Consumer Confidence Snaps Back

Back in February, the consumer confidence number, you may remember, took a sudden plunge, after three straight months of improvement. March's figure, released on Tuesday, provided a strong bounceback: After dropping in February to 46.4, the lowest figure since last April, the consumer confidence number came in at 52 in March, above even the analysts' estimate of 50.

The hard numbers agree with that assessment. Retail growth came in at a 3.7 percent increase in February, and the International Council of Shopping Centers expects a March number in the area of 3.5 percent growth. Housing prices are also up a tick in the most recent figures.

So what happened to consumer confidence in February? It's possible it was just a statistical blip. The Conference Board calculates its consumer confidence number by surveying 5000 households chosen at random. While that's enough to provide a statistically significant sample, there's always a small chance that enough wayward households got into the February sample to skew the numbers a bit. Given that the February retail numbers - the ones most affected by consumer confidence - didn't show any weakness at all, that seems a likely occurrence.

The Good News in Junk

One segment of the financial arena that has been very strong recently is the so-called junk bond market. Junk bonds, or risky corporate bonds that paid high interest rates, helped fuel the boom of the 1980s, of course, and when their market fell apart, they were eventually re-branded as "high-yield bonds." But now they're hotter than ever: There were a record $38.3 billion worth of these bonds issued in the month of March. (The previous high was $36 billion in November 2006.) They're so hot people don't mind if they're referred to as "junk bonds" again.

A big part of this resurgence is the continued near-zero interest rate offered by the Fed. Even relatively risky bond issuances can get decent rates; these high-yield offerings are paying only about 6 percentage points higher than Treasury debt at this point. Those interest rates are inducing more and more companies to issue debt, which is easier to pay back when "high-yield" doesn't have to be all that high.

It's also a sign of confidence in the economic recovery. Companies take on debt to fuel expansion and growth, and they don't take it on unless they feel confident that they will be able to pay it back. If they feel confident about being able to pay back even high-risk debt, that's a very good sign for our economy.

Tracking the GDP Changes

The Commerce Department issued its final revisions of the fourth-quarter GDP numbers late last week: It seems that instead of 5.9 percent growth, as had been reported earlier, the actual number is 5.6 percent. It's also worth reminding everyone that none of this really matters. Our economy grew at a certain level in the fourth quarter of 2009, and changing the number that's assigned to it doesn't affect what happened at all.

The bigger question is: where does the GDP number go from here? The Obama administration and most analysts peg the growth rate at around 3 percent for the remainder of the year. Most of the time, that's a perfectly respectable figure. In the current environment, though, it will feel very sluggish, and won't be enough to greatly affect the unemployment figures.

The estimate for GDP growth for the first quarter of 2010 - we really should call it the first estimate - will arrive at the end of April. We'll keep you posted.

Unlucky Horseshoes

Would you think of investing with a company that makes rubber horseshoes? What if the head honcho told you that they were going to be used in the Olympics? There are indeed equestrian events in the Olympics, but how many horseshoes can those people buy? Nevertheless, enough people were convinced of the solidity of this idea that a man from Garfield was able to convince them to give him $1.7 million to help make his scheme come true.

But the man, Samuel Serritella, never made a single horseshoe, and never put a penny into the business except to rent an office. The New Jersey attorney general indicted Serritella on Thursday, charging him with securities fraud, theft, money laundering, and corporate misconduct.

These stories are always sad, but what makes this one worse is that Serritella preyed primarily on firefighters and police officers, persuading 300 people to invest with him. It's doubtful that they will ever receive full restitution - Serritella has blown at least $350,000 already. Please, everyone: Let's be careful out there.

More Mixed Signals in Housing

February has proved to be another month with extremely mixed signals from the housing market. The big news, the tidbit that made all of the headlines, is that new-home sales reached a record low in February, with contracts being signed at an annual pace of 308,000 sales. That's down from a rate of 315,000 in January, and down 13 percent from February 2009.

There are a couple of caveats to that. These figures are seasonally adjusted, but as we've mentioned before, they're not weather adjusted. February was one big snowstorm here in the Northeast, and not surprisingly, new-home sales dropped 20 percent in this region as opposed to February 2009. In the West, which had no serious weather disruptions, February's new-home sales were up 20 percent. (It's also worth mentioning that the "record low" actually means the low dating back to 1963, when such record-keeping began.)

