A Look Back at the Sectors

There is one trading day left in the 2012 calendar year, but we might as well start taking a look at the year behind us, and see what the market did for us over the past 12 months. Among the ten sectors in the S&P 500, the biggest winner by far was the financial sector, which was up 24.5 percent. The leading stock in that group was Bank of America, whose share price more than doubled.

The only sector among the ten to lose ground this year was utilities, which were down 4.2 percent. In the middle, here are the eight other S&P 500 sectors:

• Consumer discretionary: up 19.5 percent
• Health care: up 13.8 percent
• Telecom services: up 11.2 percent
• Information technology: up 10.8 percent
• Industrials: up 10.4 percent
• Materials: up 10.0 percent
• Consumer staples: up 6.3 percent
• Energy: up 0.2 percent

Holiday Cards

Did you get any gift cards for Christmas this year? There are an estimated $110 billion in these increasingly popular presents exchanged each year. That’s up about 10 percent from last year.

According to the National Retail Federation, some 81 percent of Americans said they were planning to buy gift cards in the 2012 holiday season. The average gift-giver bought a total of more than $150 worth of gift cards.

The bad news is that only about 50 percent of the value on them is ever used. The upshot is that the average American home holds an average of $300 in unredeemed gift cards, according to an estimate in the Journal of State Taxation. Between 2005 and 2011, a whopping $41 billion in gift cards went unused.

Worries Over the Economy Ease Somewhat

As 2012 draws to a close, the economy remains the number one issue on the minds of Americans - but not to the extent that it was just a few months ago. According to a Gallup poll, 23 percent of us identify the economy as the most important problem facing the country. That's down from 30 percent who said so in November, and 37 percent who said so in October.

In second place is a related issue, unemployment, which is currently the top concern of 17 percent of Americans. That too is down recently: It was the prime concern of 20 percent of us in November and 26 percent in October.

Altogether, 59 percent of the respondents named some economic issue - the federal budget deficit and "lack of money" also finished high up in the poll - as their primary concern. The highest-rated non-economic concern was "dissatisfaction with government."

Mutual Funds Still the Choice for the Affluent

If you're wondering where millionaires park their money, the results of a recent study from the Spectrem Group may interest you. According to their research, 60 percent of all American millionaires owned mutual funds in 2012. The average amount each of those millionaires had invested in mutual funds was $253,000.

Although that percentage was the same in 2011, the figures has been dropping in recent years. Back in 2008, some 67 percent of all millionaires were invested in mutual funds, and their average stake in that year was nearly $300,000.

Although exchange-traded funds are talked about as a hot investment, they still trail mutual funds among this cohort. Only 20 percent of the millionairies surveyed said they owned ETFs.

Thoughts for Christmas Day

"A lovely thing about Christmas is that it’s compulsory, like a thunderstorm, and we all go through it together.”~ Garrison Keillor

"One of the most glorious messes in the world is the mess created in the living room on Christmas day. Don’t clean it up too quickly.”~ Andy Rooney 

"When we recall Christmas past, we usually find that the simplest things – not the great occasions – give off the greatest glow of happiness.”~ Bob Hope

Merry Christmas, everyone!

Leaving Home for the Holidays

Are you traveling this holiday season? Most Americans are staying close to home, but one in four are taking a road trip this year. There are a whopping 93.3 million travelers planning to journey at least 50 miles from home between last Saturday and January 1, according to the American Automobile Association.

Most of them, by far, are traveling by car, a total of 90 percent. They'll travel an average of 760 miles and spend $759, including an average of $3.42 for a gallon of gas.

And the majority of them, two thirds overall, are traveling to be with friends or family, with the rest of them going away on vacation. No matter where you'll be this season, all of us here at Echelon Wealth wish you a joyous holiday.

The Disappearing ETF

Here's a somewhat surprising trend from 2012: Exchange-traded funds, seen by some as the wave of the future in investing vehicles, have been closing down at a surprising pace. Over the course of the year, 95 ETFs or exchange-traded notes have shut down. That's more than the number of ETFs that closed in 2010 and 2011 combined. It's the most ETFs that have shut down in a single year for the entire 19-year history of ETFs.

And it's not the case that the market had been flooded with new issues this year. Through the end of November, 145 new ETFs had gone on sale this year, the fewest since 2009. Altogether, there are still more than 1400 ETFs available to investors.

It may just be that the industry is reaching maturity, and ETFs are now forced to sink or swim on their own, rather than drawing in assets just because they're hot. From here on out, ETFs will have to prove their worth.

Financials Come Back Strong

One of the real success stories in this year’s stock market has been the financial sector. Financials in the Standard & Poor’s 500 stock index have risen by more than 25 percent in 2012, far outpacing the total index’s 15 percent gains. That’s the first time that the financials have beaten the wider index since 2006.

