March 2016

March 25, 2016 11:00 a.m.
Your Retirement Finance Week in Review

I have some exciting news. A revised edition of my book, The New Rules of Retirement, will be published next month. The original edition was published in 2004. In that edition I forecast that the changes in retirement would continue, but I didn’t realize then how rapidly the changes would occur and how significant they would be. As a result, the new edition is almost a complete rewriting of the first edition. It covers all the financial aspects of retirement, and then some. You can learn more about the book and preorder it here.

And don’t forget you can join me and many others at the MoneyShow Las Vegas May 10-13 at Caesar’s Palace. I’ll participate in four presentations and will be available to meet our members. Registration is free. For details click here.

There remain reasons to be cautious about the recent stock rally. We seem a long way from the first six weeks of the year when stocks declined with seemingly no support. The talking heads warned about an imminent U.S. recession, serious devaluation of China’s currency, large scale defaults from commodity-related borrowers, and more. All those fears seemed to vanish after market indexes made a bottom on February 12. Since then, major stock indexes have increased 12% or so.

The majority of the data say that this remains a good time to be defensive. The rally bears many hallmarks of a bear market or countertrend rally. The long-term moving averages of the major stock market indexes still are downward-sloping despite the rally. Also, money flows into treasury bonds, utility stocks, and other safe investments still are strong. Also of note is that despite the rally in high-yield bonds, investment-grade bonds are doing much better than their riskier counterparts.

I’m not expecting a recession this year, but I recommend maintaining a lower-than-normal allocation to stocks. Profit margins and earnings growth are declining, and that’s likely to continue. The monetary policies since 2008 pulled a lot of future stock returns into the last few years. Stocks returns are likely to be modest in the next five years or so.

The Data

The relatively small amount of data issued this week was concentrated in manufacturing and housing.

The housing data was mixed this week. Existing home sales declined 7.1% from January’s level. All home categories and all regions of the country declined. Prices also declined 1.4%, for the lowest price level since last February. Over the last 12 months the numbers aren’t bad. Sales are up 2.2% and prices are up 4.4%. This data is from the National Association of Realtors and covers only existing homes, so it will differ from some other housing reports.

The FHFA Home Price Index, for example, registered a 0.5% in home prices in February and a 6% 12-month price increase. The 12-month increase is one of the best of the last few years.

New home sales in February increased 2%, and last month’s reading was revised higher as was the previous month’s. The median price also increased 6.2%, though the median still is a bit below September’s record level.

The housing data show that the housing market continues a modest, steady recovery from the lows of the financial crisis. In a few areas prices are back to or exceeding their pre-crisis highs, but not in most areas. After adjusting for inflation, there aren’t too many areas that are near their pre-crisis highs. Sales activity continues to be relatively low, and most reports at least partly attribute sales weakness to a lack of inventory for sale for both new and existing homes. Other factors restraining the housing market are slow wage growth, a lower labor force participation rate, and difficulty obtaining financing, especially for first-time buyers.

Manufacturing continues to show signs that it is finding a bottom. We saw the first signs earlier in the month in the positive Empire State and Philadelphia Fed Manufacturing Index reports. This week, the PMI Manufacturing Index Flash rose a bit. The increase was below expectations, and many components of the index were negative.

The Richmond Fed Manufacturing Index rose from a negative four last month to positive 22 this month. That is the index’s best reading since April 2010 and the largest monthly change in the 23 years the index has been compiled. Some analysts say these indexes are volatile because they are based on small samples of manufacturers, but the report is consistent with the Empire State and Philadelphia reports to the extent it indicates manufacturing isn’t declining.

It could be that manufacturing is leveling out only on the east coast. The Kansas City Fed Manufacturing Index, which covers one of the two regions hard hit by the energy price decline, registered a negative six. That is better than last month’s negative 12, but still indicates a decline.

The Durable Goods Orders report wasn’t positive. The headline number declined 2.8%. After subtracting the volatile transportation sector, it still declined 1%. January’s reading for this report was positive, and this measure is volatile from month to month.

