Wednesday, November 30, 2011

Reasons to Be Confident?

Is the economy finally turning a corner? American consumers seem to think so. The readings for the November consumer confidence index are the strongest we've seen in a long time, with the largest single-month gain since April 2003. As it generally does, Bloomberg News had surveyed economists before the release of the November figure, and not a single one of them predicted the jump would be as large as it turned out to be.

While it's dangerous to read too much into short-term prices swings, the solid early results from the Christmas shopping season combined with the strong consumer readings could be buoying some sectors of the stock market. Among the biggest gainers in the Dow yesterday were consumer bulwarks Home Depot, Wal-Mart and Coca-Cola. The S&P 500 posted its biggest one-day gain in over a month.

It's a good sign that all this is happening even before we get to December. December has historically been the best month for the stock market, which means that we have several indicators in place to end 2011 on a high note.

Tuesday, November 29, 2011

Debt Drops, but Not Spending

Whether it's through a new sense of discipline or merely because people are still afraid of ending up broke, consumer indebtedness continues to decline in America. The Federal Reserve released a study yesterday indicating that our collective debt fell by $60 billion in the quarter ended September 30. Mortgage debt was responsible for pretty much all of that, dropping by a total of $114 billion. Consumer indebtedness outside of mortgages or home-equity loans rose by 1.3 percent.

The downside of that falling debt is that it could drive consumer spending downward right along with it. But that doesn't seem to have been the case. In that third quarter, the Fed reports, consumer spending rose by 2.3 percent, the biggest gain we've seen so far in 2011.

And what of the brand-new holiday shopping season? So far, so good: retail sales for the Thanksgiving weekend were up 16 percent over last year. Shoppers spent an average of nearly $400 apiece.

Monday, November 28, 2011

Corporate Profits Continue to Surge

Though there are still troubled spots for this economy, one sign that augurs well for our future is that corporate profits continue to grow to record levels. The federal government released its estimate of corporate profits for the third quarter last week, and reported them at an annual rate of $1.56 trillion. For the 12 months that ended in September, corporate profits increased by 11.4 percent.

That $1.56 trillion accounts for 10.3 percent of our entire gross domestic product, up slightly from 10.1 percent in the second quarter. That's an enormous share of our economy. Prior to last year, the biggest share of GDP ever taken up by corporate profits was in 1929, when they topped out at 8.98 percent. As recently as 2008, that figure was down below 7 percent.

Then, in 2010, corporate profits grew to a then-record of 9.56 percent. Their current level marks the first time ever that they have reached 10 percent of GDP. The next question will be to see what our companies intend to do with all those profits.

Friday, November 25, 2011

Happy Black Friday

Going shopping today? The nation's retailers certainly hope you have the dedication - and extra spending money - of those hardy souls who pitched a tent in front of a Best Buy in Union and camped out all Thanksgiving Day in anticipation of the Black Friday sales. Today is the day that many feel will tell the tale for the success or failure of the all-important Christmas shopping season.

What should we expect? The National Retail Federation forecasts sales in November and December to be up 2.8 percent over last year, which would be a solid rise but well below the 5.2 percent annual gain we saw in 2010. The NRF expects 152 million people to hit stores this weekend, up 10.1 percent from last year, which means there will be more people shopping, but each of them will be buying less.

The real action this year may be happening online. The research firm comScore estimates that Americans could spend $37.6 billion on e-commerce this holiday season, which would be up 15 percent from last year. The 2010 increase in online sales was just 12 percent.

Thursday, November 24, 2011

Thoughts for Thanksgiving

“We often take for granted the very things that most deserve our gratitude.” ~ Cynthia Ozick

“You know that just before that first Thanksgiving dinner there was one wise, old Native American woman saying, “Don’t feed them. If you feed them, they’ll never leave.” ~ Dylan Brody

“Thanksgiving was never meant to be shut up in a single day.” ~ Robert Caspar Lintner

Wednesday, November 23, 2011

The Fed Gets Frustrated

The minutes from the Federal Reserve meeting earlier this month were released yesterday, and their disappointment with the direction of the economy was notable. Fed chairman Ben Bernanke called the pace of economic growth "frustratingly slow," and the Fed accordingly ratcheted down its forecasts for the coming year. It now sees GDP growing at 1.7 percent this year and 2.7 percent next year - and remember, it was making these predictions before the new came out that the official GDP rate for the third quarter was revised down from 2.5 percent to 2.0 percent.