Last year, for example, the financial sector declined 18 percent while the S&P 500 itself was flat. The biggest winner in the financials this year has been Bank of America, which is up 104 percent. That’s right, the share price has more than doubled.

One of the key factors in the financials’ performance has been their cost-cutting. According to Bloomberg News, the nine largest investment banks have eliminated, altogether, 30,000 jobs through the first nine months of this year. Overall, total pay for the members of the banking sector is now half of what it was in 2007.

Where's the Market Going?

It's getting to be that season when financial institutions issue predictions for the coming year. Most of these prognostications fall right in line with a typical good year for the markets, such as:

* Goldman Sachs predicts that the S&P 500 will end 2013 at 1575, or a 12.5 percent increase from where we are now.

* Merrill Lynch is predicting the S&P will finish 2013 at 1600, about a 14 percent increase.

* Citigroup puts the S&P at 1615 for year-end 2013, a rise of about 15 percent.

* One notable negative: Wells Fargo predicts that the S&P will drop about 2 percent during 2013, ending the year at around 1390.

Are any of these predictions worth taking seriously? Probably not. The Web site MarketWatch notes that Bloomberg asked seven leading money managers for predictions heading into 2008, and all seven forecast that the S&P would rise by at least 13 percent. It ended up dropping by 38 percent.

A Savings Plan Goes Unused

While we're thinking about our families this holiday season, it appears that Americans have been slow to make use of on vehicle that can help provide for the next generation: the 529 plan. Even though college tuition costs have been spiraling ever higher, at an annual rate of 6 percent between 2005 and 2011, only 15 percent of American households with school-age children have invested in a 529 plan.

The people who are using these vehicles tend to be the affluent. According to a study conducted by the U.S. Government Accountability Office, families that do have 529 plans have assets that add up to 25 times the median for families without the college savings plans.

The average amount in a 529 plan is $16,000. That doesn't sound like much - for many schools, it's not even a year's tuition -  but the total amount of money in these plans now is $167 billion, which is an all-time high.

Scaling Back Bank Insurance

One of the regulations enacted back during the financial-sector meltdown of 2008-2009 was an extension of the amount of money the government was willing to insure in bank deposits. People had become leery of putting their assets into any sort of financial institution, so in order to shore up confidence in the nation's banks, the FDIC lifted the limit on its insurance. Rather than covering $250,000 in personal deposits, the FDIC announced it would cover any amount of a personal bank deposit.

That changed rather quietly last week. The Senate considered a two-year extension of what is officially called the Transaction Account Guarantee, and decided the program should come to an end.

Obviously, most people don't have a quarter million dollars in a bank account, so the end of this rule shouldn't affect you. But it does signal that the government believes other types of investments are relatively safe. And it might urge some more investor money into the markets.

Small Business Loses Confidence

We've seen some encouraging signs from consumer confidence in recent months, but that hasn't spread to the people who sell them their goods and services. According to a new Gallup survey, America's small business owners now expect to spend less money on their businesses over the next 12 months. The net spending index is at -14, down from -1 in July.

The survey found that just 20 percent of small business owners expect to increase capital spending over the next year. Meanwhile, 34 percent of small business owners think they'll reduce their capital expenditures over the same time frame. That's the highest that figure has been in more than two years.

Looking backward, the picture looks the same. The same survey asked those small business owners about their expenditures over the past 12 months. Over that time frame, 40 percent of those owners decreased expenditures, and only 18 percent increased them.

The Fed's Switch

So what exactly does the Federal Reserve's "surprise" move of yesterday amount to? In the past, the Fed has pegged its moves to specific dates. For instance, the last we heard, it planned to keep interest rates at near-zero levels until at least 2015. That has been the way the Fed has scheduled its policies for pretty much its entire history.

But now its policies will change based on well-defined macroeconomic targets. The Fed plans to keep its loose monetary policies in place until unemployment looks like it has dropped below 6.5 percent or inflation appears to be exceeding 2.5 percent. That last is a switch for the Fed, which had earlier set 2 percent inflation as a target.

Will it have any practical effect on the economy? It's too early to say, but it certainly make sense for the Fed to tie its policies to the actual economic conditions of the country, as opposed to an arbitrary date on the calendar.

Waiting on the AMT

While the president and Congress dither over what to do about the Fiscal Cliff, there’s another issue facing that needs to be addressed before the end of the year: an adjustment to the alternative minimum tax rules. For the 2011 tax year, the first $74,450 of income for married taxpayers was exempt under the AMT, but if Congress fails to act, this exemptions will fall to $45,000, making a lot more families subject to that tax. The result is that 28 million more taxpayers would be hit by the AMT.