At this point, the manufacturing data is mixed instead of the being relentlessly negative trend as it has been the last year or so. We’ll know more as other data are issued in coming weeks.

New unemployment claims rose a modest 6,000. That indicates basically no change in the labor market.

The third estimate of the fourth quarter 2015 GDP showed why we don’t pay as much attention to it as the markets do. The first estimate pegged growth at 0.7% for the fourth quarter. Along with other data and events, that triggered talk of a recession. But the next two estimates raised GDP, with Friday’s third estimate beating expectations at 1.4%. It’s not strong growth by any means, but it is comfortably clear of a recession threat.

The Markets

Stocks ended their positive streak at five weeks. The S&P 500 lost 0.23%. The Dow lost 0.21%. The Russell 2000 index of smaller companies lost 1.01%. The All-Country World Index lost 1.18%. Emerging market stocks lost 1.45%.

Long-term treasuries gained 0.58%. Investment-grade bonds gained 0.38%. High-yield bonds followed stocks, losing 1.05%. Treasury Inflation-Protected Securities (TIPS) lost 0.02%.

Energy-based commodities lost 2.71%. Broad-based commodities lost 2.54%. Gold lost 3.13%.

The dollar gained around 1%.

Some Reading for You

Here’s a summary of reasons why the housing market is growing only modestly despite low mortgage interest rates.

One of the leading proponents of “smart beta” investment strategies explains why most of them are going to fail.

Research reports and statistics are important when making financial and health decisions. Here’s a review of how to read those reports.

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

March 18, 2016 04:50 p.m.
Your Retirement Finance Week in Review

You can join me and many others at the MoneyShow Las Vegas May 10-13 at Caesar’s Palace. I’ll participate in four presentations and will be available to meet our members. Registration is free. For details click here.

Is the correction over? Is the recent rally in assets a new march to record highs, or is this a countertrend rally that soon will run out of gas?

Central banks are doing what they can to boost asset prices. Strong stimulus measures are underway in Europe, Japan, and many other countries. The U.S. Federal Reserve is taking contradictory positions. Publicly it is saying that the economy is strong enough to handle regular increases in interest rates. Its intention last December was to begin a steady increase in rates through 2016. But it is taking expansionary measures behind the scenes. The monetary base and other measures of money supply have been increasing rapidly at the same time the Fed is talking about higher interest rates.

Easy monetary policies are one influence on stock prices, but not the only one.

Profit margins appear to have peaked. Tighter labor markets and lower productivity will pinch margins going forward. Also, businesses haven’t invested much in new capital equipment in recent years. That helped profits in the short run but has negative long-term consequences.

A major support of stock prices the last couple of years has been financial engineering. Corporations have been borrowing at low interest rates and using the cash to distribute dividends, buy back their own stock, or acquire other companies. Each of these helps earnings and stock prices in the short term. But there’s a definite cycle to financial engineering. Recent trends have all the hallmarks of nearing a peak in financial engineering. Losing this support will hurt stock prices.

I continue to believe that quantitative easing pulled into the last few years stock gains that would have been spread over the next five years or longer. Stock returns are likely to be below the long-term average going forward.

I’m recommending you own some stocks but less than your maximum allocation. I wouldn’t chase this rally, because the factors aren’t in place to give a high probability of a strong, sustained stock market rally.

The Data

Several of the reports issued this week require a look behind the headline numbers to learn the full story, and we had more positive news this week than in recent weeks.

Let’s start with manufacturing, which has been in a deep recession for more than a year. The Empire State Manufacturing Survey had its first positive number after seven months of negative numbers. The index was only 0.62, but that’s a big difference from last month’s negative 16.64 and expectations for a negative 11 this month. Likewise, the Philadelphia Fed Business Outlook Survey followed six months of negative reports with a strong positive 12.4. In both reports, new orders were strongly positive.

