The Mystery of Low Volume

Things have been looking pretty good for the economy lately: Unemployment is drifting downward, consumer confidence is up, and even the beleaguered banking industry has finally seen an upturn in loan demand. The market has responded as well, with the S&P 500 being up about 4 percent already on the year after a flat 2011.

So why, then, has trading volume on the stock markets been so low? According to research from Raymond James Equity Research, trading so far in January is down 18 percent from the same period last year. In fact, in the past four years, the only month with a lower average daily volume than this January was December 2011. Trading this month is up 5 percent from the rate in December.

Normally, January is a strong trading month. Average daily volume jumped 21 percent last January, and 23 percent in January of 2010. That makes it even stranger that there should be so little volume now.

Giving Is Going Up

Here's another sign of an improving economy: The nation's wealthiest citizens are able to be more generous these days. According to a survey conducted by PNC Wealth Management, 24 percent of all investors with assets greater than a million dollars donated between $25,000 and $999,000 to charitable causes in 2010. As recently as 2008, the figure was just half that, at 12 percent.

Moreover, the trend looks like it's still going up. Some 21 percent of the millionaires surveyed say they plan to increase their giving this year. And only 11 percent say they're concerned about their ability to make those contributions; almost twice as many respondents had said the same thing back in the 2008 survey.

Although their ability to give might have changed, one thing that hasn't changed is the fact that the wealthiest feel obligated to give back to their communities. Almost three fifths of the millionaires surveyed said they felt that obligation, a number that has not changed since 2008 - when the economy was in full meltdown.

The Final Year of the Current Estate Tax

As we move into, this marks the second and potentially final year that the estate tax exemption applies only to estates worth more than $5 million, or $10 million for couples, with a tax rate of 35 percent. Since that was a hefty increase from the old exemption of $1 million, or $2 million for couples, many people have put aside their concerns about estate tax issues for the moment. After all, $10 million seems out of reach for most people.

Tax avoidance has long been the primary reason people set up estate plans. After ranking as the Number One reason clients sought out estate planning in 2010, the tax issue dropped to Number Four last year in a survey by WealthCounsel LLC. But the current estate law expires at the end of the year, and tax avoidance could return as a major issue shortly thereafter.

Of course, there are many reasons to set up an estate plan – properly taking care of your family properly, leaving a charitable legacy, ensuring that your assets go as far as possible, etc. But concern about the estate tax has not disappeared. Remember, once the current law expires, there’s no telling where it could go after that. If you have any concerns about bumping up against that estate tax in the future, feel free to give me a call.

Playing the Earnings Game

As we enter the earnings reporting season for the fourth quarter of 2011, it's useful to recall that American companies have become somewhat famous for trying to lower expectations about their earnings. The Web site Thestreet.com has looked at all the companies that offered such guidance in the weeks leading up to earnings season, and found that the ratio of negative-to-positive news averaged 2.3 to 1. More than twice as many companies try to damp down expectations before reporting earnings than those who present good news.

For the current earnings period, companies are acting even more pessimistic than the historical norm. According to the institutional broker-dealer Strategas Research Partners, negative pre-announcements for the just-concluded fourth quarter are outnumbering positive ones by a whopping 3-to-1 margin.

If that sounds like bad news, it’s not. That skewed ratio makes it likely that a higher percentage of stocks will beat expectations, which usually gets a stock an earnings bump in the market. As Strategas wrote in its report on the current quarter, “The ratio of negative-to positive earnings preannouncements has been a reliable contrarian indicator of market performance during earnings season throughout the years.”

Foreclosures Down, but for How Long?

Some good news for New Jersey's beleaguered housing market: Foreclosures went way down in 2011, dropping by about 73 percent in the state. That far outpaces the national average, which fell by only 34 percent. Overall, there were 1.89 million properties involved in foreclosure proceedings throughout the country in 2011.

That trend may not last, though. According to the the research firm RealtyTrac, the biggest reason for the slowdown is that many banks have stopped foreclosure proceedings after the robo-signing scandal erupted. They figure that repossessions will go back up by about 25 percent in 2012, and expect to see about 400,000 more foreclosures nationwide.

We have another wrinkle here in New Jersey as well: The state supreme court is hearing a case where a foreclosure has been challenged because the foreclosing lender did not identify itself. That would be a violation of the Fair Foreclosure Act. The expectation is that once the court makes a decision in that case, foreclosures will start to rise here again.

Germany Stalls

There was some slightly sobering news out of Germany yesterday, when the German government announced that the nation's economy had shrunk slightly in the fourth quarter of 2011, with a loss to GDP of 0.25 percent. Moreover, Germany's finance minister said he expected the economy to contract in the first quarter of 2012 as well. That would technically put Germany into recession, which is defined as two consecutive quarters of contracting GDP.

Since Germany is the financially healthiest of the members of the European Union, it's a little scary to think that it might be sliding into recession. With an economy strongly dependent on exports to its European trading partners, Germany is hobbled by the reduced purchasing power of struggling countries like Greece, Spain and Italy. The fear of course, is that the reduction in economic activity will eventually spread over here to the U.S.

At the same time, though, it's easy to overstate the German economic woes. The loss in GDP last quarter was very small, and the German government also announced that the nation's economy had grown by 3.0 percent in all of 2011. By contrast, the growth in America's GDP last year - scheduled to be announced on January 29 - is expected to be about one percentage point below that.

Consumers Start to Borrow Again

Here's a sign that people are no longer living in fear of this economy: In figures released this week, we learned that consumer borrowing surged upward in November, reaching its highest level since September 2009. The increase in borrowing over the course of a single month was the largest since November 2001, exactly ten years earlier.

Revolving debt, which is primarily credit-card borrowing, climbed by $5.6 billion in the month. That was the single biggest jump in that figure since March 2008. But non-revolving debt - loans for cars, student loans, etc. - made an even bigger leap. That figure jumped by $14.8 billion, the most it's gone up in a single month since February 2005.

One of the leading factors in all that increased borrowing is car loans. Car sales in November were at their highest rate since August 2009. Overall, in 2011, the American car industry had its best year since 2008.