Thursday, March 31, 2011

Home and Abroad

The Business Roundtable's survey of American CEOs shows optimism that we haven't experienced in quite a long time. The CEOs' economic outlook is now more bullish than it's been in the entire history of the survey, dating back to 2002. The previous highwater mark had been back in February 2005.

At the same time, the head of the IMF warned in a speech in Botswana that the global economic recovery may be headed for "considerable downside risk." The emerging markets that are leading the recovery in many parts of the world are facing inflationary pressures, large capital flows and other factors that have brought a great amount of uncertainty into their futures.

That kind of global uncertainty will likely affect us as well, in terms of things like commodities prices. The ideal situation would involve our own economy reaching full strength, as the Business Roundtable foresees, before the renewed international issues begin to act as too much of a drag on it.

Wednesday, March 30, 2011

A Long Summer

Most of us know someone who has been affected by the unemployment crisis, especially if you have teenagers around the house. Summer jobs have gotten very scarce recently. The city of Chicago, for one, has already announced that its city-sponsored jobs for youth will be down 22 percent from last year.

And last year had already been incredibly bleak. According to the outplacement firm Challenger, Gray and Christmas, last summer, American teens filled 960,000 jobs - the lowest figure since 1949. That number was down 17.5 percent from 2009, when 1.163 million teenagers found summer jobs. As recently as 2006, 1.7 million teens had summer jobs.

Part of the problem is that there are older workers still hungry to take the sorts of jobs that had traditionally gone to teens. Home Depot is planning to hire 60,000 extra summer workers - but many of those will end up being older unemployed workers.

Tuesday, March 29, 2011

The Consumers' Mood

Yesterday, we discussed how the fourth-quarter GDP numbers got revised upward based in large part on much stronger consumer spending than had been initially estimated. So it's all the more surprising that consumer confidence fell off in March to its lowest level since November 2009.

The answer for the decline is simple: gas prices. Consumer confidence is directly correlated to the price of gasoline, for obvious reasons; people start to freak out a little when they're faced with the prospect of paying five dollars for a gallon of gas.

Inflation is starting to be a real concern for people. The consumer confidence survey showed that people expect inflation to average 4.6 percent over the next year. The Fed does a similar survey with a broader outlook, asking Americans where they expect inflation to be over the next five years. The response to that was 3.2 percent - the highest this survey has shown since August 2008.

Monday, March 28, 2011

New GDP Figures

It turns out our economy was a little stronger than initially reported back in the fourth quarter of 2010. The Commerce Department's first report of GDP growth for that quarter came in at 2.8 percent, but now it's been revised upward to 3.1 percent.

What changed? There were two basic factors that came in greater than initially expected: exports and consumer spending. The amount of goods and services we exported rose by 8.6 percent in the fourth quarter. And consumer spending rose by 4.0 percent - the highest quarterly increase since the onset of the recession.

That 3.1 percent growth rate is perfectly normal in ordinary times, and at one point would have been considered a healthy situation. From 2000 to the beginning of the recession, we only saw four quarters where the growth rate exceeded 4 percent. But this economy is still shaky enough that we will eventually need to see growth that's more than just solid.

Friday, March 25, 2011

Penny for Your Thoughts

Lots of people have been frustrated with their bank lately, between the stingy credit, unwarranted foreclosures and generally difficult customer service. One man in Mira Mesa, California, got especially upset when his bank turned down his application to refinance his mortgage. The man, Thierry Cahez, had been a good customer, holding a credit card with the bank in addition to his mortgage.

But when he was rejected for his refi, Cahez decided to close out the balance on his credit card as well. To pay off the $6,500 balance, he amassed 650,000 pennies and drive them in his car down to the bank. At first, they refused to accept the pennies, but they are legal tender, after all, and eventually the bank found a vault large enough to hold them all.

And I'm sure Cahez felt pretty good about his deposit.

