The GDP Revision

The Commerce Department released its first revisions to the estimates for the first quarter's GDP this morning, and the news was not good: What had initially been reported last month as an annual growth rate of 2.2 percent was knocked down to 1.9 percent. This is after we saw 3.0 percent growth in the fourth quarter of 2011.

There were two basic culprits: Consumer spending, which was initially estimated to have increased at a rate of 2.9 percent, was revised downward to 2.7 percent. And the government revised upward its inflation estimate for the quarter for personal consumption expenditures, from 2.4 percent to 2.5 percent. So a little bit of what was first thought to have been economic growth is now seen as just prices rising.

At the same time, the Commerce Department released its first estimate of corporate profits for the first quarter, and that news was much better. Corporate pre-tax profits were up by $11.4 billion in the quarter, an increase of 13.2 percent.

What's Hurting Consumer Confidence?

The May consumer confidence reading came in at a disappointing level, falling the furthest for a single month since October 2011. Economists had expected the number - which had been pretty solid so far in 2012 - to rise in May. What's interesting about the current reading is that consumers seem most worried about their job prospects. The number claiming that jobs are hard to get increased from 38 to 41 percent, and those who anticipate that there will be fewer jobs in the months ahead increased from 18 to 21 percent.

This is probably - at least in part - an artifact of April's disappointing employment report, when it was reported that the economy had added just 115,000 jobs in that month. The jobs report for May comes out this Friday, and has a chance to turn a lot of people's minds around.

Already, it's been forecast to come in at around 150,000, which would be higher than April, although not especially strong. It will also be important to see if the April number has been revised upward, which has been a regular trend over the past six months or so. We'll be keeping an eye on that.

Get Older, Get Happier

Getting older is certainly a hard thing to live through, but there are some things that just get better with age. According to a new survey from Gallup, one of them is apparently our financial satisfaction. People aged 75 and over are the ones most likely to say they feel good about their financial situation. Of those 75 and older, 86 percent of those surveyed said they were satisfied with their standard of living, and 72 percent said they felt good about the amount of money they have.

For the group nearing retirement, it's a much different story. Of those aged 50 to 64, just 50 percent said they felt good about the money they have. Just 32 percent of that age group said they had more than enough money to do what they wanted to do.

There is one area in which the older cohort expressed concern: Only 23 percent of them said their standard of living was getting better. That contrasts with 39 percent of those in the 50 to 64 age group, and a whopping 66 percent in the 18 to 49 group who said things were getting better.

Thoughts for Memorial Day

The bravest are surely those who have the clearest vision of what is before them, glory and danger alike, and yet notwithstanding, go out to meet it. ~ Thucydides
 
 The greatest glory of a free-born people is to transmit that freedom to their children. ~ William Havard

It doesn't take a hero to order men into battle. It takes a hero to be one of those men who goes into battle. ~ Norman Schwarzkopf

Banking on the Rebound

Another sign of the improving health of our nation's economy is that the banking sector appears to be gaining strength all the time. According to a report from the FDIC, the banking industry collectively earned $35.3 billion in the first quarter of 2012, up 23 percent from the previous quarter, when it earned $28.7 billion. The nation's banks haven't earned so much since the second quarter of 2007, before the start of the recession that fall.

In addition the number of banks on the FDIC's "troubled" list continues to drop. It's now at 772, down from 813 in the fourth quarter of 2011. But it's still at a frighteningly high 9.5 percent of all federally insured banks.

It's worth recalling just how dire the situation was for our banking sector at the heights of the fiscal crisis. From 2007 to 2009, the world's banking system posted losses of around $1 trillion; here in the U.S., Citibank lost $124 billion, Wachovia lost $77 billion and Bank of American lost $68 billion. We've come a long way since those days.

Ford's Promotion

Ford Motor Company had its bonds upgraded by Moody's earlier this week, to Baa3, which officially moves it from so-called junk status to investment grade. This news might not seem to be of interest to anyone except people who have invested in Ford's bonds. But it could have a ripple effect throughout the high-yield bond market.

Ford is a huge issuer of debt, so much so that it constituted 3 percent of the Barclays U.S. Corporate High-Yield index all by itself. With its debt upgrade, it will no longer be part of that index, meaning that managers of high-yield funds will have to sell the Ford debt and replace it with something else. We are likely in for a good deal of reshuffling at high-yield bond funds.

There's also a lesson here about index funds: Even though they can seem stable, they are hardly static. Anyone who bought a high-yield bond fund in part because of Ford's reliability is now going to have to reassess that investment. 