The Fed also sees unemployment settling at 8.6 percent by the end of 2012. That means it expects little change over the next year, since the official rate is currently 9.0 percent.

There wasn't any action taken after the meeting, but the overall sense of pessimism makes it more likely that the Fed will take future steps, perhaps a third bout of quantitative easing. The Fed next meets on December 13, and we'll keep an eye on that date.

Tuesday, November 22, 2011

Families Slowing Down

Everyone understands that the economic downturn has led to a decrease in family expenditures, but has it led to a decrease in families as well? According to the National Center for Health Statistics, American births fell to around 4 million last year, the lowest they've been in 11 years.

The Department of Agriculture estimates that it costs an average of $226,920 to raise a child to the age of 17. So it's no wonder people would put off having children till they feel a bit more financially secure. One ramification of this demographic slowdown, though, is that it's going to make a housing recovery all that much harder to come by. If people's families aren't growing, there's less incentive to buy a bigger house.

Other data bears out that hypothesis. The Census Bureau announced that the number of Americans who moved last year hit a historic low - the lowest the figure has been since they started tracking this number, back in 1948. Only 11.6 percent of all Americans found a new residence between 2010 and 2011. As recently as 1985, the number was nearly double that, at 20.2 percent.

Monday, November 21, 2011

Turkey Day Travel

Are you heading out of town for Thanksgiving this week? If so, you're not alone. According to the American Automobile Association, a total of 42.5 million Americans will be traveling at least 50 miles for their Thanksgiving celebrations this year. In a small sign of an improved economy, that's up from 40.9 million who traveled that far last year.

The vast majority of those travelers - 90 percent - will be driving, despite the fact that gasoline is much more expensive this year than it was in 2010. Nationwide, a gallon of gas will cost you an average of $3.43 right now, up from $2.55 at this time last year.

Add it all up, and the median spending by an American Thanksgiving traveler this year is projected to be a not-insignificant $540. That's a nice little boost to the economy as we head into the all-important holiday spending season.

Friday, November 18, 2011

Phantom Taxes

Bernard Madoff's Ponzi scheme stole money from an awful lot of investors, and even those people who thought they were making money with Madoff turned out to have nothing more than phantom profits. To add insult to injury, some people even paid taxes on those nonexistent profits. But a couple from Middletown who paid New Jersey state taxes on those phantom profits has successfully gotten that money returned to them.

John and Cathy Dalton had invested about $700,000 with Madoff. For several years, Madoff reported sizable capital gains to the Daltons, who dutifully paid taxes on it. After Madoff's scheme collapsed in 2008, the Daltons were only able to get $572,000 of their money back. They then filed amended tax returns to recoup the taxes they had paid on those phony capital gains.

At first, they were told no, they couldn't get a refund, because they technically could have cashed out their positions at any time before the Madoff scheme collapsed and enjoyed their gains. Finally, this week, a court ruled that the Daltons shouldn't have had to pay taxes on investment income that never really existed. The reward: a refund of $5,000 in capital gains taxes from the state of New Jersey.

Thursday, November 17, 2011

Inflation Eases

Inflation seems to have ground to a halt in October, as the Labor Department statistics released yesterday showed that consumer prices dropped 0.1 percent for the month, after four months of increases. Core inflation - stripping out the more volatile food and fuel costs - rose by just 0.1 percent. Overall, consumer prices have increased by 3.5 percent in the past 12 months.

The biggest drops in prices for October came in the energy sector. Gasoline was down 3.1 percent on the month, but even so, it's still up 23.5 percent for the past year. On the other hand, utility gas service dropped a similar 3.0 percent in October, but it's now down 2.2 percent over the course of the year.