 

The lowering of the exemption means that married couples with adjusted gross income between $200,000 and $500,000 would pay an average of almost $11,000 in AMT. That’s in addition to their regular tax liability. But they’re not the only ones who would pay more: About 88 percent of taxpayers with incomes between $100,000 and $200,000 would pay an average AMT of over $3,100. Even those making just $50,000 could end up paying $1,000 more.

 

In the past, Congress has routinely adjusted the AMT exemption upward to adjust for inflation. There’s still time for them to do it prior to the 2012 filing season as well. Let’s hope they act before all of us are faced with bigger tax bills.

The New Wave for 401(k)s?

IBM recently announced a change to the way it operates its 401(k): Rather than contributing to the employees’ retirement plans with every pay period, Big Blue will do so just once a year, on December 31^st.  It may at first blush look like solely an actuarial change, but it could have a serious effect on the way IBM employees save for retirement. And it could be the wave of the future.

The contributions will be made at the end of each year, which deprives workers of earnings and interest that could be compounding in the accounts over the course of the year. And if an IBM employee leaves the company before December 15^th, he or she gets nothing in their 401(k) for that calendar year.

To date only 9 percent of all companies operate their 401(k)s under the IBM annual model, while 84 percent continue to do it the traditional way, contributing a portion of every paycheck. But as more and better-known companies become aware of the savings – IBM may save millions with a once-a-year plan – it could be increasingly commonplace.

Two Paths for Confidence

Consumer confidence has been running pretty strongly lately: In November, the benchmark consumer confidence index as measured by the Conference Board reached a nearly five-year high. Consumers haven't felt this good about the economy since February 2008, or just three months into the recession.

Oddly enough, though, these feelings aren't shared by the nation's CEOs. In the latest survey of the nation's chief executives conducted by the Business Roundtable, their confidence has sunk to its lowest in three years.

What explains the discrepancy? Most people think that business owners fear the onset of the Fiscal Cliff, which would saddle the nation with higher tax rates and drastic spending cuts come the first of the year. The CEOs fear this could send the economy back into recession; general consumers either disagree about the outcome, or aren't aware of what the consequences might be.

Jobs Survive Sandy

Despite concerns that Superstorm Sandy, which struck right at the end of October, would hold down employment gains for November, the new jobless figures for that month, released this morning, were actually fairly good. The economy added 146,000 jobs in November, which is pretty much par for the course at this point, despite an economists' consensus that the number would be about 85,000. The headline unemployment figure edged down from 7.9 percent to 7.7 percent.

Unsurprisingly, the economic sector showing the biggest gains was retail, where 53,000 new jobs were added. That might be a result of the unusually early Thanksgiving, which meant that the last full week of November was part of the holiday shopping season.

The Bureau of Labor Statistics reported that Sandy had little effect on the overall jobs numbers. But we'll know more about that on December 21st, when the BLS releases state-by-state employment figures for November. It could be that the employment figures here in New Jersey were much worse than for the overall nation.

Apple Ups and Downs

It's been a rough time lately for what might be considered America's flagship stock, Apple. The biggest stock in the world has lost more than 17 percent of its value since it peaked - briefly and barely - over $700 back on September 19. The news was even worse than that at one point: Between September 19 and November 15, the stock had fallen by nearly 25 percent.

That means, of course, it's up nearly 10 percent since then. And we can expect to see a bit more whipsawing on the part of this stock in the near future, if the volatility indicators are to be believed. Options traders bought heavily into Apple on Wednesday, according to the Wall Street Journal, signaling there could be more heavy swings ahead.

Yesterday morning alone, the implied volatility for Apple shares jumped by 15 percent. That's not necessarily bad news - volatility can consist of upward swings as much as downward movement. But it does indicate that Apple investors can expect some more choppy waters to come.

Banking on Strength

It's been a boom time for the nation's banks recently: The FDIC reported yesterday that America's banking business recorded its biggest quarterly profit in six years during the third quarter of this year. The total profits of $37.6 billion were up 6.6 percent from the same quarter a year earlier.

The biggest driver of that growth was auto loans, which were up 2.4 percent from the previous quarter. Business loans were up 2.2 percent, and home loans were up 0.8 percent. On the other side of the ledger, banks have become less and less hampered by having to deal with bad loans; provisions for loan losses fell by more than 20 percent in the third quarter.

And while bank failures used to be a massive problem for the industry, their numbers have shrunk radically in recent years. Only 12 banks failed in the third quarter, the lowest figure since the fourth quarter of 2008.

Parties Are Back

Here's an indicator showing that the economy may be getting stronger: The holiday party is coming back this year. Last year, just 74 percent of all companies had a holiday party, which was the lowest figure that the executive search firm Battalia Winston had seen in 24 years. But among the companies surveyed, 91 percent say they will have a holiday party this year.

The news is not as good for smaller companies, though. The staffing company Robert Half asked more than a thousand senior managers with companies that had as few as 20 workers if they had plans for a holiday party  this year. More than half said no.