The World's Biggest Brands

Global research agency Millward Brown came out with its annual list of the world's most valuable brands this week, and it should come as no surprise that Apple remains the biggest brand in the world, for the second year in a row. They estimated the Apple name to be worth $183 billion, up 19 percent from last year.

Here's the rest of the Top Ten:

2. IBM at a value of $116 billion (up 15 percent from last year)
3. Google at $108 billion (down 3 percent)
4. McDonald's at $95 billion (up 17 percent)
5. Microsoft at $77 billion (down 2 percent)
6. Coca-Cola at $74 billion (up 1 percent)
7. Marlboro at $74 billion (up 9 percent)
8. AT&T at $69 billion (down 1 percent)
9. Verizon at $49 billion (up 15 percent)
10. China Mobile at $47 billion (down 18 percent)

The biggest movers among the top brands were Facebook, up 74 percent from last year, and the luxury clothier Hermes, up 61 percent.

A Modestly Bright Future

The National Association of Business Economists - one of the most respected economic groups around - has just released its forecast for the American economy over the next 12 months. And mostly, what they're expecting is more of the same. The 54 economists surveyed expect conditions to improve - but very gradually - over the next year.

For instance, their anticipated monthly addition to the employment rolls average 188,000 for the next 12 months; that's up from the average of 134,500 over the past two months. That would bring the unemployment rate down but only slightly, to 8.0 percent at the end of this year and 7.5 percent by the end of 2013. It's at 8.1 percent now.

Meanwhile, the best news in the survey is that housing starts are projected to grow by 18 percent this year. Consumer spending is also expected grow, at a rate of 2.2 percent for the remainder of the year. 

Strength in Large Caps

One aspect of the stock market this year that's gone largely unnoticed is that large-cap stocks have continued to outperform small-cap stocks. This is perhaps best shown by looking at the Russell indexes, which are divided into different groups based on market capitalization. The largest companies are contained within the Russell 1000, which has returned 3.74 percent year-to-date. Meanwhile, the Russell 2000, consisting of mid-size stocks, has returned 2.83 percent. The Russell 3000 Small-Cap Index has returned just 1.34 percent on the year.

Perhaps the biggest reason for this is that large-cap tech stocks have been performing much better than small-cap tech stocks, which have fueled the rise of small-cap indexes in recent years. Led by Microsoft at 17.5 percent,  large-cap stocks had returned 15 percent as of early last week, while small-cap tech stocks had returned just 4.6 percent.

Large-cap stocks outperformed small caps last year as well. If the trend holds this year, it will be the first time since 1998 and 1999 that large caps have returned more than small caps for two years in a row.

Facebook Goes Public

The big investing news today is, of course, the Facebook IPO, which will probably get underway about an hour or so after the NYSE opening bell rings at 9:30 this morning. Here are some key facts and figures:

* Facebook announced yesterday that its shares would open at a price of $38. At that price, the IPO should raise about $16 billion.

* Increased investor demand led Facebook to expand the number of shares being sold by 25 percent. They now include 241.2 million held by existing shareholders, and 180 million new shares.

* Facebook founder Mark Zuckerberg plans to sell 30.2 million of his own shares in the IPO. That will bring in more than a billion dollars. But he'll still hold over 500 million shares.

Bright Spots in the Economy

Three bits of good news for the American economy came out yesterday:

* Housing starts rose 2.1 percent in April, a number that is made even more impressive by the fact that March's numbers also got revised upward, so that growth was beginning from a higher place to begin with. The rise in housing starts was also higher than the  consensus forecast.

* Industrial production grew at a pace of 1.1 percent in April. That's the biggest monthly growth figure we've seen since December 2010, and like the housing-starts number, it was well higher than expected.

*Finally, the Mortgage Bankers Association reported that the number of mortgages that were more than 30 days late has dropped to its lowest level since 2008. The percentage of home loans in delinquency is now down to 7.4 percent; as recently as 2010, that figure was over 10 percent.

A Tough Market for Grads

The employment picture has been tough for a lot of people lately, but none moreso than recent college grads. Researchers at Rutgers recently took a look at how people have been doing in their introduction to the job market, and the results are highly sobering. Less than half of those people who have graduated from college since 2009 were able to find a job within a year of leaving school. That number has dropped a lot in recent years: For those who graduated between 2006 and 2008, 73 percent had a job in the first year.

Moreover, those who do land jobs aren't exactly satisfied with them. Of those who did find work, 42 percent described them as "just a job to get you by." Another 36 percent call them "a stepping stone to a career," and just 22 percent said their first job was the start of a career.

