The Final Revisions

After some rough economic times, we can at least end September on a high note: The Bureau of Economic Analysis has revised upward some of the GDP figures from earlier this year. It turns out that the pullback we thought we had experienced in the spring wasn't as severe as it had been reported. Second quarter GDP - which had been revised downward from 1.3 percent to 1.0 percent in August - has been revised back up to 1.3 percent in the government's third and final estimate.

What changed? The biggest culprit was consumer spending - which went in two different directions. Consumer spending on goods, especially durable goods such as motor vehicles, was one of the primary decliners for the quarter. (Business investment in equipment and software was also revised down.) But consumer spending on services was revised upward in the final set of figures.

Current-dollar GDP - which reflects the market value of the nation's output of goods and services - made an even bigger upward swing. That figure had dropped from 3.7 to 3.5 percent in the first set of revisions, but it has now been nudged up even further, to 4.0 percent.

The first estimate for third-quarter GDP is due out on October 28.

The Silver Rules

The price of gold has seen some tumultuous days recently, losing ten percent of its value in less than a week and currently sitting about 15 percent off its peak. While that has been covered extensively, it hasn't been quite as widely reported that silver has taken even a bigger tumble: It's lost more than 25 percent of its value within the past week.

What happened to drive the price down? The answer may lie not so much in supply and demand as in margin rules. Buying an investment on margin, as you probably recall, means putting down only part of the purchase price, and borrowing the rest. The Shanghai Gold Exchange just last week raised the silver margin requirements by 20 percent, which apparently triggered the fall in price.

You might not attribute the drop solely to the rules of the Chinese market - except that there was another silver price plunge earlier in the year, right after the Chicago Mercantile Exchange raised its own margin requirements for silver. Yet another lesson in one of the most important principles of investing: The global supermarket is a complicated place.

Consumer Spending Still Precarious

A report released yesterday from the Bureau of Labor Statistics helped to point up why our economic slowdown has been so difficult to recover from. According to the BLS, household income in 2010 dropped slightly, by 0.6 percent, from $62,857 to $62,481.

A decrease of around $400 per household shouldn't have a dramatic effect on the economy - except the drop in spending was worse than that. The average American household spent 2 percent less than it had in 2009, and that was coming off a spending drop of 2.8 percent from 2008.

That's why the consumer confidence numbers are so important. We've seen declines in consumer spending not just because Americans have less money, but because they're more reluctant to spend the money they do have. The Conference Board reported yesterday that consumer confidence was ever-so-slightly higher in September, posting a "marginal gain"; that's a good first step.

Women's Work

We've talked before about how many Americans are unprepared for their retirement years, but a new survey from IRI looks at a group with special risks: women. Only 34 percent of the women surveyed expressed confidence that they would have enough money to make it through their retirement years, as opposed to 41 percent of men who feel that way. Nearly half of all women said they did not consider themselves knowledgeable about investing in securities.

Interestingly enough, though, there are indications that women tend to be more proactive about their finances than men. Of the women surveyed, 47 percent have consulted with a financial advisor on their retirement, while only 42 percent of the men had. And slightly more women than men have tried to figure out how much money they need to save for retirement, by a margin of 55 percent to 52 percent.

That's crucial, of course, to any retirement plan: identifying the gaps in your knowledge and trying to fill them in with expert advice. To see the full IRI survey, click here. And if you're unsure of any aspect of your own retirement, please feel free to give me a call.

Breaking Down the Sectors

As we pointed out last week, the S&P 500 has not joined most of the rest of the world in bear market territory - it's off 16 percent from its April peak, while a bear technically requires a 20 percent drop. Yesterday's New York Times pointed out just how precarious the current position is, since four of the S&P's ten sectors have already slid below that 20 percent mark.

The four sectors that are already in bear territory:

* Financials
* Industrials
* Technology
* Telecom Services

That leaves six stronger sectors: Consumer discretionary, consumer staples, energy, health care, materials and utilities.

Global Bears

A key global stock index sank 4.5 percent yesterday, officially bringing it into bear-market territory amidst further worries about the Greek debt crisis. The MSCI Index of developed and emerging-market stocks has now joined other benchmark indexes of European and emerging-market stocks that were already considered to be in bear territory.

Like a lot of financial terms, "bear market" gets thrown around a lot casually but does have a technical definition attached to it. A stock market is officially considered a bear when it drops 20 percent off its peak. Though the S&P 500 has been falling pretty hard since July, it's down only about 12 percent from its peak, which means that American stocks are not officially in a bear market.

