August 2013

August 30, 2013 05:15 p.m.
Your Retirement Finance Week in Review

The week started with the big news being about potential military action against Syria. The increased potential for an action moved markets. But as the week went on, the data started to move markets.

The most recent data is weaker than the lagging data, as you’ll see below. For example, the second report on second quarter GDP was revised sharply higher from the first report. But the more recent data, such as housing and personal income and outlays, indicate that higher interest rates and other factors are slowing growth a bit.

A couple of weeks ago it was almost clear that the Federal Reserve had enough evidence of economic strength to reduce bond buying a bit. That’s a harder case now. The economy clearly is losing some steam in the face of higher interest rates plus the fiscal tightening that started earlier in the year.

Now, some investors are thinking that the Fed might not take action at its September meeting. There even are some who still believe that the Fed’s next move will be to increase stimulus instead of trimming it.

I continue to believe that most investors overreacted to the Fed statements in May and June. There are bargains in a number of income investments, especially tax-exempt bonds and closed-end funds that own them. I was early in calling for these investments in July. But they should be profitable after the Fed’s September meeting.

The Data

This week had a combination of somewhat older, lagging data and newer data. The newer data shows higher interest rates are slowing sectors of the economy, but the economy still is in a slow-growth mode.

The biggest surprise of the week was the revised GDP report for the second quarter. This is the second of three reports on GDP and showed annualized growth of 2.5% instead of the initial 1.7%. That’s a big jump and ahead of expectations. The report shows a fairly robust private sector (relative to the rest of this cycle, not to history). The major source of the increase was higher exports. Though Europe is a mess, it seems to have stabilized and is even growing a bit from its very low base, and that helps the U.S. economy.

Even so, this is middling economic growth. It isn’t enough to improve the employment picture rapidly. The next quarter or two are likely to be a bit lower because of the effects of higher interest rates.

As I mentioned, the more recent data are less robust.

The week’s manufacturing data were mixed. The Dallas Fed Manufacturing Survey revealed growth but at a lower rate than last month. The Richmond Fed Manufacturing Index was better, showing a strong improvement from last month. Durable Goods Orders were down, but this report always has to be read carefully because of the volatile transportation segment and also month-to-month volatility. Excluding that segment, the year-to-year growth is a healthy 5.9%. Yet, the monthly number was a bit soft, which was reflected in the Fed regional bank and other surveys over the last month.

A couple of housing reports this week indicate that the housing sector won’t continue the rapid growth of the last year or so. The Case-Shiller Home Price Index rose 0.9% for the month but was a little below last month and expectations. Pending home sales, meanwhile, declined a little bit. It looks like higher mortgage rates plus higher home prices are having some effects on the residential market. I don’t expect a collapse, but I do expect things will improve at a much slower pace than we saw in the spring.

New unemployment claims declined a little but basically are in the same 330,000 to 340,000 range we’ve seen for a while.

Corporate profits for the second quarter, as measured by the Bureau of Economic Analysis, rose 5.8%. This measure determines a measure of after-tax book profits instead of using the quarterly earnings reports issued by corporations. Most economists and analysts believe it is more accurate and less subject to manipulation than the earnings reports. It’s a nice number but well below a year ago and below most quarters before 2006.

The Chicago PMI, which tries to measure all business activity in the Chicago area, rose a bit and was the highest monthly gain in a few months.

Personal income and outlays contained several negative surprises. Analysts didn’t expect much in either income or consumer spending, but both came in below expectations at 0.1% growth. Even worse, wages and salaries declined 0.3% after gaining 0.4% last month. Also, inflation remained solidly below the Fed’s stated target of 2%. It’s hard to find any good news, or any reason for the Fed to reduce stimulus, in this report.

Two readings of household confidence generally were positive. The Conference Board’s Consumer Confidence Index rose slightly and remains near post-crisis highs. But details in the report show some weakness, such as reduced plans to make major purchases and less confidence in the current situations. Consumer sentiment as measured by the University of Michigan rose a solid amount and was above expectations. But it still is well below July’s reading. Unlike the Consumer Confidence Index, this measure showed households with increased confidence about both the current situation and expectations.

The Markets

News about possible military action in Syria largely moved the investment markets for the week. Stocks were slightly positive to start the week but declined sharply on the reports military action by the U.S. was being considered. The All-Country World Index fared worst, losing 2.5% for the week, while the Dow 30 did best by losing 1.4%. The S&P 500 lost about 2% while emerging markets lost 1.5%. They soared out of last place with a Friday surge.