For the full year, aside from energy prices, the biggest risers were used cars and trucks (up 5.2 percent), food (up 4.7 percent), and apparel (up 4.2 percent). Interestingly enough, the cost of food eaten at home was up more than twice as much as food eaten out, by a margin of 6.2 percent to 2.7 percent.

Wednesday, November 16, 2011

Hedge Funds Rise, Even in a Down Year

With the stock market showing an awful lot of unpredictability this year, many institutional investors have headed for hedge funds instead. These investors - including many pension plans - have put nearly $40 billion into hedge funds in 2011, as of last week, according to Pensions & Investments magazine. That's up 24 percent from the inflows we saw in 2010.

The record year for institutional inflows into hedge funds looks unbeatable, though. That was in 2007, when there was more than $66 billion of such assets put into hedge funds.

The funny thing about all of that money entering these funds this year is that 2011 has been very weak for hedge funds. According to the HFRI index, total hedge fund returns were flat through the first half of the year - up just 0.76 percent - then cratered in the third quarter, when they dropped by 5.5 percent. All told, the hedge fund index shows a net loss of 3.33 percent on the year.

Tuesday, November 15, 2011

Buybacks on the Rise

You can add one more entity to the list of people who are buying stock heavily these days: Corporations themselves are buying back their own stock at near-record levels. American businesses have bought back more than $450 billion of their own stock so far in 2011, putting this year on pace to be the third-highest such year on record, behind only 2006 and 2007. And with corporations like Apple sitting on record amounts of cash, we might even see those rates increase.

American companies spent 70 percent more money on buying their own stock in the third quarter than they had a year ago. Among those businesses getting in on the act is Warren Buffett's Berkshire Hathaway, which started a buyback program in September, for the first time in the more than 40 years that Buffett has controlled it.

What does it mean? The immediate reading to take from buybacks is that corporate management is feeling confident about their prospects and the economy at large. They must feel that their companies are either undervalued or on the verge of growth. At the same time, though, their record of prognostication is hardly stellar: Note that the last time we saw this level of buybacks, it was 2007 and we were headed into recession.

Monday, November 14, 2011

Boomers Worry About Their Retirement

As the Baby Boom generation nears retirement, it shouldn't come as any surprise - given the financial landscape of the past few years - that many of them aren't thinking of retiring at all. A new poll of Americans born between 1946 and 1964 shows that 27 percent of them now expect to never retire. Another 16 percent plan to work till at least the age of 70, which means that nearly half of Baby Boomers will be working into their septuagenarian years.

It's clear that what's primarily driving these decisions is fear. Nearly a third of the Baby Boomers surveyed said that they fully expect to struggle financially in their retirement years. Another 41 percent say they expect to scale back their lifestyle in a significant manner during their retirement.

Surprisingly, just 33 percent of these Baby Boomers say they have devoted a "great deal of thought" to their retirement. Maybe if the other two thirds had devoted more of their attention to retirement planning, they wouldn't be so worried about it. If you feel like your retirement planning needs a bit more attention, feel free to give me a call.

Friday, November 11, 2011

The Christmas Tree Tax

As if you're not getting taxed enough already, there was a story going around this week about a special new tax that many of us would be paying over the next month or so: a Christmas tree tax. And the story is true: There really was a plan to assess a tax of 15 cents on each Christmas tree sold.

But the story comes with a couple of caveats. For one thing, the whole scheme was the brainchild of the private Christmas Tree Task Force, which wanted to set up a program in partnership with the USDA to help promote the sales of Christmas trees, along the lines of the milk producers' "Got Milk?" campaign. The 15-cent assessment was supposed to go toward funding those efforts.

More importantly, even though the Christmas tree producers themselves wanted the program implemented, the hue and cry surrounding it was so great that the whole thing has been canceled. "I can tell you unequivocally," said a White House press secretary, "that the Obama administration is not taxing Christmas trees."