Industrial production was a negative 0.5%, but the manufacturing component was a positive 0.2%. Taken together, these reports offer the first indication that manufacturing might be finding a bottom. We had a false indication of a bottom in 2015, so it is too early to take this to the bank.

The two inflation reports this week show inflation rising a bit. The increase is partly due to commodities, especially energy, bouncing off the recent bottom. It also is partly due to a steady rise in the cost of services. Until now, the decline in commodity prices more than offset the increase in services. Producer prices declined 0.2% in the last month and are flat for the last 12 months. After subtracting food and energy producer prices were flat for the month and up 1.2% for 12 months.

Consumer prices declined 0.2% for the month and are up 1% for 12 months. But after excluding food and energy the CPI was up 0.3% for one month and 2.3% for 12 months. That’s the first 12 month reading above 2% in quite some time.

Retail sales decline 0.1%, but that’s misleading. Real retail sales, after adjusting for inflation, continue to be strong. They continue to exceed the average over this economic expansion. Real retail sales growth fell a bit recently, but still are strong enough for the economy to continue its modest growth.

Home builders continue to be positive, keeping the Housing Market Index from NAHB unchanged. New home sales mostly are held back by a lack of inventory and, in some areas, laborers. Housing starts also had a strong increase. Until recently, housing starts were propelled primarily by multifamily housing. More recently, multifamily housing is nearing saturation and single family home starts are increasing. Single family home starts are very strong, up 16.8% in 12 months.

New unemployment claims rose slightly, keeping the measure near record lows. The JOLTS (Job Openings and Labor Turnover Survey) showed a large increase in job openings but also reported businesses having difficulty filling the openings with qualified people. JOLTS also showed people are more willing to leave job, indicating confidence that jobs are available.

Consumer Sentiment as measured by the University of Michigan declined a bit and remains below the peaks of the recovery. But it still is at high levels. That indicates the consumer is likely to keep supporting economic growth.

Leading Economic Indicators as measured by The Conference Board are positive again after two consecutive months of negative readings.

The Markets

Stocks continued rising, registering the fifth straight week of gains. Emerging market stocks led the way with a 4.28% gain. The S&P 500 rose about 2.6%. The Dow Jones Industrial Average rose 2.87%. The All-Country World Index rose 2.99%. The Russell 2000 U.S. Smaller Companies Index brought up the rear with a 2.55% gain.

Long-term treasuries held steady with a 0.10% gain. Investment-grade bonds returned 1.34% for the week. Treasury Inflation-Protected Securities (TIPS) gained 0.94%. High-yield bonds gained 1.29%.

Energy-based commodities continued their rally, gaining 2.42%. Broader-based commodities gained 2.25%. Gold stumbled, losing 1.14%.

The dollar continued its recent decline, losing about 1.2%.

Some Reading for You

This article argues that changes in the dollar are causing moves in other markets.

Central banks continue to sell U.S. bonds to prop up their economies.

A recent survey found that older people in the U.K. believe old age doesn’t start until 85.

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

March 11, 2016 04:30 p.m.
Your Retirement Finance Week in Review

The European Central Bank on Thursday showed the growing impotence of central banks. The ECB announced a package of stimulus measures that was more significant than many analysts expected. Yet, the reaction in the markets was mixed. At first, markets reacted the way the ECB hoped, with the euro declining and stocks rising. Then, investors reconsidered and those markets reversed course. On Friday, investors again reassessed. The euro declined a bit and European stocks rose, especially bank stocks.

The ECB’s package isn’t likely to do much to boost the economy. It will help the banks continue to rebuild their profits and balance sheets. It won’t do much to stimulate the economy by encouraging businesses and households to spend, invest, and borrow.

The Federal Reserve in the U.S. is in the same position. The limits of monetary policy are reaching their limits. The Fed can develop some new policies that will help support markets and to a lesser extent the economy. But the policies won’t boost growth above the long-term average. For that, both Europe and the U.S. need strong fiscal policy changes that reduce regulations and taxes and encourage growth.