But maybe it's just as well. The same survey asked both managers and office workers if they actually enjoyed their companies' holiday parties. And 79 percent of the managers - as well as 75 percent of the employees - said they'd just as soon go home.

Holiday Shopping in Full Swing

The figures are now in for Black Friday, and it looks like this shopping season is off to a strong if not blazing start. Total spending for the four days starting on Thanksgiving - which we might want to start calling the Black Long Weekend -  totaled $59.1 billion, which is up 13 percent from the same period a year earlier, according to a survey by the National Retail Federation.

On the other hand, the increase was more modest in a report that came out at the end of last week, looking at sales at 16 of the nation's biggest retail stores. Among large chains like Macy's, Nordstrom and Target, same-store sales were up by a mere 1.6 percent in November, as opposed to November of 2011.

One point in favor of this year's holiday shopping season: It will be unusually long. Thanksgiving falls on the fourth Thursday of November, which this year was as early as it could possibly be, on November 22. That gives shoppers 32 shopping days before Christmas, the maximum number possible. Let's hope they make good use of them.

ETFs vs. Mutual Funds

Exchange-traded funds have been the hottest vehicle in the investing world for some time now - they've grown at a rate of 48 percent since the start of 2010, as opposed to mutual funds growing at just 9 percent, according to Morningstar. There's still a huge gap between the two categories, though. Mutual funds have total assets of $9 trillion, while ETFs have just $1.3 trillion.

Will there come a time when ETFs overtake mutual funds as America's preferred investing vehicle? That's what the fund-reporting service Ignites asked in a recent survey. Most of the respondents said it won't happen for a long time: 36% said ETFs won't surpass mutual funds in terms of assets for at least 20 years, while another 21 percent said it would never happen.

But 28 percent said it could happen within 10 years, and 15 percent said within five. It would take a real change of mind-set among investors - and huge inroads for ETFs in Americans' 401(k)s - for that to happen.

Why GDP Got Stronger

The estimate for third-quarter GDP released this morning shows an economy growing faster than first thought: The revised 2.7 percent growth is the strongest we've seen since the fourth quarter of 2011, when the economy grew at a pace of 4.0 percent. The third quarter of 2012 was stronger than nine out of the last ten quarters.

The biggest positive change to the revisions came from business inventories. In the first estimate, inventories were thought to have subtracted 0.12 percentage points from GDP; now they're figured to have added 0.77 points. The other positive contributor was exports, which swung from costing us 0.18 percentage points to adding 0.14 percentage points.

The biggest detractors were consumer spending and business investment. Growth in consumer spending dropped from 2.0 percent in the first estimate to 1.4 percent now - a decline from the 1.5 percent reported for the second quarter of 2012. Business investment, which had been reported as dropping by 1.3 percent, is now estimated to have fallen by 2.2 percent - the first quarter in which it's dropped since Q1 of 2011.

Hurrying Up the Dividends

The Fiscal Cliff scenario, in which automatic budget cuts and tax hikes go into effect starting January 1, isn't a certainty yet, but many companies are already acting in response to it. For instance, the tax on dividends is now at 15 percent, but as of January 1, unless Congress takes action, they will start to be treated as ordinary income.

That's why the retail store chain Dillard's, which has paid out its dividend in January for each of the past ten years, this year decided to move it up to December. Wal-Mart similarly changed the schedule for its dividend payout, moving it up from January 2, 2013, to December 27, 2012.

Don't think this is merely an outburst of altruism on behalf of these companies' shareholders, though. In each of those cases, the prime beneficiary of the preferential tax treatment - if that indeed comes to pass - will be the family that controls a significant portion of the stock.

Moving Out of Foreclosures

One of the necessary steps for getting the housing market back to full strength has long been clearing out the number of foreclosures that are on the market. We seem to be approaching a turning point there, according to new figures from LPS: The percentage of home loans in the delinquency process is now at its lowest level since 2009. The number of mortgages in foreclosure has dropped 19 percent since this time last year, and the number of delinquent properties is down 10 percent.

Those numbers have been dropping sharply as of late. The delinquency rate (loans more than 30 days overdue) dropped by 5 percent between September and October, and the number of loans in the foreclosure process dropped by 6.7 percent.

Meanwhile, mortgage rates have now fallen to another record low: The rate for a 30-year fixed is now all the way down to 3.31 percent, down from nearly 4 percent a year ago. Everything would seem to be in place for solid growth in the housing market.

The Cost of Cyber Monday

All of these post-Thanksgiving days now have their own label to better market themselves: Black Friday was followed by Small Business Saturday. And today is Cyber Monday, the day in which everyone is supposed to shop online for the things they couldn't or wouldn't buy last Friday.