Thursday, March 24, 2011

Rough News from the Housing Market

The news from the housing market continues to be dismal, as the latest report on new-home sales shows. One thing that's confounding about this is that the experts keep expecting the housing sector to pull out of its slump. As it usually does, Bloomberg surveyed a panel of housing experts on their expectations for new-home purchases in February, and their consensus was that the number would come in an annual rate of 290,000. Instead, the number plunged to 250,000 - a decrease of 16.9 percent. That's the slowest rate of new-home sales on record.

The other figures were just as discouraging:

* The median new-home price has fallen 8.9 percent in the past 12 months.
* Previously owned home purchases also dropped by 9.6 percent in February.
* The median home price is at a nine-year low.
* Prices of new homes are at their lowest level since December 2003.

Wednesday, March 23, 2011

A New Resource

If you're interested in following the direction of the economy at a fairly academic level, the New York branch of the Federal Reserve has begun a new blog, Liberty Street Economics. There are more than 60 economists working in the New York Fed's Research and Statistics Group, with access to a huge amount of economic data, so this promises to be full of pertinent information.

For example, the first post presents a graph showing that Americans' non-mortgage debt (credit cards, car loans, etc.) stayed fairly steady, at around $200 billion per year, for most of the past decade, before plunging into negative territory in 2009. It's currently back up to around $50 billion per year. That's a huge move, and says a lot about what happened to our economy in the past couple of years.

Many of these posts will be for experts only - it will take a very keen mind to get through the upcoming post on "Calibrating Regulatory Minimum Capital Requirements." On the other hand, there is also a post scheduled to discuss the question "How Much Will the Rise in Commodity Prices Reduce Discretionary Income?" That's the kind of issue that affects all of us. If there are more general questions like that addressed in the future, this blog could provide some valuable insight into the workings of our economy.

Tuesday, March 22, 2011

Hedge Funds and Inflation

The conventional wisdom seems to have swung around to the idea that higher commodities prices may end up fueling inflation at the grocery store. Or has it? Bloomberg is reporting that hedge funds have slashed their long-term bets on commodities in the past week greater than at any point in the last year.

The index of managed-money net-long positions, which are basically bets on rising prices, dropped by 14 percent over the course of last week. Net-long positions on cattle fell by 8.7 percent; corn futures and options plunged by 17 percent - after the price of corn had risen by 82 percent in the past year.

What caused all of this? The crisis in Japan is the leading culprit; some people see events in Japan as seriously slowing economic growth around the globe. The reality is that there are probably lots of factors affecting commodities prices. But the message for the future is clear: Hedge fund managers don't think we're in for a strong bout of inflation.

Monday, March 21, 2011

Michael Lewis on Japan

Back in 1988, when Michael Lewis was fresh off of Wall Street and just starting on the career as a journalist that would eventually lead him to Moneyball and The Blind Side and The Big Short, he came up with an idea for a story about Japan: What would be the financial fallout if a devastating earthquake hit Tokyo? He's now revisited that article, and the differences and similarities are very telling.

Lewis found that the Japanese were already studying such a scenario, and one of the things they forecast was "a dramatic rise of five percentage points in interest rates, a collapse in economic growth and in asset prices -- all in the U.S." Of course, Japan's economic strength was much greater in 1988 than it is now. How bad off are the Japanese? The nation's ratio of government debt to GDP is the worst in the world. It's twice as much as that of Greece, the reigning basket case among world economies.

So even though the March 11 earthquake struck only a glancing blow to Tokyo, the end result may be as bad as Lewis' 1988 nightmare scenario. As fragile and unstable as the financial world looked back in 1988," Lewis writes now, "to those who tried to imagine the worst, it looks even less stable and more fragile today."

Friday, March 18, 2011

Tax Surprise!