We're actually one of the few international stock markets that's not a bear right now. There are 24 developed stock markets around the world, and every one of them is officially in bear territory except for markets in Canada, New Zealand, Singapore - and the good ol' U.S. of A.

The Fed Does the Twist

As widely expected, the Federal Reserve yesterday announced a new iteration of Operation Twist, the plan to buy long-term securities and sell off shorter-term ones. Between now and the end of next June, the Fed will buy $400 billion worth of Treasurys with maturities between 6 and 30 years, and sell off a similar amount with maturities under 3 years. If everything works out as planned, long-term interest rates will go down, spurring business investment.

While some economists see the move as a tool that will increase overall growth, it's worth pointing out that interest rates are already pretty low, including long-term ones. The yield on the ten-year Treasury fell to an all-time low after the Fed's announcement, and 30-year mortgage rates are down to around 4 percent.

Since this program won't add anything to the Fed's bottom line, it's a relatively cheap tool to use, but remember, American businesses are already flush with cash right now. Having access to capital is not holding back most corporations. So while there isn't much opposition to this move, it remains to be seen what kind of impact it will ultimately have.

Apple in the Dow

Apple is one of the leading lights of the American business community, with the largest market capitalization of any corporation in the nation. At the moment, the electronics giant is closing in on a market cap of nearly $400 billion, putting it narrowly ahead of second-place ExxonMobil and more than $100 billion ahead of third-place Microsoft. Yet it's not, contrary to what many investors believe, one of the 30 stocks in the Dow Jones industrial average.

Why is that? In a letter to its clients yesterday, Bespoke Investments pointed out that Apple is just too big for the Dow - not its overall market cap, but its share price. Apple shares are now trading at around $420, which would be by far the largest in the Dow. Since the index weights its stocks by share price, Apple's ups and downs would dominate the Dow's price movements.

The highest share price in the Dow right now belongs to IBM, which is trading at about 175, or around 40 percent of Apple's price. The lowest? Bank of America closed yesterday at less than 7, which means its overall affect on the Dow Jones average is virtually nil.

Investors Fleeing Equity Funds

One factor that has fueled the recent slump in the stock markets has been investors taking huge amounts of money out of U.S. equity funds. Over the four months that ended in August, investors have withdrawn about $75 billion from American stock funds. In August alone, there was $33.6 billion taken out of these mutual funds. By contrast, during the first four months of this year, those same funds had taken in around $18.7 billion.

How bad is that? In the four months after the Lehman Brothers bankruptcy, at the end of 2008 and beginning of 2009, investors pulled out $72.8 billion from equity funds. We've managed to top that mark. It's no wonder that in those four months, the S&P 500 managed to lose more than 10 percent of its value.

The big winner in all of this has been bond funds. From April through July, American bond funds added $42.3 billion from investors, although they did start to see some outflows in August.

Let's Twist Again?

The Federal Reserve meets this week, giving them a chance to act for the first time since chairman Ben Bernanke made his much-anticipated speech at Jackson Hole last month. Prior to that address, many economy-watchers predicted a return to a strategy called Operation Twist. It didn't happen then, but we may see the strategy announced this week. Rumor has it that Bernanke needed the extra time to arm-twist some of his Fed governors into going along with the strategy.

Would Operation Twist make much difference? According to the economic forecasters at Macroeconomic Advisors, it could be significant. They estimate that Operation Twist alone could add 0.4 percentage points to our GDP, and create 350,000 jobs. That's on top of whatever natural growth we see.

Of course, economic forecasts are a dime a dozen. But with the Fed adding an extra day to its normal meeting time this week, don't be surprised if something truly dramatic happens this week.

Don't Be Afraid of the Dark

Don't Be Afraid of the Dark

A while back, a study found that the stock market tended to have rough days on those Mondays in the autumn just after we switched off of daylight savings time, and suggested that the loss of those daylight hours (or a lack of sleep) might be depressing stock traders, and causing those gains. In fact, the worst Mondays of the year tend to come in the fall, when the S&P 500 has suffered average losses of as much as 8 percent.

But if you're thinking of making some trades to take advantage of this year's switch back to standard time - which is coming up on November 6 - that might not be a wise idea. Another researcher has gone back to the original study, and found that the real explanation for the market woes was not a lack of afternoon sunshine but dim economic news.

The second researcher, Jeffrey Gerlach, did find those drops on autumn Mondays, but determined that they were the result of "seasonal patterns in market-related information." In other words, it's the result of the same old things that always drive the markets.

Another Zero

The month of August resulted in exactly zero jobs added to our nation's economy, as we've discussed before. Now we've got another zero on the ledger: In that same month, retail sales remained exactly flat.