And there may be something to that. According to MarketWatch, workers taking time out to do their shopping on Cyber Monday cost their businesses roughly $1 billion per year in lost productivity. That's in addition to the $2 billion that shoppers are expected to spend online today.

If you are shopping today, the retail trackers will tell you that kitchen appliances tend to have some of the best prices on Cyber Monday, down about 16 percent from Black Friday. Another popular bargain: travel, especially hotel rooms.

Beware of Black Friday

Going shopping today? Some of those bargains can be awfully hard to pass up. But a new study out from the Wall Street Journal and a pricing-data firm called Decide Inc. indicates that a lot of those sales are bargains in name only. After studying 500 "doorbuster" ads, Decide found that nearly a third of the advertised items had been sold at lower prices earlier this year.

For instance, Home Depot is advertising a GE Adora dishwasher on sale this Black Friday for $598 - a claimed savings of $151. But Decide found that the same dishwasher was available during a Columbus Day sale last month for just $538.

According to the Journal, the best time to buy gift items like watches and jewelry is in October, which is when their prices tend to be the lowest. The best time to buy flat-screen TVs is around the New Year. There are true bargains to be found on Black Friday as well - as long as you do your homework.

Thoughts for Thanksgiving Day

"Those early Pilgrims were thankful for what had happened to them, and we should be thankful, too. We should just be thankful for being together. I think that's what they mean by 'Thanksgiving,' Charlie Brown."  ~ Marcie, from "A Charlie Brown Thanksgiving"

"Thanksgiving dinners take eighteen hours to prepare. They are consumed in twelve minutes. Halftimes take twelve minutes. This is not coincidence." ~ Erma Bombeck

"Grace isn't a little prayer you chant before receiving a meal. It's a way to live." ~ Jackie Windspear

Paying for Turkey

If you noticed that your Thanksgiving preparations cost you a little more than last year, you're not alone. According to the American Farm Bureau Federation, American households will lay out $49.48 on Thanksgiving dinners this year, which adds up to an increase of 28 cents more than we spent last year.

The biggest factor driving the price increase is the turkey itself. The average cost of a 16-pound turkey rose from $21.57 in 2011 to $22.23 this year. On the other hand, the price of three pounds of sweet potatoes is down 11 cents, and a half pint of whipping cream is down 13 cents.

The Farm Bureau Federation added up the cost for an entire meal, and found that a Thanksgiving dinner still costs less than $5 per person. That's still a relative bargain, and something to be thankful for.

Strength in 401(k)s

How's your 401(k) doing these days? In a piece of very good news for Americans, Fidelity is reporting that the level of money in the nation's 401(k) plans is the highest it's ever been, or at least since the mutual fund firm began tracking that figure back in 2000. At the end of September, the average 401(k) had $75,900 in it.

There have been two fundamental factors driving this trend. First of all is the rise of the stock market: For the 12 months ended on September 30, the Standard & Poor's 500 was up by 27 percent.

At the same time, employees have ramped up their contributions to their 401(k)s. Five percent of all plan participants increased their contribution rate during the third quarter, while only three percent reduced them. Add it all up, and American 401(k)s start to look very healthy.

The App Economy

One of the biggest job-growth areas in the economy is something that didn't even exist until five years ago, something that required a whole new word to describe it: the app economy. The entire notion of making applications for mobile devices was invented with the introduction of the iPhone in 2007, but now it's a huge engine for our nation's economy. It created $20 billion in revenues last year, a figure that's expected to rise to $100 billion by 2015, according to new data compiled by a firm called TechNet.

It's been a big driver of the economy here in New Jersey as well. In 2011, 4.2 percent of all jobs created here were attributed to the app economy, placing our state fifth in the nation. California was way out in front - 23.8 percent of all its new jobs were app-related - followed by New York, Washington and Texas.

All told, the app industry has added an estimated 460,000 jobs to our national economy over the past five years. When you hear of older industries shedding jobs, it's important to remember that there are also innovative ones creating new jobs for hundreds of thousands of Americans.

The Next Generation

Would you recommend that your children follow you into your career? You might if you’re in agriculture and ranching – although if you live here in New Jersey, you’re probably not in one of those professions. But 67 percent of the people in those professions say they’d recommend those jobs to their kids.

That’s the highest percentage of any profession, according to a new survey from Salary.com. Way down at the bottom of the list is retail, at just 18 percent, followed by finance and banking at 24 percent. Nothing comes close to ranching at the top of the list: It’s followed by professional services at 44 percent, IT at 43 percent, and health care at 42 percent.

Overall, only 36 percent of people say they would recommend that the next generation follow in their profession’s shoes. So there will be a lot of kids out there branching out on their own.

Expecting Volatility

The Fiscal Cliff - the series of budget cuts and tax hikes scheduled to go into effect at the first of the year - is expected to bring increased volatility to the markets through the remainder of the year. That's the finding of a recent poll by the financial news service Ignites, which found that 80 percent of all financial advisors expect the political climate to bring more risk to the market. 