Bonds and the dollar, the usual safe havens, had good weeks. Long-term treasury bonds fared best. They were up over 3% at one point but tumbled on Friday to hold on to a 1.6% gain. Treasury Inflation-Protected Securities (TIPS) also tumbled Friday to register a fractional loss.. Investment-grade bonds did a bit better with a 0.5% gain. High-yield bonds struggled for a fractional gain. The dollar was up almost 1%.

Commodities had a volatile week. They rose sharply on the news of possible military action then declined later in the week. Energy-based commodities finished with a 1.3% gain. Broader-based commodities and gold declined about 0.2%.

Some Reading for You

Emerging markets went from investor darlings to basket cases. Here’s a good summary of why.

Medicare spending is increasing less rapidly. It’s not all good news. Read this summary and the links in it.

There’s likely to be a shortage of caregivers for the elderly. Line up your caregivers early, says this report.

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

August 23, 2013 04:45 p.m.
Your Retirement Finance Week in Review

The big news this week was the release of the latest minutes of the Federal Reserve’s Open Market Committee, the group that sets the Fed’s monetary policy. Investors and the media in general continue to misunderstood and overreact to statements from the Fed and its members.

There wasn’t much new in the Fed minutes. They reinforced what we already were told. For some reason, a large number of investors and media people believed there was something new.

Most Fed officials seem to believe that the U.S. economy is near a point when the Fed should begin to reduce bond buying. That thought panics a lot of investors into believing that the Fed is about to tighten monetary policy significantly and raise rates. Let’s look at what the Fed also is saying in that statement.

First, the economy is not there yet. If it were that healthy, the Fed already would have reduced bond buying. It hasn’t. It might do so at its September meeting, or it might wait longer. In fact, all FOMC members agreed at the last meeting that reduced bond purchasing wasn’t yet appropriate. Instead, a number of them argued that tightening would be appropriate if the economy continued to improve at its recent pace.

Second, Fed actions will depend on the data. Unlike in the previous episodes since 2008, the Fed isn’t letting the calendar or firm deadlines dictate changes in policy. It is following the data and responding to it. Also, the Fed’s analysis of the data will be more complex than some commentators seem to think. For example, it isn’t going to simply stop the bond buying when the unemployment rate declines to 6.5%. It will look at other factors, such as the high level of part-time employment, the number of people who left the work force and now are returning, the level of wage increases, and more. For example, while the unemployment rate has declined, much of that decline is due to people taking part-time jobs when they want full-time jobs and many employed people are receiving modest if any pay increases.

Third, a reduction in bond buying isn’t the same as an old-fashioned tightening of policy. Remember that the current level of bond buying is extraordinary and was put in place after the markets and economy slumped in summer and fall of 2012. The Fed is talking only about reducing that level of bond buying in line with improvements in the economy since then.

Fourth, the reduction in bond buying will be gradual. This point and the second one are related. The amount of reduction will depend on the data and will be gradual. There won’t be a shock to the system, and if the economy stumbles the Fed is prepared to reinstate the bond buying that was reduced.

Fifth, it should be considered somewhat good news that the Fed thinks we reached this point. It means the economy might be healthy enough to continue growing without so much stimulus.

Sixth, the Fed isn’t saying the economy is in great shape. It is well aware that we’re growing at an average rate at best and the economy could stumble without the full level of stimulus. Households are facing higher taxes, higher gas prices, higher interest rates, and a great deal of uncertainty about the effects of Obamacare.

People who think they learned from the earlier QE episodes are making a mistake. Since this reduction in QE will be gradual and dependent on the data, it isn’t likely to have the shock effects of the last two attempts to end QE.

I stated a month ago that I believe investors overreacted in May and June. Bonds and other income investments lost too much money and were selling at bargain prices. Markets settled down for a while, but in late July and so far in August, investors sold income investments again. I think once the Fed makes an announcement after the September meeting, things will settle down. There’s a good potential for a sharp rally in oversold income investments, especially closed-end funds.

The Data

There was not a lot of data issued this week. If we can glean anything from the data it is that if higher interest rates are going to have an effect on the economy, it hasn’t happened yet. The U.S. economy continues to grow slowly and so far households have been able to adjust to the year’s higher taxes, reduced federal stimulus, and higher interest rates.

Housing was the subject of the most reports this week. Existing homes sales as reported by the National Association of Realtors were significantly higher than last month and than expectations. The Realtors opined that rising mortgage rates might be causing investors who were on the verge of buying to accelerate their plans. In recent months, low inventory held back sales, but this month inventory increased.