Actually, the situation is worse than that might initially seem. At the same time the August figures came out, the Commerce Department revised the July sales figures downward. The initial figures had July retail sales climbing by 0.5 percent, but now it seems that they rose by just 0.3 percent. The August numbers, then, couldn't even improve on that lower threshold.

The big culprits were auto sales (down 0.3 percent for the month) and clothing sales (down 0.7 percent). Some people blamed Hurricane Irene for the loss in auto sales, which is plausible: while she didn't reach New Jersey until the 28th, the storm did completely wipe out the final weekend of the month as far as car-shopping goes.

Taxing Muni Bonds

Buried within the Obama administration's jobs bill was a proposed change to the tax treatment for municipal bondholders. If the bill were to pass as originally presented - which doesn't seem very likely - people in the top tax brackets would not be able to deduct quite as much interest from tax-exempt muni bonds.

It's important to understand what this proposal would and wouldn't do. It applies only to people in the top tax bracket, which means families with more than $250,000 in income, or singles with more than $200,000. It would cut back the tax advantage for tax-exempt munis from 35 percent to 28 percent. It would also have no effect on state taxation levels.

The idea is that the reduction of this tax break would help pay for other job-creating activities in the president's bill. Last year's deficit reduction panel had already made a similar proposal. But in addition to raising taxes, it could also make it even more difficult for state and local governments to borrow money and finance their projects; those state and local governments have cut more than 600,000 jobs since 2008.

Tamping Down Expectations

A new survey of business economists adds another strong voice to what many have suspected: The American economy is headed for another slowdown over the next year. The economists polled by the National Association for Business Economics forecast our GDP to grow by 1.7 percent over the remainder of 2011, and 2.3 percent in 2012. That's down from a forecast in May of 2.8 percent and 3.2 percent, respectively.

The survey also knocked down previous estimates of consumer spending growth, from 2.8 percent in the May forecast to 2.1 percent in the current one. The prediction for monthly jobs added for the remainder of the year fell from 190,300 in May to 124,000 for the September survey.

If there's a bright spot to all of this, it's that inflation expectations have been tamped way down as well. The ten-year TIPS spread has dropped to right around 2 percent, reflecting a global trend. Around the world, bond yields indicate an expectation of just 1.3 percent for consumer inflation.

Moneyball in the NFL

The NFL wraps up the inaugural week of its 2011 season tonight, a season that for a while looked like it might not come off at all. The preseason was marred by a lockout on the part of the NFL owners, who argued they were giving up too much money to the players.

The crisis was resolved, however, probably because this is one situation in which there is plenty of money to go around. Forbes magazine annually estimates the value of each of the NFL franchises, and the champion this year was the Dallas Cowboys, checking in at a whopping $1.85 billion. Our local teams, the Giants and the Jets, rank fourth and fifth respectively, with franchise values of $1.3 billion and $1.22 billion. The average NFL franchise is worth about $1.04 billion.

Where's all that money coming from? The NFL's network TV deals alone - there are four of them, with CBS, Fox, NBC and ESPN - total $3.1 billion a year, plus an additional $1 billion from DirecTV's Sunday Ticket. That's more than $125 million for each of the league's 32 teams. And here in New Jersey, the Giants and Jets shared $400 million from MetLife in naming rights for their new stadium. That's a pretty big haul, before either team sells a single ticket.

Debt in Retirement

We've talked a lot about the fact that many Americans have had to postpone their retirements, or at least keep working part-time at an age when they hoped to have put their careers behind them. An article in the Wall Street Journal this week pinpointed perhaps the biggest reason for this: debt. Households headed by folks aged 62 to 69 held an average of $71,000 in mortgage debt in 2007, a whopping five times higher than the inflation-adjusted amount from 20 years earlier.

Mortgage debt of all kinds is on the rise for older people. In 1994, 22 percent of homes headed by people aged 60 through 64 still had primary mortgage debt; now that number is up to 39 percent. The figures for secondary mortgages have risen from 12 percent in 1994 to 20 percent today.

Home mortgages aren't the only type of debt affecting older Americans. According to TIAA-CREF, which runs many types of retirement funds, loans taken out against retirement accounts rose by 18.8 percent in the past year alone. That's going to make a comfortable retirement awfully tough.

The Local Conditions

The Fed's Beige Book, with its periodic look at economic conditions in eight separate regions around the country, arrived yesterday, and its examination of our area here in New Jersey was somewhat dispiriting. Economic growth is still "sluggish," and even before Irene hit, "manufacturing reported steady to weakening activity."