And, not surprisingly, they're not making a lot of money. Those who have graduated since 2009 are making an average salary of $27,000. That's down from the classes of 2006 and 2007, who averaged around $30,000 for their starting annual salary.

Upswing for 401(k)s

Balances in American 401(k) plans have rebounded nicely from the market crash of a few years ago, and now sit at the highest level they've been ever since Fidelity Investment began tracking them back in 1998. As of March 31, the average account balance in a 401(k) was $74,900, an increase of nearly 12 percent from the same date a year earlier.

If $74,900 doesn't sound like a lot for a retirement nest egg, that's because the study tracked all 401(k) plan participants, including those just starting on their retirement savings. For people who have been investing in a 401(k) plan for at least ten years, the average balance is $191,000. For people over the age of 55 who have been investing for at least ten years, that average goes up to $233,800.

Participants are saving an average of 8.2 percent of their salaries in their 401(k)s.  Fidelity reports that 10 percent of its account holders increased their savings rate in the first quarter of this year; that's the highest that number has been since they started tracking it, in 2006.

Managing Social Security

Here's something you might find very handy: The Social Security Administration has begun offering a feature called My Social Security that lets people see all their earnings and benefits information online. This information used to be printed and sent to American taxpayers, but since that cost $60 million every year in printing costs, it was decided that this might be a better way to do it.

It's useful to poke around there and see what kind of benefits you might be eligible for. You can also see your lifetime earnings, estimate of the Social Security and Medicare taxes you've paid, and information about qualifying and signing up for Medicare.

We've heard a lot about Social Security not being enough to cover most people's retirement needs, and it's true - yet it's still a valuable asset that many people overlook. If you forgo receiving benefits until age 66 and are eligible for maximum benefits, you can earn as much as $2,513 a month. If you live till age 90, that's more than $700,000 worth of lifetime benefits. That's a significant amount of money. 

Stock Funds Still Losing Ground

The drop in assets held by domestic equity mutual funds, which we've discussed here before, continues its downward trend. For the week ended May 2, American stock funds lost a whopping $6.6 billion in assets. For the year, outflows from U.S. funds are now up to $37 billion.

At the moment, though, this is part of a larger trend, as investments into all types of mutual funds have cooled. The total inflows for all types of funds, both stocks and bonds, was just $2.24 billion for the week ended May 2, which is the lowest for any week so far this year.

The strongest category for any type of funds remains the taxable bond funds. They took in $6.4 billion the week of May 2, which isn't even their biggest haul of the year; back in the first week of April, those funds had inflows of more than $9 billion.

The Facebook Predecessors

Facebook now looks as if it will hold its much-anticipated IPO next Friday, May 18. The expectation is that the shares will sell for somewhere between $28 and $35, which would mean the company would take in somewhere between $10 billion and $12 billion. In all likelihood, it will be the biggest IPO in American history.

The existing leader in that category provides a bit of a cautionary tale for Facebook.  In 2000, AT&T spun off a subsidiary to create a new company, AT&T Wireless, in an IPO that raised $10.6 billion, which is the number Facebook is aiming to beat. But its share price slid from $29.50 at the initial offering all the way down under $10 within three years, before merging with Cingular in 2004, in a deal that valued AT$T Wireless at $15 a share.

Of course, that was a very different time; AT&T Wireless launched just as the high-tech boom was ending, and rode that trend downward. Facebook is hoping to be more like Google, which launched an IPO in 2004 that raised "just" $1.67 billion, but has been solid ever since.

Medicare's Shortcomings

For more than a generation now, Americans have come to expect Medicare to be there for them as a critical resource to help with their health care needs throughout retirement. Even high-net-worth individuals think that Medicare will take care of the majority of their medical bills. That's the upshot of a new survey from Harris Polling, wherein 1,250 Americans with household assets of over $250,000 were asked about their retirement plans.

The survey respondents indicated that they expect Medicare to take care of 68 percent of their medical bills in retirement. In actuality, Medicare covers more like 51 percent of those costs. The respondents also said they expect their health care bills to average about $5,600 a year during retirement. The real costs have been estimated at over $10,000 a year.

The survey also found that only one in five Americans had discussed their health care costs with a financial advisor. Planning for health care is a critical part of any retirement plan; if you'd like to discuss how well you're covered, feel free to give me a call.

The Big Jump in Consumer Debt

Consumer spending continues to be a bright spot for this economy, with the latest figures from the Federal Reserve showing that consumer borrowing grew in March at the strongest rate in ten years. The increase in consumer credit - a total of $21.4 billion for the month - was the single greatest for any month since November 2001.