New home sales, on the other hand, plunged. They were well below last month and expectations. At the same time, the number of new homes for sale increased, so there’s more inventory on the market.

Before you worry about the decline in new home sales, read this. It makes the points that new home sales data are volatile and frequently are revised. Also, the homebuilder reports in previous months probably overstated the extent of the housing recovery. Plus, rising interest rates affect the new home sales reports before the existing home reports.

Home prices increased again, according to the Federal Housing Finance Agency monthly House Price Index. The year to year increase now is 7.7%.

So far, it appears housing is continuing its recovery. The road forward won’t be as robust as over most of the last year, but barring a sharp spike in interest rates or a renewed recession, I expect continual gradual improvement in sales levels and prices.

Reports on the overall economy and manufacturing were mixed. The Chicago Fed National Activity Index showed economic activity remains a little below historic normal levels. The Kansas City Fed Manufacturing Index and the PMI Manufacturing Index Flash both showed continued growth of manufacturing. The growth rate, though, is moderate.

New unemployment claims increased a bit to 336,000 after last month’s recovery low of 320,000 (which was revised higher to 323,000). The four-week moving average declined again.

The Index of Leading Economic Indicators as kept by the Conference Board rose sharply. But this should decline some in August if the stock indexes remain lower and consumer sentiment is lower as recently reported.

Overall, we have a slowly-healing economy that is operating at or a bit below the long-term average. It’s a long way from a healthy economy, which is why the Fed still is buying a substantial amount of bonds each month. But it is in better shape than most other economies and seems to be moving gradually back toward a normal economy with the Fed’s help.

The Markets

It was a fairly wild week in the markets as investors reacted differently to news from China, the Fed’s minutes, and the few pieces of data released. This week investors clearly focused on headlines and the short term instead of long-term trends and fundamentals.

Stock indexes bounced up and down, though most stayed in a trading range. The Russell 2000 Index of small U.S. companies did the best, rising over 1% and only touching negative numbers earlier in the week. The worst performer was emerging market stocks. They were down about 3.5% midweek but rebounded after China released favorable economic data late in the week. They closed with about a 1% loss.

The major stock indexes were less volatile. The S&P 500 squeaked out a fractional gain. The All-Country World Index was close behind with a fractional loss. The Dow 30 trailed with a  loss of about 0.75%.

Bonds and the dollar were more volatile but closed on positive notes. Apparently the new homes sales released Friday calmed some investors’ fears of imminent tightening by the Fed. Long-term treasury bonds closed up 1.4% after being down as much as 0.7%. High-yield bonds recovered from an early week slump to close up 1% for the week. Investment-grade bonds closed up 0.6% after being down as much as 0.4% during the week. Treasury-Inflation Protected Securities (TIPS) also were down early in the week but rebounded late for a gain of almost 0.4%. The dollar closed with a fractional gain after being down about 0.5% early in the week.

Commodities had a mixed week. Gold was positive most of the week and surged on Friday for a 2% gain. Broad-based commodities were down most of the week but closed higher on Friday for a gain of about 0.3%. Energy-based commodities didn’t fare as well. They closed with a fractional loss after being down as much as 1.25% earlier in the week.

Some Reading for You

I thought in July bonds were oversold. It appears I was at least early. Here are some thoughts on why bonds might have bottomed for now.

It appears that medical costs vary around the country primarily because doctors in different areas have different local standards on how to treat certain conditions. Learn more here.

Have you considered the all-cash lifestyle? Read this report from a journalist who tried it.

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

August 16, 2013 04:45 p.m.
Your Retirement Finance Week in Review

We usually can depend on the financial media to interpret the facts incorrectly, and this week was no exception. They said Thursday’s sharp decline in stock prices and rise in bond yields was due to “strong economic data.” Actually most of the data wasn’t particularly strong. The media focused on a few pieces of employment data.

Prices moved primarily for a few other reasons. One is geopolitics. There’s a great deal of turmoil in Egypt, as you know. Also, it is apparent the U.S. has little or no influence there. This triggered sales of financial assets and purchases of precious metals.

Plus, corporate earnings aren’t coming in as well as expected in a number of cases. Wal-Mart was the big problem this week, and most commentary blamed the company problems on issues outside the company, such as lower consumer spending. It looks like the record profit margins of recent years finally are hitting a wall. Expect profit margins to decline in the near future. I think investors are starting to realize this and are recalibrating how much to pay for stocks.