Right now, such changes aren’t on the horizon. That could change in November, depending on the results of the elections. But that is far from clear. In the meantime, the economy and markets depend almost entirely on monetary authorities, and their tool boxes don’t have much left in them.

In the meantime, some stock indexes wrapped up four consecutive weeks of positive returns while some others fell just short. That’s a far cry from the atmosphere that dominated on February 11, when the markets reached their recent bottoms. There were strong discussions about a recession and deflation. China was a major worry.

Though markets turned around, not much has changed other than the lack of bad news. The U.S. economy is growing, but the rate of growth continues to slow, as we’ll review below.

Recent events show the futility of investing based on the latest headlines and public mood. They also show that it isn’t a good idea to believe that recent trends will continue indefinitely. Instead, we pay attention to the data that really matter to markets over longer periods and don’t worry about what the markets are doing in the short term. You have to be especially careful to avoid getting caught in the thinking that dominates the media.

The Data

There wasn’t much economic data this week.

Last week the major employment reports were released. They showed the labor market continues its steady recovery from the financial crisis. More jobs were created than most analysts expected. People can differ over whether the real unemployment rate is the one published by the Department of Labor, but there’s no doubt it has improved significantly from the bottom of this cycle. But, as usual, the details aren’t as attractive as the headlines. Wage increases continue to be modest at best as are increases in hours worked. Also, the labor reports tend to lag other data. We’ve already seen data indicating that the economy slowed in recent weeks.

One sign of a slowing economy is another decline in the Small Business Optimism Index from the NFIB. The index now is at a two-year low. Most of the components of the index declined, including plans to increase employment.

New unemployment claims had a sharp decline of 18,000, keeping the weekly number and the four-week average near historic lows. Employers aren’t laying off many workers. This report plus the employment situation reports indicate the economy is near full employment. In a normal economy this would mean significant wage increases and competition for workers and perhaps inflation pressures. Yet, we don’t have any of that. This shows how unusual this economic cycle is.

The Markets

As mentioned the Dow Jones Industrial Average concluded four consecutive weeks of positive returns with a 0.42% return for the week. The S&P 500 just missed with a 0.12% loss. The All-Country World Index eked out a 0.09% gain. Emerging market stocks gained 0.87%. Smaller U.S. stocks didn’t fare as well with the Russell 2000 losing 1.12%.

The flight to safety of early this year has reversed, with long-term treasuries losing 0.59% this week (and 2.92% for the last four weeks). Investment-grade bonds gained 0.93%. High-yield bonds gained 0.64%. Treasury Inflation-Protected Securities (TIPS) lost 0.74%.

Gold gained about 0.64%. Energy-based commodities continued their recent rally, gaining 5.17% in the week. Broad-based commodities also rallied, gaining 3.92%.

The dollar lost about 1.2%.

Some Reading for You

Here’s a review of how corporate earnings projections have decreased as this quarter developed.

In this article several fund managers discuss the prospects for high yield bonds after the recent rally.

Productivity is declining, and that means slower growth and lower profit margins.

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

March 4, 2016 03:30 p.m.
Your Retirement Finance Week in Review

I’m at the MoneyShow Orlando this week, and Friday will be a busy one, so I’m issuing the report a day and a few hours early this week. The employment situation reports to be issued Friday are the big news for the media. I’ll discuss them next week. Longtime readers know I don’t think much of these reports. They backward-looking and subject to major revisions. Markets tend to overreact to them. We’ll wait until next week to review them.

The big question for investors and businesses is: Will the problems in manufacturing and economies outside the U.S. drag down the U.S. economy?

If you’ve been reading anything about the economy you know that manufacturing is somewhere between a deep recession and a depression. The sector is beset by a combination of the strong dollar, sinking commodity prices, lower productivity, and weak economies outside the U.S. Fortunately, the sector accounts for less than 15% of U.S. employment and GDP.