But there was also a curious figure buried in the housing report: Despite the fact that sales have dropped, prices are on the rise. The median price of a new home in February was $220,500, up 6 percent from January's figure. Prices rose more than sales fell, in other words. So new homes are costing more even as they're selling less.

Adobe's Good News

We saw a perfect example yesterday of how Wall Street isn't so much rewarding performance as it is reacting to expectations. Adobe Systems, the San Jose-based creator of software products such as Acrobat and Creative Suite, released numbers that looked pretty weak: Adobe's profits fell from $156.4 million in the first quarter of 2009 to $127.2 million in the same quarter this year. That's a drop of nearly 20 percent. Adobe had released its latest software package in the teeth of the recession in 2008, and ended up laying off 9 percent of its workforce last year.

But Adobe shares rose 4 percent in after-hours trading once the announcement had been made. Why? Because the company had targeted first-quarter revenues in the $800 million to $850 million range, but they actually came in at $858 million. Adobe also forecast second-quarter revenues of somewhere between $875 million and $925 million, while the analysts had forecast $860 million.

This is all a reminder that the market is forward-looking. All of Adobe's past troubles had been figured into the stock price before today, as had the various analysts' expectations. In the end, what really moves a stock's price is change.

The Small-Cap Rally

In talking about the direction of stocks we sometimes lapse into the habit of describing the market as a whole, when of course there are many different sectors and classes of stocks that behave in different ways. For example, we've noted that we recently passed the one-year anniversary of the market's bottom. The S&P 500 and Dow Jones have both done really well in the 12 months since then, gaining roughly 72 percent and 65 percent, respectively.

But the bigger winner over that same time frame has been small caps. The Russell 2000 index, which collects 2000 stocks with an average market capitalization of around $530 million, also bottomed out on March 9, 2009, at 343; it closed yesterday at 682. That's an increase of a whopping 99 percent - just about doubling in a little more than a year. The S&P 600 SmallCap Index, the S&P 500's little brother, tells a similar story - it's more than doubled, up 101 percent, since March 9 of last year.

Note that the small-caps haven't been wildly outperforming the large caps. There's been more than enough growth to go around. But it's clear that they have been the stronger asset class throughout this rally.

The Lost Decade

Last week we noted the one-year anniversary of the bottoming out of the stock markets. This week brings another anniversary: On Wednesday, it will have been ten years since the Standard & Poor's 500 reached its peak following the bull market of the 1990s.

On March 24, 2000, the S&P closed at 1527, its all-time high at that point, then spent the remainder of the year zigzagging downward in the throes of the high-tech crash. Then 9/11 helped push the index down even further until it closed September 21, 2001, at 965. Things looked better for a bit, until another mini-crash in the summer of 2002 brought the S&P to what looked like its bottom of 800 that September.

Of course, for much of the rest of the decade, the markets looked pretty healthy. The S&P peaked on October 9, 2007, at 1565, an inch ahead of its peak in early 2000 - it had taken seven long years to get back to where it started the decade. But the index would never get any higher, and it would eventually crater at 676 a year ago.

Today, after a year of rallying, the S&P 500 sits at 1145. A decade has brought not the growth investors had come to expect, but a loss of roughly a quarter of the value of the 500 largest companies in America.

The End of the MBS Program

One move from the Federal Reserve that hasn't gotten a lot of notice among the discussion over whether to raise interest rates is its decision to end its mortgage-backed securities purchasing program this month. The Fed has bought $1.25 trillion in MBS since it started this program last year, but has been gradually cutting back in preparation for getting out of this business.

No one quite knows what the repercussions of this exit will be, but the hope is that the market for mortgages has stabilized enough that the effects will be small. Mortgage-backed securities, remember, were one of the key drivers of the real estate collapse; when lenders could turn any kinds of mortgages into securities - almost always given AAA ratings - and sell them off to unwary investors, they had a great incentive to sell as many mortgages as possible, with little concern for whether they'd ever be paid back. In large part, it's the securitized versions of these subprime mortgages that the Fed has been soaking up over the past year.

Banks have now, of course, become much more prudent about the types of mortgages they're willing to offer. Moving forward, mortgage-backed securities should be a much stronger investment vehicle, and the Fed is hoping these securities will be snapped up by money managers and other investors.