Some 62 percent think it is already causing volatility, such as the sell-off we saw on the day after Election Day. Another survey, by the investment management firm Lord Abbett,  found that three in five of all financial advisors named fiscal uncertainty as their primary financial concern now that the election is over. 

Oddly enough, though, this increased volatility has yet to evince itself in the market. The VIX index, the primary measure of the market's volatility, closed yesterday at 19 and change, just under its long-term average of 20.  

Shedding More Light on 401(k)s

As of August 30th, 401(k) and other defined contribution retirement plans have been required by law to disclose their fees to their participants. But so far, the reaction has been underwhelming. According to a new study from the Plan Sponsor Council of America, just 2.3 percent of participants have chosen to change their asset allocations since receiving the new fee disclosures.

Only 1.4 percent of participants even asked questions about the fee information they received. A minuscule 0.6 percent chose to defer some of their salary at a higher rate, while none decreased their deferrals in light of the fee disclosures.

Nearly all the plan sponsors surveyed, a total of 95.9 percent, reported no changes in participant behavior as a result of fee disclosures. Still, that doesn't make the new rules a failure. Especially in something as important as saving for your retirement, it's always better to have more information rather than less.

Bond Funds Come Back Strong

One part of the economy that has rebounded strong after the effects of Hurricane Sandy is the municipal bond market. Muni bond funds had been strong all year, with net inflows for 28 straight weeks before the storm hit, and 58 out of 62 weeks overall. But the week that ended on October 31, with the markets closed much of that time, saw net outflows from muni bond funds totaling $123 million.

But the following week, ending November 7, saw a complete turnaround: A whopping $866 million  flowed into muni bond funds that week. As a category, muni bond funds now hold a total of $318.6 billion in assets.

Corporate bond funds also bounced back strong for the week. Reflecting pent-up investor demand, investment-grade corporate bond funds took in $2.74 billion in new assets for the week - the biggest week for those funds on more than 20 years.

Losing the Earnings Game

It appears as if investors have become very aware of the way companies play the expectations game, managing their earnings forecasts so as to ensure they outperform come earnings season. In the current earnings season, stocks that beat their Wall Street consensus are getting very little reward for it. Companies that beat earnings are outpacing the S&P 500 by an average of just 0.9 percentage points on the day of their reports, according to a report from Goldman Sachs. That's a marked difference from last quarter, when outperforming companies got a boost of 2.9 percentage points over the S&P 500 on the day they announced their earnings.

At the same time, they're being punished a bit more for missing expectations. Companies that have fallen short of the consensus have slid by 3.6 percentage points compared to the S&P; last quarter, that same figure was 3.2 percentage points.

McDonald's illustrates what's been happening. The Golden Arches came in last month with a weaker than expected earnings report, on a day when the S&P as a whole fell by 1.7 percent. But McDonald's stock slipped that day by more than twice as much, at a loss of 4.5 percent.

A Warm November?

Now that November is here, are stocks due to heat up for the next couple of months? There's a longstanding adage that investors should "Sell in May, then go away"; the time they're supposed to return to the market is in November. And there's a growing body of research suggesting this may be exactly the right move.

Two researchers in New Zealand recently took a staggeringly comprehensive look at the phenomenon, examining every bit of historical data they could from 108 different markets. They had a whopping 300 years’ worth of information regarding the market in the United Kingdom alone. The bottom line: Returns from November through April over all that time were 4.52 percent higher than returns from May through October. 

And if anything, the effect is getting stronger. In the past 50 years, the average advantage for May through October has increased to 6.25 percent. Over the last five 10-year sub-periods that the researchers looked at, the November Effect ranged from 5.08 percent to 8.91 percent. In other words, it’s lately been at least 5 percent, and is regularly much more than that. This is definitely something to keep in mind.

A Solid Foundation for Housing

As we assess the damage done to our homes here in New Jersey by Hurricane Sandy, it appears that the housing market around the country is in increasingly good shape. The median selling price rose in the third quarter of 2012 for 120 out of the 149 metropolitan areas surveyed by the National Association of Realtors. That's 81 percent of all U.S. cities showing an increase in prices.

Overall, home prices jumped 5 percent in September over the same month a year earlier. That's the biggest 12-month increase we've seen since June of 2006. Nationwide, the median price for an existing single-family home was $186,100 in the third quarter of this year.

One of the major factors was the dwindling number of homes for sale. At the end of the third quarter, 2.32 million existing homes were available for sale, 20 percent less than had been available in the year-earlier period. A big factor in that is the fact that all those foreclosures have been clearing off the market; we'll have to wait and see what effect Sandy has on home sales.