We're entering the home stretch of the tax-return season, and some of you may have already gotten your tax refunds from the IRS. But it's likely you didn't get as nice a surprise as Denise Bossetti of Huron, Ohio. She recently got a letter from the Ohio Department of Taxation notifying her that she was receiving a $200 million refund from the state of Ohio.

Unfortunately, the letter also stated that the state was unable to directly deposit the $200 million in Denise's checking account, as was supposed to happen with her refund, and that she would be receiving a check instead. Rather than getting a check in the mail, Denise got another letter a week later explaining that - oops! - it was all a software error.

Thursday, March 17, 2011

The Big Drop

American stocks had a horrible day yesterday, with the S&P 500 losing more than 2 percent of its value and erasing all of its gains for 2011. It's easy to connect that directly with the horrible news out of Japan, and many financial pundits are doing just that. "Fears over Japan's nuclear crisis sent major U.S. stock indexes into negative territory for the year," the Wall Street Journal reported.

But is that true? The biggest loser among the 30 stocks in the Dow Jones Industrial Average was IBM, which was downgraded by the influential Bernstein Research. That has little or nothing to do with Japan. And in the S&P 500 homebuilders index, 11 of the 12 listed stocks lost value after some pretty dismal news from the Commerce Department, showing that the number of new housing starts dropped in February more than they had in any month since 1984. That obviously has nothing to do with Japan.

The Japanese earthquake and nuclear crisis is clearly bad news for many stocks, but it's not the only thing happening in the world right now. Interestingly enough, while American stocks were tanking, Japan's Nikkei index was up 5.7 percent. But it had probably already absorbed the bad news: Japanese stocks were rebounding from their worst two-day drop since 1987.

Wednesday, March 16, 2011

Rumblings of Inflation

The price of imported goods jumped by 1.4 percent in February, and the cost of goods for factories in the Northeast region reached their highest in almost three years, fueling fears that we're in for a bout of inflation. The turmoil abroad, especially in oil-rich Libya, has already sparked a rise in energy prices.

But aside from at the gas pump, there's been little evidence of these things factoring into our everyday consumer prices. Excluding fuel costs, prices rose just 0.3 percent in February. In January, those same prices had risen 0.7 percent.

But one area where we are seeing higher prices is, as February's report indicates, in imported consumer goods. The cost of imported food and beverages rose by 0.8 percent in February, and has now risen 15.8 percent in the past 12 months - the highest one-year increase on record.

Tuesday, March 15, 2011

The View From the Millionaires

You can add one more group of people to the list of those who have grown optimistic about this recovery: millionaires. Fidelity Investments recently surveyed more than 1000 American decision-makers in households with at least $1 million in investable assets, and found that their optimism was the highest it's ever been since Fidelity began running this survey in 2006.

The survey asks the millionaires to rate their feeling about the future of the economy, with -100 being most negative and +100 being most positive. The future outlook for this group currently stands at +37. Back in 2006, long before the recession hit, the number was only at +6, the previous high-water mark.

One other interesting finding was that these people did not consider themselves wealthy, despite the fact that they averaged $3.5 million in investable assets and $379,000 in annual income. How much did they think it would take to feel wealthy? An asset level of $7.5 million.

Monday, March 14, 2011

When Do You Trade?

When do most investors feel the need to buy or sell stocks? If you said they do so at the periods of highest market volatility, you're pretty close. A professor of finance at NYU recently got hold of nearly 20 years' worth of communications from an investment firm named Gerstein Fisher, and was able to track the requests of the firm's clientele. The result: Individual investors most often want to sell just after a time of great market volatility.

The research showed, unfortunately, that such a strategy led investors to either buy at a market top, or sell when the market was at its low. These overly aggressive orders end up costing investors about four percentage points a year over a more rational trading strategy. "Buy low, sell high" is a truism that every investor respects - until the market starts soaring or tanking, and the investor starts panicking.

