openings are in the increase and businesses plan to increase capital spending and believe they might have to increase wages.

Consumers appear to be in good shape. Retail sales increased, which was very positive given the recent sharp drop in gasoline prices. Normally a drop in gas prices causes a drop in retail sales for a while before consumers feel confident spending the savings on other items. This month after excluding autos and gasoline, retail sales increased a strong 0.6%. Retail sales are volatile on a monthly basis, so we don’t want to read too much into one month.

Consumer Sentiment as measured by the University of Michigan rose for the fifth month in a row to another new post-recovery high. Strong consumer optimism usually is a sign of higher retail sales in coming months.

The labor market continued its steady healing from the collapse of 2008. New unemployment claims increased by 12,000, but this still keeps the number comfortably under 300,000 and the four-week average at 285,000.

The Job Openings and Labor Turnover Survey (JOLTS) also showed steady improvement. We had the highest levels of new hires since December 2007. Perhaps more importantly, we had the highest number of quits since April 2008. More people quitting jobs indicates they are optimistic about the job market and are actively looking for better jobs. People quitting jobs also makes it more likely that the unemployed will be hired.

The Markets

Stocks began the week with a continuation of the rally of the last two weeks, and then slowed a bit. There was a fair amount of divergence between the major indexes this week. I expect there to be a period of ups and downs in the indexes before investors decide if they want to drive the indexes to new highs.

The Dow Jones Industrial Index led the way with a gain of about 0.5%. A fraction behind were the All-Country World Index and S&P 500. Small company stocks as measured by the Russell 2000 U.S. Smaller Companies Index started the week strongly, with a 1% gain by early Thursday. Then they tumbled to close with a 0.2% loss for the week. Emerging market stocks were down all week but had a rally on Friday to close with only a 0.4% loss.

Bonds also had a lot of divergence. Long-term treasuries led the way with a 0.2% gain. But they were down early in the week, then up, then down again, before closing with a rally on Friday. Investment-grade bonds were less volatile but were down most of the week and closed with a 0.3% loss. Treasury Inflation-Protected Securities (TIPS) had the same loss but were down all week and managed to limit their losses with a rally on Friday. High-yield bonds had a bad week, losing almost 1% after steep slides on Thursday and Friday.

The dollar was up and down, closing with a 0.1% loss after being up 0.6% on Friday morning.

Gold was flat most of the week but rallied on Friday to close with a 2.5% gain. Energy-based commodities continued to suffer with a 3% loss. Broad-based commodities lost just under 1%.

Some Reading for You

Do high recent stock returns mean future returns are likely to be low? This post has the historic data.

Here’s an article on ways to pass down family history.

This is an interesting take on what it was like behind the scenes of the mortgage scandals.

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

November 7, 2014 04:30 p.m.
Your Retirement Finance Week in Review

There was a lot to digest this week: election, international events, big market moves, and a lot of data.

I’m not one who thinks elections move markets in the short-term. I believe investors who factor elections into their strategies were following things closely. They were following the polls and already were betting that the Republicans would take the Senate and increase their majority in the House. They might be surprised by the extent of the changes, but that’s all.

The real question about the election is how will the President and the new Congress work together. After the 1994 elections, when the Republicans surprised almost everyone by gaining a large majority of the House, President Clinton choose to work with the new majority and find policies on which they could compromise. That helped produce balanced budgets for a while, tax cuts, strong economic growth, and a powerful stock market. (Other factors were at work as well.) It’s not clear we’ll have that kind of result today.

The long-term important news was from Europe. The European Central Bank held interest rates steady, but ECB President Mario Draghi indicated that the members now were behind him. The staff is preparing plans to implement when needed that will help the ECB engage in a policy similar to those the U.S. and U.K. followed after 2008. Some people wonder why he is waiting, because the European economy clearly is weakening. But markets generally seemed pleased that Draghi is confident of being able to move aggressively.

The European economy is a drag on the global economy. Neither China nor the U.S. can grow adequately if demand from Europe is weak. The ECB is worth watching more than the Fed these days.

The Data

The data was particularly strong this week, bouncing back from a dip over the last month or so.

The reports worth noting both are from ISM. Its Manufacturing Index and Non-Manufacturing Index both indicated the economy is doing well across the board. The Manufacturing Index was particularly strong and out of line with some other data. For some reason this year this index has been stronger than other manufacturing data. The Non-Manufacturing Index was a little lower than last month but still strong. Of note is that it was particularly strong in employment, indicating both more jobs and higher wages to come.

The PMI Manufacturing Index for October was consistent with other data, showing strength but not as strong as in previous months. Factory Orders declined, but a little bit less than expected.

The PMI Services Index was consistent with the ISM Non-Manufacturing Index, showing slower but still solid growth.

This was the big week for employment data, and the reports showed recent trends in place. The first was the ADP Employment Report, which showed a few more private sector jobs created than last month. New unemployment claims declined by 10,000, bringing the four-week average to 14-year low. Finally the major Employment Situation reports delivered on Friday had a mixed picture. There were a healthy number of new jobs created, but not as many as expected or in recent months. The unemployment rate declined again, but partly because of a declining labor force. Average hourly earnings went up by a small amount again, continuing the trend of very modest wage increases. Yet, average hours worked increased a bit. Altogether the employment data show continued improvement in the labor market but a at a slow pace. Sometime in 2015 or early 2016 we’ll reach a point when the labor market will be near normal and there will be upward pressure on wages. That will help overall economic growth but put a crimp in corporate profit margins.

Consumer Credit rose a bit. But most of the increase was in auto loans and student loans. Growth in the traditional consumer spending tools of credit cards and mortgages continues to grow slowly.

The Markets

Stock indexes have been soaring since bottoming on October 16, though they started to stall a bit as this week went on. The rally has signs of a classic short-covering rally. Those who were pessimistic about stocks finally gave in and covered their short positions. That’s over, and we’ll see if the rally continues or if the correction resumes. History has enough data to argue for either result. Since the economy is healthy, I expect stocks to resume their rally after a bit of a pause.

This week was mixed for stock indexes. Emerging markets fared poorly, losing almost 2%. The Russell 2000 U.S. Smaller Companies Index, after almost two weeks of strong gains, lost about 1.6%. The All-Country World Index lost almost 0.5%. The S&P 500 gained about 0.5%, and the Dow Jones Industrial Average gained 1%.

Bonds had a good week. Long-term treasury bonds led the way with a gain of almost 0.6%. Treasury Inflation-Protected Securities (TIPS) rose almost 0.5%. High-yield bonds and investment-grade bonds each rose about 0.1%.

The dollar after being up almost 1% on Thursday gained 0.4%.

Commodities had an up and down week. Early in the week they continued the sell off that has been strong since June. Most commodity indexes were down around 2%. But they rebounded the last two days of the week. Gold led the way and eked out a gain of about 0.25%. Broad-based commodities lost a fraction. Energy-based commodities lost 1%, compounding their losses in the second half of the year.

Some Reading for You

Most people make data on instincts or rules of thumb, instead of data. Here’s a good critique of that approach.

Researchers on a four-decade study in the U.K. says their study indicates the keys to a healthy life.

The managers at Hoisington Investment Management explain why interest rates are going to stay low.

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