If that's the case, the end of the MBS purchase program will be no more than a blip. Then the bigger question will come when the Fed starts trying to unload that $1.25 trillion in inferior mortgages.

Meeting the Pension Goals

A couple of weeks ago we pointed out the shortfall in New Jersey's state pension plan, which has been rocked by underperforming equity investments in the past couple of years. Yesterday, on the same day Governor Christie announced his plans to slash of the state budget, there was also a report that the state's Investment Council plans to move more aggressively, putting a larger slice of the state's pension fund money into hedge funds.

The part of the pension fund that can be put into alternative investments - real estate, private equity, hedge funds - is now limited to 28 percent, which the Investment Council apparently wants increased. They would reduce the fund's allocation in stocks, which is currently at 47 percent.

In the past ten years, the pension fund has returned 2.47 percent annually, which isn't all that bad, truth be told. The Dow Jones industrial average is basically flat over the past ten years. But the pension fund managers have a target return of 8.25 percent annually, which borders on the unrealistic. The problem here may not so much be the asset allocation as the expectations the investment team is trying to fulfill. Rather than thinking hedge funds can pump up the returns, it might be better for the Investment Council to figure out a way to fund the pension plan on returns of less than 8.25 percent a year.

Keeping the Credit Markets Open

The Fed announced yesterday that it would be keeping its benchmark interest rates at near-zero levels for a while yet. That's not really a surprise, since the economy remains sluggish and inflation is, in the words of the Fed, "subdued." In fact, one thing the Fed may have been responding to is that the credit markets have slowed up a bit lately.

In 2009, the corporate bond market sold a whopping $1.24 trillion worth of bonds. That was a record, and up a staggering 42 percent from the $874 billion that had been sold in 2008. But now, in 2010, corporate bond sales are running behind that pace. Less than $250 billion has been sold so far in 2010, or an annual pace of just under $1.2 trillion. While that's still historically strong, it's not a great sign when bond issuances decline in the middle of an economic recovery.

When people talk about the necessity of a strong credit market, they're generally referring to corporate bond flows. If the Fed is keeping interest rates down in part to keep these credit markets flowing, that's a good thing.

The Meat of the Prospectus

To follow up on yesterday's report on investor behavior, we received another study from IRI, the mutual fund group, on how much attention investors pay to prospectuses. The answer: Not much.

Only one fifth of all investors always read the prospectuses sent to them about their investments. A little over half, or 56 percent, say they read their prospectuses either sometimes or always.What would make investors more likely to read them? Nine out of ten respondents said they wanted a short summary form of the prospectus rather than pages and pages of details. In other words, they'll read a prospectus as long as it's something other than a prospectus.

The survey also asked investors what pieces of information are most important to them in a prospectus - in other words, what they'd want to see in the shortened version. The answers were fees, returns and risks, in that order. Mutual fund companies, take note.

Confidence Game

Confidence is a very good thing to have, but there's a point at which it becomes too much of a good thing. And a new study shows that men have more confidence in their investing prowess than women - which is to their detriment.

Vanguard found that during the market downturn of 2008-2009, men were more likely to indulge in heavy trading than women. And because of that, they were more likely to end up selling off at market lows. That kind of heavy trading comes as no surprise: Overall, men make 50 percent more trades than women.

The Vanguard study reinforced what a 2001 study on gender differences had found, according to a story in yesterday's New York Times. Men have more confidence in their abilities to pick stocks, so they end up buying and selling them much more often. The study found that the additional churning by men ended up costing them 0.94 percentage points a year over what women made.

These results don't hold for all men or all women, of course, but it's valuable to know what your tendencies might be, where your weaknesses might fall, so you can work against them. Have some of your recent trades reflected a little overconfidence in your stock-picking abilities? These studies remind us to keep an eye on ourselves for just these types of problems.

A New Kind of Bank Robbery

Most of us have gotten so used to the sight of an ATM in the lobby of our local bank branch or in the corner of a 7-Eleven that we don't even recognize how valuable they are. Although the number can vary widely, one estimate reports that there is up to $35,000 in cash in each ATM.

They are fairly impervious to theft, though, which didn't deter a Sumo wrestler in Russia earlier this month. He walked into a Moscow shopping mall and carried the 200-pound machine out of the store on his shoulder. The wrestler and his accomplice made it as far as their getaway car in the mall's parking lot before police arrested them.