The study also revealed one of the true values of a wealth manager. As much as choosing which stocks or funds to buy, sticking to a reasonable, well-planned strategy is one of the hallmarks of meeting your long-term financial goals. Careful guidance from an experienced wealth manager truly does help save you from your own mistakes.

Friday, March 11, 2011

New Jersey's Wealthiest

Forbes magazine has come out with its annual list of the richest people in the world, as well as the 400 wealthiest Americans. Surprisingly, only a handful of them are listed as residing in New Jersey. The richest people in our state are:

Publishing magnate Donald Newhouse, Somerset County, $5.4 billion
Hedge fund manager David Tepper, Milburn, $4.3 billion
Investment banker Peter Kellogg, Short Hills, $2.8 billion
Hedge fund manager Leon G. Cooperman, $1.5 billion
Mutual fund manager Michael Price, Far Hills, $1.4 billion

Thursday, March 10, 2011

The Debit-Fee Controversy

There has been a lot of discussion lately about debit-card fees, with the big banks screaming about limits that were proposed on them by last summer's financial reform legislation. The issue, in a nutshell, is this: Banks currently impose an average fee of 44 cents each time you swipe your debit card. You don't pay this fee; the retailer where you're making your purchase does. The Fed now has until April 21 to consider the effect of the proposed new limits, which would cut that fee to no more than 12 cents.

Banks and credit unions have been complaining vociferously about the new rule, claiming it could cost them as much as $12 billion a year in lost income. On the other side, retailers like Target and Home Depot have stepped up their lobbying efforts in favor of the new rules.

The most immediate result of all this controversy is that the issue will likely get kicked down the road. Two senators have introduced a proposal that would delay implementation of any debit-card fees for an additional two years. What seems unlikely to happen is that any version of the swipe fee would be imposed directly upon you, the consumer: In pretty much all the scenarios, you'll end up paying slightly higher prices at retail stores or fees to your bank. But what else might happen is still anyone's guess.

Wednesday, March 9, 2011

Survey Says....

A Charles Schwab survey of financial advisors around the country, conducted in January, shows that people who manage money are continuing to get more and more bullish on the economy. Nearly 40 percent are expecting to put more money into American large-cap stocks over the next six months. Only 27 percent gave that answer in the last Schwab survey, conducted last July.

But everyone understands that investors are more optimistic now than they were earlier in this economic recovery. Perhaps more significant is that these advisors report that they think that other economic activity is about to rebound as well. A full two thirds say that they expect their clients to increase their consumer spending over the next six months. Last July, only 42 percent of the advisors surveyed felt the same way.

The markets haven't been hurting over the past few months; what the economy needs now is more spending at the consumer level. The idea that people will be putting more money into the stock market is good, but the idea that they'll be spending more is even better.

Tuesday, March 8, 2011

The Trouble in Munis

One asset class that has shown no signs of emerging from the economic downturn has been the once rock-solid municipal bond. State and local governments were very hard-hit by the recession, seeing their tax bases erode and laying off thousands of workers, which has left the market skeptical of their ability to repay their bonds. Over just the past four months, some $38 billion has flowed out of the muni bond market, or 7 percent of all the money once held there.

How much risk is there in municipal bonds? At the moment, the default rates are still pretty low. The entire municipal bond market is worth nearly $3 trillion, while bonds that are now in default constitute about $8 billion worth. That means about 0.3 percent of the market is in default.

On the other hand, the consulting firm headed by Nouriel Roubini - the economist called Dr. Doom who predicted the Great Recession - sees a wave of municipal defaults headed our way. Roubini has forecast as much as another $100 billion in defaulted bond issues. It's true that other economists think that figure may be way too high, but it's an opinion worth keeping in mind.

Monday, March 7, 2011

Jobs: Even Better Than We Think?

Friday's employment report was a bit of unalloyed good news: The Labor Department estimated that 192,000 new jobs were added during the month of February. More importantly, the private sector added 222,000 jobs, while the public sector lost 30,000. All told, the unemployment rate fell to 8.9 percent, the first time it has been below 9 percent in almost two years.