Most of that increase was accounted for by a new $16.2 billion in non-revolving debt, primarily student loans and car loans. Revolving debt, which includes credit cards, rose by $5.2 billion in March, the first time in three months that that particular number had increased.

Total outstanding consumer credit in the nation now totals $2.54 trillion.The all-time high for that figure is $2.58 trillion, set in July 2008, shortly before the financial system began melting down that September. Consumer debt may not be all that healthy for individual households, but it's a good sign for our overall economy.

April Doldrums

Last year, the S&P 500 finished almost exactly flat. The Dow Jones industrial average managed to match that feat for the month of April: It ended up rising just 1.59 points over the course of the month, which means it was up a whisper-thin 0.01 percent.

Even the month's biggest gainers weren't all that impressive. Here are the Dow stocks that rose the most in April:

* Travelers, up 8.7 percent
* Verizon, up 5.6 percent
* AT&T, up 5.4 percent
* Kraft, up 4.9 percent
* American Express, up 4.1 percent

Among the biggest losers in April, though, there was one real dog. Here are the bottom five Dow stocks for the month:

* Wal-Mart, down 3.7 percent
* Cisco, down 4.7 percent
* Procter & Gamble, down 5.3 percent
* JPMorgan Chase, down 6.5 percent
* Bank of America, down 15.3 percent

April's Jobs Report

Figures released this morning by the Bureau of Labor Statistics showed that the economy added 115,000 jobs in April, marking the second straight disappointing month for that number. Although that's a lower rate of growth than most economists would have hoped for, the overall unemployment figure did tick down to 8.1 percent.

The April figure closely resembles the March one, which was initially reported as 120,000 - except the BLS also announced this morning that that number had been revised upward to 154,000. February's total of new jobs added was also revised upward, from 240,000 to 259,000. That softened the blow for the lower April number.

There was no individual sector with huge gains or losses of jobs; the changes were fairly anemic all around. The sectors adding the most jobs in April were professional and business services, which added 62,000, and retail, which added 29,000. The biggest loser was transportation and warehousing, which dropped 17,000 jobs.

The Woes of New Jersey Taxes

An organization called the Small Business and Entrepreneurship Council recently released its Business Tax Index for the year 2012, assessing the impact of taxes on businesses in all 50 states and the District of Columbia. It probably won't come as any surprise to you to learn that when they combined the impact of 18 different taxes that affect small business, New Jersey landed right near the bottom. Minnesota was the only state with a worse score.

We weren't the worst in any single category - not even in our dreaded property taxes. New Jersey's property taxes stand at 5.36 percent of personal income, which is second from the bottom, behind New Hampshire at 5.75 percent. And in some categories we were relatively good, like finishing tenth from the top in local sales taxes, and third - behind only Alaska and Wyoming - in gas taxes.

But when you add them all together, only Minnesota and D.C. get an overall worse score. It might not hamper us too badly with small business, though, because the obvious state for local businesses to move to - New York - is just one notch above us on the ladder.

Driving the Economy

On the heels of the GDP report last week showing that auto sales have been a key driver of our economy, there was more good news from the auto sector yesterday. After a quarter that saw the best auto sales in the U.S. since 2008, the April figures were also far ahead of estimates. Although Ford's sales slipped somewhat during the month, Chrysler just posted its best April in four years, with sales 20 percent higher than last year.

GM is now forecasting that it will sell between 14 million and 14.5 million light vehicles worldwide this year, up from its earlier estimate of 13.5 million to 14 million. The research firm TrueCar projects that new car sales domestically will reach 14.5 million, up from 12.8 million last year.

Meanwhile, manufacturing is also coming on strong. In April, the Insititute for Supply Management's factory index reached its highest level since last June. The forward-looking index indicates that manufacturing orders may increase for some time to come.

The Cost of Falling Short

We're more than halfway through the current earnings season, and 300 of the companies in the Standard & Poor's 500 have reported their earnings. As a historical matter, companies tend to exceed their earnings estimates, with 62 percent of companies beating the analysts' estimates over the past ten years. But this quarter has been even stronger than normal - 70 percent of reporting companies have beaten estimates.

Since most companies do beat their estimates, there is generally much more of a penalty for missing than there is a reward for those who outperform. Alliance-Bernstein Investments has quantified the effects of this for the current quarter. S&P 500 companies that beat their estimates outperformed the overall S&P 500 by just 0.9 percent on the three days surrounding the day of the earnings report.

On the other hand, companies that fell short suffered a much bigger penalty. Those stocks that missed their earnings estimates ended up lagging the index by 4.1 percent on the days around their earnings reports.