That’s why I look at the data and markets each week and don’t rely on media headlines and summaries.

We’re in a volatile period until the Fed finally changes its policy instead of allowing speculation to run rampant. I expect the economy will continue to grow at something near its recent pace. Households and businesses will adapt to higher interest rates and taxes and lower federal spending. But things can change. So, as always we focus on risk management and are open to change.

The Data

There was not a lot of significant data this week. Retail sales are worth paying attention to. They rose 0.2%, but this was slightly below expectations and well below last month’s number. Retail sales are volatile month to month, so I don’t read a lot into this. The declines mainly were in interest-sensitive categories. The report shows consumers are adjusting to higher interest rates. We’ll watch this the next few months to see if I’m correct that households will adjust to higher rates as smoothly as they adjusted to higher taxes.

Inflation remains well-contained and in fact below the Fed’s target. Producer prices were flat for the month, and consumer prices were up a modest 0.2% in line with expectations. For the last 12 months, consumer prices are up less than 2%.

The NFIB Small Business Optimism Index continues a fairly steady increase and is at its fourth highest level of the recovery. Most categories of the survey were positive.

The manufacturing data released for the week wasn’t as positive. The Empire State Manufacturing Survey declined.  A positive feature of the survey was an increase in employment growth. Industrial production also disappointed with a flat reading after a gain last month and expectations of another gain this month. Much of this disappointment was attributed to reduced auto production. The Philadelphia Fed Survey also declined, showing business conditions slowing in its region.

Productivity increased after several periods of decline. But Unit labor costs increased more than expectations. Rising labor costs I think are a reason profit margins will decline as the economy continues to improve.

The two housing reports for the week were positive. The Housing Market Index had another sharp jump, indicating that builders see a lot of traffic and new home sales. In fact, it is at its highest level since 2005. Housing starts also increased, but most of the jump was in multifamily housing (apartments). Overall, there seems to be an adjustment to higher interest rates that’s slowed start of single-family homes.

The report that excited the media was new unemployment claims which declined to 320,000, the lowest level of the recovery. That still points us a long way from a normalized employment market, but it does show continued improvement.

The biggest disappointment of the week was consumer sentiment, which declined after months of steady improvement. We’ll have to watch this, because it’s a fairly good forecaster of future retail sales. It could be a one-month blip or the start of a new pullback.

Overall, we still have a slowly growing, healing economy. While I expect the recent rise in interest rates will cause growth to stumble, I don’t think we’ll tumble into a recession or zero growth. But we have to monitor the data for signs that households won’t adapt as well to rising rates as they did to higher taxes.

The Markets

There weren’t too many investments that had a good week. It was a race to see which could lose the least. Most investments dropped at Thursday’s opening due to the combination of the new unemployment claims and the disintegration of things in Egypt.

All stock market indexes declined. The international indexes did better. The All-Country World Index snuck into the lead, losing less than 1% for the week. Emerging market equities were close behind with a loss of just over 1%. The S&P 500 lost just under 2%, while the Dow 30 and Russell 2000 Small Company index both lost just over 2%.

Long-term treasury bonds were hammered, losing almost 4% for the week. They largely were a victim of speculation about changes in Fed policy and how it will affect them. Treasury Inflation-Protected Securities (TIPS) were next worst, losing over 2.5%. Even investment-grade bonds tumbled, losing more than 2%. High-yield bonds fell just over 1%. The dollar traded in a narrow range all week and lost a fraction.

Commodities were the only winners with each category I follow gaining 2.5%. Gold started the week lower but took off late in the week, presumably on the news from Egypt. Broad-based commodities and energy-based commodities rose steadily all week to score their 2.5% gains.

Some Reading for You

You might a review of the habits that distinguish millionaires. Find them here.

I’ve never liked what’s called the 10,000 hour rule. Here’s why.

Vacation homes and similar properties are among the more difficult problems in estate planning. Here’s a good discussion.

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

August 9, 2013 04:25 p.m.
Your Retirement Finance Week in Review

This was a slow week for data and other news. Investors focused on some speeches by Federal Reserve officials. In particular, three Federal Reserve officials spoke this week and the headlines indicated they were ready to reduce the Fed’s bond-buying (known as tapering) at the September meeting. Several days of stock market losses were attributed to these statements.