The trajectory of the unemployment rate is very heartening. It was at 9.8 percent for November before falling to 9.4 percent for December, 9.0 percent for January and now 8.9 percent in February. That's a drop of 0.9 percentage points in three months. The last time we saw a drop that precipitous was in 1983 - exactly the moment when the rate dropped for good at the end of the early-1980s recession.

And the official numbers may be understating the recovery. As David Leonhardt of the New York Times points out, while the businesses surveyed have reported average monthly job growth of 102,000 for the past three months, the similar household survey reports it's actually been 221,000 jobs added per month. It's possible that the business survey is missing a significant number of entrepreneurs and small businesses that have been generating jobs over the past quarter. So the employment news may be even sunnier than what's being widely reported.

Friday, March 4, 2011

Money on the Table

Have you filed your income taxes yet? Every year about this time, it gets tempting to just forget the whole thing, but that's really not a good idea. Not only is it illegal, but you might be missing out on some money coming back to you. The IRS just announced that it's sitting on $1.1 billion for the 2007 tax year alone that should have been refunded to taxpayers who ended up not filing a return that year.

If you're one of those people, you have until April 18 to file your 2007 return and claim your money. After that, the money is going straight to the U.S. Treasury. If you also didn't file in 2008 and 2009, though, you're out of luck.

Thursday, March 3, 2011

The Fed's Economic Report

The Fed's Beige Book - its eight-times-a-year report on economic conditions around the country - came out yesterday, and mostly reiterated what we've been hearing lately: The recovery is getting stronger. Eleven out of the Fed's 12 regional banks reported that conditions in their area were improving; only the Chicago bank dissented.

Yesterday, we noted that the nation's manufacturing growth was at its strongest in seven years; the Fed reinforced that idea as well. Eleven of the 12 districts reported growth in manufacturing. In this case, St. Louis was the sole holdout.

There was even good news on unemployment, with all 12 Fed districts reporting "some degree of improvement" in the labor market. That goes along with the monthly report from payroll giant ADP, which estimated an increase in private-sector jobs of 217,000 in January. The ADP numbers have been wildly optimistic lately, but they're another indication that all factors are pointing in the right direction.

Wednesday, March 2, 2011

Fueling Inflation

Is the long-rumored spate of inflation finally coming home to the American economy? The turmoil in the Middle East, as we discussed recently, looks like it will have a serious effect on our oil prices. Oil is now at its highest price level since September 2008 - the month the banking sector collapsed and brought down our whole economy with it.

Remember, the price of oil affects not just how much we pay at the pump, but a whole host of industries. Airline tickets will cost more, but oranges being trucked up from Florida could also see a jump in price. Still, Fed chairman Ben Bernanke thinks the spike in prices should be just a "temporary and relatively modest increase in U.S. consumer price inflation."

At the same time, the American manufacturing sector continues to rebound strongly. In February, manufacturing grew at its fastest rate in seven years, according to the Institute for Supply Management. We may be seeing the American economy return to normal - which would include an inflation rate closer to 2 to 4 percent, rather than the 1 to 2 percent we've had for the past couple of years.

Tuesday, March 1, 2011

Buffett the Bull

Warren Buffett's annual reports for his investing vehicle, Berkshire Hathaway, are always worth reading, if only to find out what's on the mind of America's most successful investor. But this year's provides some really good news, for the Oracle of Omaha is making it very clear that he is optimistic about the American economy.

“The prophets of doom have overlooked the all-important factor that is certain,” Buffett wrote. “Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective. Now, as in 1776, 1861, 1932 and 1941, America's best days lie ahead.”

Buffett's putting his money where his mouth is. In 2010, more than 90 percent of Berkshire Hathaway's investments went into American goods, a total of more than $5 billion. Buffett said that was just the beginning: From now on, the company will be putting nearly all its money into America.