The Economic Toll

There's no denying the horrible destruction that the hurricane wreaked on our area. You simply need to look around to see evidence of that. Now some of the economic toll is starting to become clear as well. Consumer spending has more or less ground to a halt since the storm arrived, according to data compiled by MasterCard.

Here in New Jersey, retails sales for the week of October 28 through November 3 were just 60 percent of what that week normally sees. It was a little bit better in New York and Connecticut, which  had about 80 percent of the normal retail sales for the week. And those figures do not include automobile sales; it's hard to imagine many New Jerseyans were out buying a car over the weekend.

On the other hand, there has been an awful lot of economic activity accounted for by contractors, plumbers, electricians, etc. Those costs haven't been quantified, but the city of New York has already spent $5 million on pumping equipment alone. It's going to take an awful lot of spending to rebuild this kind of destruction.

Thoughts for Election Day

"A politician thinks of the next election; a statesman thinks of the next generation."  ~ James Freeman Clarke

“I'm tired of hearing it said that democracy doesn't work.  Of course it doesn't work.  We are supposed to work it.”  ~ Alexander Woollcott

“Always vote for principle, though you may vote alone, and you may cherish the sweetest reflection that your vote is never lost.” ~ John Quincy Adams

Retirement Plans and The Middle Class

Both presidential candidates have been very forthright about their devotion to taking care of the middle class, but there's some evidence recently that the middle class hasn't been doing a good job of taking care of itself. The research firm LIMRA has conducted a survey of middle-class Americans - defined as those earning between $40,000 and $100,000 annually - and found that two thirds of them save less than 5 percent of their income for retirement. Nearly fourth of them save nothing at all.

What's even worse is that the closer people are to retirement, the less likely they are to save. Members of the middle class over the age of 55 were actually the most likely to be saving nothing at all, with 26 percent of them in that group. On the other hand, that cohort was also the most likely to say they knew they needed to save 15 percent or more of their income for retirement.

In a separate survey, the Insured Retirement Institute found that 30 percent of all Baby Boomers stopped contributing to a retirement plan during the past 12 months, and 16 percent of them prematurely withdrew funds from a retirement plan. Of course, the Boomers have started retiring, so you'd expect some of them to stop funding a plan - but not 30 percent of them.

October's Jobs Report

In the jobs report out this morning, October brought us a bit of a reversal from the September news. Back then, you'll remember, the overall number of jobs added was fairly weak, but the unemployment rate moved downward anyway. In October, we have a much stronger number of new jobs, with the economy adding 171,000. But the rate ticked back upward, from 7.8 percent to 7.9 percent.

This latest figure is right on target for what we've been seeing lately. Since July, the economy has added an average of 173,000 jobs per month. The Bureau of Labor Statistics also revised the figures for August and September, and announced that we added 84,000 more jobs than previously thought.

So why did the unemployment rate move upward? Primarily, it was because the work force expanded, with an additional 578,000 Americans starting to look for work. It appears as if the strengthening economy is encouraging more people to get back into the labor force.

The Bad - and Good - News About Gas

Among the other problems we're facing here in New Jersey, gasoline has been very difficult to find. Even some stations that are open and have gas also have waits of an hour or more for consumers to fill their tanks. Governor Christie has announced that stations will be allowed to buy gas from out of state, which is normally not allowed. That should ease things a bit.

But in the longer term, the storm might end up having a positive impact on fuel prices. Crude oil prices dipped yesterday, in large part over concerns that the damage from Sandy will limit driving and other transportation here in the Northeast. With less demand for fuel, gasoline prices could drop as well.

Of course, Hurricane Sandy isn't the only thing going on in the world. Chinese demand for oil has fallen as well, and world oil supplies are ample right now. Add it all up, and we might see some much-needed relief at the pump.

And Now, the Recovery

Now that the storm has passed, and we've started counting up our losses and wondering when we'll have  power again, it's time to start assessing the damage of Hurricane Sandy. According to a company called Eqecat, which provides damage estimates to insurance companies, the toll could be anywhere from $10 billion to $20 billion, or even more.

There's also the question of what the impact could be on the larger economy. Obviously, there's been an immediate slowdown in economic activity, with the markets closed for two days. And the devastation will put the brakes on a lot of consumer spending for a while; for instance, no one in the tri-state area is going to be shopping for a new car in the next few days.

But there also might be something positive to come out of this, as far as the economy is concerned. You only need to look around to see all the repair and reconstruction that needs to be done. Some estimates show that the short-term hit to the economy is generally slightly outweighed by the long-term activity that goes into rebuilding everything. It would be nice if in the end we got at least a little something good out of all this mess.

Closed for Business

We're all hoping this message finds you safe, and that you and yours have been spared the worst from Sandy. Much of the Eastern seaboard has fled for cover, including the New York Stock Exchange, which was closed yesterday and will be again today.