Thursday, November 10, 2011

Buffett Is Buying

At least one prominent investor took advantage of the disastrous third quarter to buy cheaply priced stocks: Warren Buffett's Berkshire Hathaway invested $23.9 billion - $7 billion of it into equities - in that quarter alone. That's the most Buffett has invested in any quarter in at least 15 years.

That $7 billion investment in stocks for the third quarter was up from $3.62 billion in the second quarter and a paltry $834 million in the first quarter. Although the specific list of stocks Berkshire Hathaway bought in the third quarter hasn't been released, we do know that the firm's position in banks, insurance and finance stocks rose 2.7 percent over the quarter, while its position in consumer stocks dropped by 5 percent.

The last quarter in which Buffett's firm invested more than $20 billion was the fourth quarter of 2008. That bet may have been slightly premature, but it eventually paid off: The S&P 500, you'll remember, bottomed out in the first quarter of 2009 before coming back strong.

Wednesday, November 9, 2011

Help Wanted

Despite the fact that last week's unemployment report wasn't particularly strong, there are signs on the horizon that we may be seeing an uptick in hiring over the next few months. The Labor Department reported yesterday that job openings increased by 225,000 in September, and now stand at 3.35 million. That's the highest they've been since August 2008 - a month before the Lehman Brothers bankruptcy triggered the meltdown of the nation's financial sector.

While we generally look at jobs added to see how the employment situation is changed, the hiring records are actually much larger than those numbers. Overall, employers hired 4.25 million workers in September, up from 4.06 million in August, although most of those were obviously already employed before they took on their new positions. Clearly, there are jobs out there.

Does that mean we'll see some improvement in the unemployment numbers in coming months? It's very possible. Some experts even think we could see an upward revision to October's relatively weak new-jobs figure of 80,000.

Tuesday, November 8, 2011

Vanguard Gets Confused

Investing can be a complicated endeavor for even the most studious individual investor. As a matter of fact, even big financial institutions like Vanguard get confused from time to time. The fund company recently reported on its Web site that in eight of the nine bear markets since 1960, the S&P 500 typically made most of those gains back within the following year.There's just one problem: That's not true, as the Wall Street Journal noted yesterday morning.

What Vanguard meant to say was that if the S&P lost 25 percent in a bear market, it would usually rally 25 percent within a year. But that doesn't bring the index back to where it started. The math doesn't work out. Consider if the S&P were at an even 1000, and lost 25 percent; that brings it down to 750. But a gain of 25 percent from a level of 750 only brings the index back up to 937.50. To get back to 1000 would require a gain of 33 percent.

Unfortunately for Vanguard, the S&P hasn't shown that kind of resiliency. Only two of the eight bear markets that Vanguard reported as getting back to whole within a year actually made it that far.

Monday, November 7, 2011

The Fed's Jobs Outlook

Friday's unemployment report, in which the official jobless rate ticked down to 9.0 percent, must have come as a bit of a surprise to the Federal Reserve. Just two days earlier, the Federal Open Market Committee had issued a forecast saying that unemployment would be between 9.0 and 9.1 percent for the remainder of the year, meaning that they don't expect any further improvement in the jobless rate. That would be very disappointing. Even in 2012, the Fed thinks unemployment will remain between 8.6 and 8.9 percent.

The Fed did raise its inflation outlook for the rest of the year. After projecting in June that inflation would run between 1.5 percent and 1.8 percent throughout 2011, last week the Fed inched that forecast up to 1.8 to 1.9 percent. That shouldn't be interpreted as a trend, though; long-term, the Fed doesn't see inflation on the rise. Its inflation projection for 2012 is 1.5 to 2.0 percent, and for 2013 is even lower, at 1.4 to 1.9 percent.

So the inflation forecast is good news for the economy, but the unemployment forecast is not. The Fed doesn't appear to have known when it made that forecast that the Labor Department would revise upward the jobs figures for August and September just two days later. Maybe that knowledge would have resulted in a rosier projection.