Apparently, the plan was to get the machine back to some safe place where it could be opened up with a blowtorch. But this happened in Russia, remember, where the population isn't wealthy enough to make frequent hundred-dollar withdrawals, as we do here in America. All told, the ATM held 25,000 rubles - which is just 838 dollars. Hardly worth carrying a 200-pound machine through a shopping mall, isn't it?

A Year Removed

It was a year ago this week that the stock markets completely bottomed out: On March 9, 2009, the Dow was at 6,469, while the S&P 500 had arrived at the devil's number: 666. At the time of course, we had no way to know that the markets had reached the bottom. The next day, March 10, the Dow added 500 points, but we'd seen that kind of fickleness before.

Many people suspected that the bottom had been reached several months earlier, in November 2008, when the Dow fell to 7,552 then started heading back up through the end of the year. But it fell back through that floor again in February, then sunk even lower before bottoming out - we now think - in March.

So are we safe to refer to March 9, 2009, as the market bottom? The Dow has risen about 63 percent since then, and the S&P 500 around 70 percent, while we've seen much less volatility than was prevalent in early 2009. With the markets, you should never say never, but it would basically take a depression to bring the markets down to the bottom of a year ago.

The Millionaires Club

We extend our hearty congratulations to the million new millionaires that were created in 2009. According to a new study from the Spectrem Group, the number of American families with a million dollars in net worth grew from 6.7 million in 2008 to 7.8 million last year. This is still down, however, from the all-time high of 9.2 million millionaires in 2007.

The number of families with at least $5 million in net worth was also up solidly, from 840,000 in 2008 to 980,000 last year. The number of families with $500,000 in net worth showed an even stronger upturn than the two larger categories, going from 11.3 million in 2008 to 12.7 million in 2009.

So how are all these wealthy families investing their money? The two lower categories are both still being conservative: They say they're likely to keep their money primarily in cash over the next 12 months, with stocks and bonds, in that order, as their secondary choices. The $5 million-plus families, however, said they are most likely to put their money into stocks, followed by cash and international investments. It seems that those most affluent families can afford to take a few more risks.

Looking Global

Bloomberg reported yesterday on a forecast from Joseph Carson, an economist with AllianceBernstein, who noted that the strong 5.7 percent GDP growth we saw last quarter was fueled in large part by exports, which accounted for 2.32 percentage points of that. Carson expects this state of affairs to continue, meaning that he sees annual growth in the 3.5 to 3.7 percent range, rather than the 2 percent that other economists have suggested.

Carson thinks one of the major drivers of our economy will be the growth seen in developing nations. The International Monetary Fund has predicted that emerging and developing nations will see their GDP expand by a robust 6 percent this year, while developing nations are expected to grow by just 2.1 percent.

If the U.S. can continue to feed off that kind of growth through exports, it makes our own landscape of half-finished subdivisions and half-empty strip malls that much less forbidding. UPS for instance, saw its international business increase by 11.8 percent in the fourth quarter of '09, even as its domestic business slipped by 1.9 percent. Perhaps it's time to look overseas for signs of recovery.

Credit Lines

The Credit Card Responsibility and Disclosure act was passed last spring, but some of its provisions were delayed in taking effect, so the full law didn't really take hold until a few weeks ago. This had the result of giving the banks extra time to squeeze whatever the could from their cardholders. A recent article in the Press of Atlantic City took a look at what's happened in the past 12 months to credit card holders, and it's not pretty.

A year ago, the average credit card rate was under 12 percent. Six months ago, it was at 12.1 percent. Now it's 14.4 percent, the highest it's been in five years, even as interest rates overall are the lowest in recent memory. The average for cardholders with inferior credit ratings is a whopping 21.1 percent, up from 14.3 percent six months ago.

Even so, less than half of all consumers say they're using cash more often these days. That may be a sign of the times, and of this treacherous economy that has left many people without a lot of cash on hand.

More than ever, the important thing is to stay apprised of your situation. If a credit card issuer raises your rates beyond what you think is fair, your best weapon is also the simplest: stop using it.

Weather Report

We mentioned yesterday that the Fed's Beige Book reported that retail conditions in both the New York and Philadelphia regions - which together cover New Jersey as well - suffered from the snowstorms we endured last month. Nevertheless, another report out now says that retail sales nationwide rose significantly in the month. Overall, sales were up by the largest amount since November 2007, before the recession began.