The actual comments by the Fed officials weren’t nearly as clear-cut as headlines indicated. As in all previous statements, the officials indicated that bond buying will depend on the economic data. The recent data has been positive, especially on the labor market, but it doesn’t indicate a robust economy. The key issue, of course, is whether the recent growth rates are sustainable. That’s been the question since the Fed began its quantitative easing in 2009. In every instance, so far, the growth wasn’t sustainable without stimulus. That’s why the Fed went to its current policy in late 2012.

What investors should know is that the Fed’s actions will be data dependent. They won’t change current policy unless there is good data indicating recent growth rates are sustainable. Even after making a change, the Fed will reverse course if the data turns negative.

I’ve maintained since May that the Fed is trying, first, to let investors know there will come a time when quantitative easing will be reduced, and second, to squeeze some of the speculation out of the markets. It’s likely that a good investment policy to follow in these times is to sell on the rumor and buy on the news. The speculators who depended on unchanged Fed bond buying were squeezed out of the markets in May and June. Once the Fed announces a policy change, whether in September or later, it probably will be mostly reflected in market prices.

Other news that moves markets came from overseas. The Bank of England announced its stimulus will be data dependent, as is the Fed’s, and that it anticipates better economic growth over the next year. On the negative side, there’s a dispute between Russia and the U.S. that made headlines and disturbed some investors.

China announced its latest data on Thursday, and it was better than expected. That soothed a lot of people who were worried that China’s economy will be worse than expected and continue to drag down global growth.

The Data

In this quiet data week, the most interesting reports to me were employment related. Keep in mind that the Fed primarily is watching the labor market. It isn’t concerned about higher inflation at this point and shouldn’t be. Reduced stimulus will occur only after the labor market is healing and on its way to normal levels. Initially it appears that employment is positive. The unemployment rate is declining; there’s good jobs growth each month; and new unemployment claims continue to decline. The four-week moving average after this week’s number is the lowest in the post-recovery period.

But this week the JOLTS report (Job Openings and Labor Turnover Survey) was released. New jobs aren’t being created at a rapid enough rate to reduce by much the number of unemployed. More importantly, the “quit rate” is very low. When the economy is healthy, people are willing to quit jobs they don’t like to seek other jobs. Ever since the financial crisis, the quite rate has been low and hasn’t improved. This means the only way for the unemployed to find jobs is through new job creation. This indicates that while the Fed might change its bond buying somewhat, it isn’t ready to make a big change.

The ISM Non-Manufacturing Index rose above consensus and last month’s number. The report was very positive, revealing a surge in some business activity. But new hiring still is weak.

Consumer credit use declined in July after a big increase in June. As has been the case for a while, most of the growth was in auto and student loans. Revolving credit (mostly credit cards) was down in July after a big increase in August. This shows households still aren’t confident and are using credit opportunistically.

I don’t usually report on the Bloomberg Consumer Confidence Index, but it is worth some time this week. It increased to its highest level in more than five and half years. Importantly, this index breaks down the data by different income and wealth levels, and the latest report shows confidence increasing even among those at the lower levels. Despite the positive news, the overall index still is below its long-term average.

Overall, the data show little change in recent trends. The economy is growing but at an average to below-average rate. So far, it looks like the economy will adjust to recent interest rate increases just as it was able to absorb the tax increases and reduced federal spending earlier this year. What we need to see now is if the economy can continue these growth rates when the Fed scales back its stimulus.

The Markets

This largely was a negative week for stocks, the worst week for U.S. indexes since June. The international indexes recovered on Thursday and Friday after China released positive economic data. The U.S. indexes were the week’s laggards. The Dow 30 barely was the worst with just over a 1 % loss while the Russell 2000 small company index lost 1%. The S&P 500 was close with a 0.8% loss. Emerging market stocks were down as much as 2.5% midweek recovered after the China data release for a 0.25% loss for the week. The All-Country World Index broke even.

Bonds had a better week. Long-term treasuries lost ground early in the week but made it up late in the week for a 1% gain. Investment-grade bonds weren’t as volatile and gained 0.2% for the week. Treasury Inflation-Protected Securities (TIPS), on the other hand, were up all week and closed with a 0.8% gain. High-yield bonds followed stocks down, losing about 0.2%. The dollar declined steadily, and then had a small recovery on Friday, losing about 1% for the week.

Commodities were down the first part of the week but gained ground after the China data hit the news. Broad-based commodities and gold both gained about 0.3%. Energy-based commodities had a small loss after being down 2% at one point.

Some Reading for You

The financial crisis changed the way the wealthy spend and invest, and the changes are becoming habits.