There was a dollop of good news, though. Retail sales and tourism activity were both pretty solid, at least until the hurricane hit. The residential real estate market has been stable for existing homes, and the commercial real estate market is even starting to rebound, with both office and industrial spaces showing some signs of improvement. In northern New Jersey, the industrial vacancy rate was at its lowest level in two years.

One thing to watch for the housing market: The Beige Book reports that foreclosures have been weighing down the residential market, which comes as no surprise to those of us who live here. But the processing of those foreclosures is proceeding ahead now, which might temporarily depress home prices but should also mean more sales and a reduction of housing inventory on the market.

What's Killing Consumer Confidence?

As we noted last week, consumer confidence fell through the floor in August, with the biggest single-month decrease in the Consumer Board's benchmark Consumer Confidence Index since October 2008, the month after the financial sector collapsed. Another reading, a consumer survey run by the University of Michigan, now finds confidence at its fourth-lowest level since 1956.

Wall Street Journal columnist Gerald F. Seib looked at the Michigan numbers, and was able to pinpoint the moment at which consumers lost all that faith: the debt-ceiling battle. During the negotiations over the debt ceiling, consumer confidence took a hit similar to those it suffered through the Iranian hostage crisis or the Lehman Brothers bankruptcy. Not surprisingly, 71 percent of Americans say they are unhappy with the way the debt negotiations were handled.

Seib calls the whole spectacle "Washington at its worst." But unlike, say, the Lehman Brothers meltdown, the same actors are still in place and capable of redeeming themselves. The question now becomes: What, if anything can Washington do to rebuild consumer confidence?

Real Treasury Yields at Zero

The 10-year Treasury bond hit a milestone of sorts last week: On Friday, according to the Treasury Department, the real yield on that bond was exactly zero. In other words, the true cost to the federal government for borrowing money on a ten-year horizon is nothing, and the true benefit to investors for lending money to the federal government for ten years is nothing.

The real yield is figured by taking the yield that ten-year Treasurys are paying, and subtracting the expected inflation rate over that same ten-tear period, as expressed in the TIPS (or Treasury Inflation-Protected Securities) rate. Obviously, the yield on the ten-year Treasury has been in the doldrums lately, closing Friday at just a smidge over 2 percent. That leaves it - at least for one day- right at the expectation for inflation.

The real yield had hovered between 0.75 percent and 1 percent most of the year, before plummeting in early August, at the time of the debt-ceiling standoff. It had actually stood at zero once before this year, on August 9th; where it heads next is anyone's guess.

Thoughts for Labor Day

I'm a great believer in luck, and I find the harder I work, the more I have of it. ~ Thomas Jefferson

Work while you have the light. You are responsible for the talent that has been entrusted to you. ~ Henri-Frederic Amiel

If a man is called a streetsweeper, he should sweep streets even as Michelangelo painted, or Beethoven composed music, or Shakespeare wrote poetry. He should sweep streets so well that all the hosts of heaven and Earth will pause to say, Here lived a great streetsweeper who did his job well. ~ Martin Luther King, Jr.

Jobs Report: Bleak

August is generally a slow month for all economic activity, and the unemployment numbers released this morning affirmed that: The number of people in America with jobs was unchanged for the month. The unemployment rate remained at 9.1 percent; the number of unemployed people remained at 14 million. The net change in jobs was zero.

That, of course, is another blow to the economy. We would need to be adding roughly 250,000 jobs a month in order to make a serious dent in the overall unemployment rate. That's why the Obama administration released a study yesterday forecasting that unemployment would stay around 9 percent for at least another year, and wouldn't dip below 6 percent until 2016.

To point up how bleak that is, prior to the onset of the recession, unemployment had last been above 6 percent for five months in 2003, and before that, not since September of 1994. But if these latest forecasts hold true, we could be looking at unemployment staying at that lofty level for eight whole years.

The S&P Downgrade, in Retrospect

The normally expected effect of Standard & Poor's downgrade of America's debt, which took place on August 5th, would have been that our nation should have had to pay out more interest in order to get investors to buy its bonds. After all, if our credit wasn't as sound as previously thought and we were more at risk of default, it should be more difficult, and more expensive, to get people to lend us money over the long term.

Instead, the opposite has happened. The month of August saw Treasury bonds reach their strongest gains in almost three years, since December 2008. Yields plunged to record lows as investors, rather than finding American debt risky, chased after it as a safe haven. Treasury bonds returned more, on average, than corporate bonds did in the month of August.

Does that mean that S&P's call was wrong? Not necessarily, but it does appear that the number of investors who think that America's debt has gotten more risky is a distinct minority.