The rest of the U.S. economy has been doing well enough the last couple of years to more than offset the weakness in manufacturing. Growth hasn’t been robust, but it’s been positive and above the long-term average. Housing’s been improving, steadily and surely. The unemployment rate has worked down to what is traditionally below full employment. Wages have been growing modestly, and wage growth recently increased. Consumer confidence is below its highs of 2015 but still is at solid levels. Most elements of the service sector are growing.

Yet, all these positive factors have turned less positive as we rolled into 2016. The problems internationally and in the manufacturing sector likely are having an effect on managers at all types of businesses. Data indicate that they aren’t confident, and they are being cautious when making hiring and capital investment decisions. It looks like this is likely to continue. Businesses will remain cautious, and that will reduce the increases in hiring and wages.

I don’t see a recession on the horizon, absent an abrupt move by the Fed to keep raising interest rates. Real retail sales, the trend in the unemployment rate, industrial production, and several other traditional early recession indicators remain most in positive mode. We watch the data as it is published and are ready to revise our views, but that’s the current state of the economy.

The Data

The week started with a bunch of manufacturing data, little of it positive. The Dallas Fed Manufacturing Survey of course was deeply negative, since that region’s manufacturing is so heavily concentrated in energy. The new orders component of the index was at its lowest level since 2009. The Chicago Purchasing Managers Index showed that last month’s positive number was a fluke. The index is back below 50 to 47.6, indicating that the sector is in contraction.

The ISM Manufacturing Index turned in its fifth straight month below 50, but it was marginally in contraction territory at 49.5. This has been the most positive of the manufacturing data through this manufacturing recession, and this month is no different. But it still indicates a contraction.

Factory orders posted a strong increase of 1.6%. This was well above the previous month’s 2% decline but below expectations of a 2% increase. Other than the energy sector, the strength of the report was broad-based. But this report is a lagged one. It represents activity for January, while data since then indicate there likely was less activity in February.

A revision of the fourth quarter Productivity and Costs report showed a slight improvement but still indicates profit margins are being squeezed. Productivity declined a little less than in the initial report, and unit labor costs increased a little less.

Housing continues to slow in 2016. The good news is last month’s pending home sales were revised from 0.1% growth to 0.9%. But this month’s preliminary report says sales declined 2.5% from last month. This was below expectations, and the 12-month increase is only 1.4%.

The service sector, which is sustaining the economy, was close to unchanged in the last month. The ISM Non-Manufacturing Index lost a tenth of a point to 53.4. That keeps the measure pointing to expansion, and except for employment the details of the report were positive.

On the other hand, the PMI Service Index declined below 50 to 49.7 and that’s down from 53.7 in January. This reading is the weakest since 2013 during the government shutdown.

There’s a clear difference between these two measures of the service sector. The broad range of data indicate that the service sector slowed in the last month or two but that growth still is positive. We’ll have to wait to see if the PMI index is a better indicator of what’s happening in the economy or if its sampling doesn’t reflect the broader economy.

The Markets

Stocks continued to rally from the February 11 bottom. Emerging markets have led the way with a return of about 5.5%. The Russell 2000 was next with about a 3.5% return. The All-Country World Index rose about 2.5%. The S&P 500 gained 1.5%, while the Dow Jones Industrial Average trailed with a gain just under 1%.

Bonds had a bad week, retreating from their February 11 peaks. Investors apparently believe that the economy is stronger than they thought a few weeks ago, so they expect the Fed to continue raising rates. Long-term treasuries lost about 1.5% and were down more than 2% on Tuesday. Investment-grade bonds lost a fraction while Treasury Inflation-Protected Securities (TIPS) gained a fraction. High-yield bonds as usual followed stocks more than bonds and rose 2%.

The dollar lost a fraction.

Gold continued its recent rally, rising more than 2.5%. Energy-based commodities rose 0.5% while broad-based commodities lost a fraction.

Some Reading for You

You should read Warren Buffett’s annual letter to Berkshire Hathaway shareholders every year.

Here’s a warning about the retirement planning tools widely available on the Internet.

This article explains why people are predisposed to make bad debt management decisions, even those with strong financial backgrounds.

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