Of course, that doesn't account for the horrible spate of winter weather the East Coast endured (and to be fair, the weather was normal in most of the country). These things do tend to be seasonally adjusted - housing sales are expected to be slow in December but pick up once school lets out in the spring, for example - but they can't really be weather adjusted. If the people filing the Beige Book are to be believed, and retail sales in the Northeast really were hampered by the snowstorms, then February's strong sales numbers are even better than they appear.

February's jobs report is due out today, and a Bloomberg survey of economists expects the number to come in around 50,000 jobs lost, following 20,000 jobs lost in January. The severe weather may have played havoc with the employment situation a bit, though we have no way to gauge its effect. It may be hard to get a handle on what the "true" changes are for unemployment for another month or so.

Beige in Winter

The Fed released its quarterly Beige Book yesterday, detailing economic conditions in each of 12 national regions. New Jersey is cleaved down the middle between the New York and Philadelphia regions, so let's take a closer look at those two areas.

One key difference is that the Philadelphia (and South Jersey) report expects business lending to increase just slightly through the rest of the year, but in New York (and North Jersey), the outlook is even more pessimistic: there, "bankers report weakening in loan demand in all categories." Similarly, commercial real estate in the Philly area is expected to advance because of reduced rents, albeit without much new construction, while the New York area is described as "exceptionally weak." Car sales, for some reason, also looked stronger in the Philadelphia area.

The two areas track each other in some key ways: Both report that business conditions are improving, although very slowly. Retail sales were up in both regions. Then again, both regions also reported that economic activity slackened somewhat during the snowstorms of February; it seems that Adam Smith is sometimes no match for Mother Nature.

Watching Buffett

Warren Buffett released his annual shareholder letter last week, full of prescriptions for the American economy and the prediction that the housing market will recover in 2011. To continue our theme from yesterday, though, Buffett's actions are more significant than his words.

These are the Top Ten holdings in Berkshire Hathaway, Buffett's investment vehicle, as of the end of last year:

Coca-Cola

Wells Fargo

Burlington Northern

American Express

Proctor & Gamble

Kraft

Wal-Mart

Wesco Financial

ConocoPhillips

Johnson & Johnson

What's Buffett been buying? Iron Mountain, a document management company; Republic Services a waste-management company; Becton Dickinson, an insurer, and he's been adding to his positions in Wells Fargo and Wal-Mart. Berkshire Hathaway also finished its complete takeover of Burlington Northern.

What's he been selling? Among his top ten, Buffett has recently pared back positions in oil companies ConocoPhillips and Exxon Mobil, and in consumer-products giants Johnson & Johnson and Proctor & Gamble.

More Consumer Confusion

A new report released on Monday showed that consumer spending increased in January for the fourth consecutive month. The 0.5 percent increase was larger than both the December number (which had been 0.3 percent) and the consensus analyst estimate. With consumer spending making up a whopping 70 percent of our national economy, this is good news indeed.

It also makes it a bit more puzzling that last week's consumer confidence report, which we noted in passing, was such a downer. Part of the problem is that the confidence report's biggest falloff was in the area of expectations; people reported that they expect things to get worse - again- than they already are. Also, the confidence report covered February, and these more recent numbers are from January; it's possible that consumer confidence nosedived for some reason around the first of February.

In general, though, when you can choose between hard economic data and surveys of people's opinions, go with the facts. It's instructive to know the consumer mind-set, which is a key factor in why the economy behaves as it does. But you can always trust what people do more than what they say, especially in their economic behavior.

Staving Off Foreclosures

A year ago, our now ex-governor, Jon Corzine, announced the formation of the Foreclosure Mediation Program, which was designed to give homeowners in trouble a chance to sit down with their bankers, and perhaps hammer out a solution that would keep them in the home. With 60,000 properties across New Jersey already in foreclosure, this program was supposed to stem that tide a bit.

But after a year of the FMP, only 750 homeowners have had their loans modified by it. Another 2600 people have signed up for help, but even that's just a drop in the bucket. All the program ensures is that people have a chance to met with their mortgage-holders; there's no guarantee of modification, or even a procedure to move that process along.

Whatever the good intentions of this program, it doesn't look like it will do much to improve overall home values for New Jersey homeowners. We've seen a bit of positive movement on housing values here lately, but at this point, it's clear that market forces rather than government intervention are going to be the key.