Friday, November 4, 2011

October's Jobs Figures

This morning's jobs report from the Bureau of Labor Statistics was more of the "one step up, one step back" phenomenon we've been seeing in the unemployment figures for some time now. Taken at face value, the addition of 80,000 jobs to the economy in October looks pretty feeble; it's the fewest number of jobs we've added in four months, and was below most economists' estimates.

At the same time, though, the official unemployment rate ticked down, from 9.1 percent to 9.0 percent. We've seen such anomalies in the past, with a small number of jobs being accompanied by a reduction in the overall unemployment rate. Sometimes, it's a result of people leaving the labor force and shrinking the overall number of employed persons, which is obviously not good for the economy.

But this month's figures are different: The biggest reason the unemployment number dropped is because the jobs figures for both August and September were revised upward. Instead of the original figure of 57,000 jobs added to nonfarm payroll employment in August, the government now says it was actually 104,000, and September was bumped up from 103,000 to 158,000. In other words, hiring was stronger than initially thought throughout the late summer, and the unemployment rate probably ticked down at some point back then.

On the other hand, those stronger months in the recent past make the October figure a little more disappointing. Maybe it too will get revised upward at some point.

Thursday, November 3, 2011

Long-Term, Bonds Inch Ahead of Stocks

After a lost decade in the stock markets (you can read more about it here), we have reached a most unlikely anomaly in long-term investing: As of the end of October, over the past 30 years, returns on long-term Treasury bonds have outpaced returns from equities. How unlikely is that? We hadn't seen such a 30-year period since before the Civil War, with a stretch that ended in 1861.

In the most recent 30-year period, the S&P 500 has gained an average of 10.8 percent on an annual basis. But long-term government bonds have gained an average of 11.5 percent over the same period, according to a study conducted by Bianco Research in Chicago.

Those same trends have remained strongly in force this year, although at a lower level. Bond investments have returned 6.25 percent this year through the end of October, while the S&P 500 is up 2.18 percent.

Wednesday, November 2, 2011

Investors Are Returning

Despite the disastrous third quarter in the markets, we're seeing signs of renewed optimism among investors. In September, for instance, for the first time in three months, more money flowed into mutual funds than came out of them. The biggest winner: Taxable bond funds, which took in $3.5 billion for the month.

At the same time, though, reversals in the markets kept total mutual fund investments down. By the end of September, the total amount of assets in U.S. mutual funds was at a yearly low of just $7.4 trillion. ETFs showed a similar pattern: Asset flows into them were positive in September, but they still fell to a yearly low total investment of $956 billion. That was the first time all year they had dropped below $1 trillion.

These are all figures for September, remember. That optimism on the part of fund investors was rewarded; the S&P 500 returned 11.8 percent in October, its strongest month since 2009.

Tuesday, November 1, 2011

Jon Corzine and the Volcker Rule

The bankruptcy of the investment bank MF Global, under the guidance of our former governor Jon Corzine, has highlighted the way the so-called Volcker Rule is supposed to protect our economy from the failure of "too big to fail" financial institutions. The Volcker Rule, which is scheduled to take effect next year, only affects institutions that are much larger than MF, but the principle is the same: Banks or financial firms that have government guarantees, or are so deeply entwined in the financial markets that their collapse threatens the entire system, should not be allowed to make such risky bets that could bring them down.

The collapse of MF resulted from unwisely betting $6.3 billion on European sovereign debt, when the firm itself had only $2.5 billion in capital. If a larger firm like Goldman Sachs had lost proportionally as much money as MF Global, and fell into bankruptcy, our financial system would be in great peril.

And the big investment banks often lose huge sums of money. As part of the research into implementing the Volcker Rule, the government looked at the proprietary-trading desks at six major investment banks. Over the 18 quarters studied, the desks turned a total profit of $15.6 billion in 13 of the 18 quarters. But in the remaining five quarters, the traders lost a total of $15.8 billion. As profitable as these investment banks usually are, when their trades go bad, they can go really bad, really fast.