That in itself is a testament to what a dangerous storm this is, because the stock market basically never closes for two days. Back in 2001, the markets remained closed from September 11 through the following Monday, September 17, a total of four trading days.  But in terms of weather-related issues, the market hasn't had consecutive days disrupted since 1978, when the exchange closed at 2:00 p.m. on February 6th because of a snowstorm, and didn't reopen until 11:00 am the following day.

The NYSE hasn't lost two whole days to weather since way back in 1888, when a blizzard closed the exchange on March 12 and 13. That's how big Sandy is: the worst weather calamity to befall the stock market in 124 years. Be safe.

Bracing for Sandy

If you can read this, you’ve probably already headed for higher ground and safety. If you haven’t yet, let’s hope you have an escape route planned. We still don’t know what kind of damage Sandy is going to bring to the area, of course, but it’s expected to be worse than Irene last year, and that was plenty bad.  

The final tab for Tropical Storm Irene ended up at more than $15 billion in damage. A lot of that damage here in New Jersey was from flooding; the National Flood Insurance Program paid out more than $1.28 billion in flood-related losses.

If there’s any good news in all of this, it’s that insurance companies are much better positioned this year to respond to their customers. In 2011, with a spate of tornadoes and the horrific earthquake in Japan, many insurance companies were stretched to the limit by the end of October. Whatever the result of Sandy, it shouldn’t be too hard to get compensated for your losses. Good luck, and be safe.

Third Quarter GDP

The Commerce Department issued its first estimate of GDP growth for the third quarter this morning, and the news was a bit better than expected. Our economy grew at 2 percent for the quarter, slightly ahead of the consensus expectation of 1.8 percent, and up from 1.3 percent in the second quarter.

Consumer spending was a key driver of the increase: Real personal consumption expenditures were up by 2 percent, after having risen just 1.2 percent in the prior quarter. And government spending was up by a surprising 3.7 percent, mostly as a result of increased defense spending, after it had dropped by 0.2 percent in the second quarter.

There were a couple of weak signs as well. Overall business investment softened somewhat, as did nonresidential business investment. Exports were also a problem, dropping by 1.6 percent from the previous quarter.

A New Kind of Earnings Miss

Earning season is a critical time for companies, since so much is riding on the reports they issue. You would think they would be ultra-careful about everything surrounding the release of those earnings reports. But no. On at least three instances so far in this earnings season, the reports have leaked before the scheduled announcement.

First it was Google, which had its report filed early by its printer, R.R. Donnelley, and was forced to release its earnings early in the morning last Thursday, rather than after the closing bell, as initially expected. Google missed its earnings expectations by quite a bit, and may have been able to cushion the blow with a little more time to prepare. As it was, the stock lost $19 billion off its market cap that day.

And the errors continued. Dow Chemical was supposed to release earnings on Wednesday, but someone at Dow emailed a draft of the report to Bloomberg News late on Tuesday night. Dow ended up releasing its earnings close to midnight that same night. Then Daimler had a similar incident, when a PR person hit "send" instead of "save." You would think these major corporations would have the drill down by now.

New Jersey Gets Paid

The Tax Foundation came out with its annual ranking of the state and local tax burdens affecting people in each of the states this week, and the news was not good for New Jersey. As was the case last year, our state came in second in the highest percentage of taxes exacted from its citizens, at 12.8 percent of our income. That put us just behind New York and just ahead of Connecticut.

That number, unfortunately, is moving in the wrong direction. It was at 12.4 percent in 2010, and all the way down at 10.7 percent in 2000, which is the lowest mark for any year since 1977. The average citizen of New Jersey pays a total of $4,853 in taxes within the state, and an additional $1,836 to other states, for a total of $6,689.

Was there any good news for New Jersey? We do rank as the second-highest state in income as well, with a per capita income of $53,869. So that's a little something to be proud of.

Stocks Rule!

What's the hottest investment of 2012? It's stocks, of course. With the S&P 500 up an even 14 percent on the year, according to Bloomberg News, that outpaces every other asset class. That might not sound so remarkable, but it hasn't happened since 1995, when the S&P returned 35 percent, for its biggest year of the last 50 years.

It's not as if other asset classes are having a disappointing year; they're all in positive territory, some of them quite significantly. Here's the scoreboard for the year:

U.S. High-Yield Corporate Bonds: up 13.6 percent
Emerging Market Stocks: up 11.8 percent
Gold: up 10.9 percent
Hedge Funds: up 4.8 percent
U.S. Treasuries: up 2.6 percent

High-Speed Trading Slows Down

High-speed trading, the computerized automatic stock sales and purchases that are the hallmark of many high-tech firms, seemed like the hottest thing in the world a few years ago, before the market crash of 2008-2009. But even though the stock market has recovered, the sky-high profits enjoyed by these firms seems to be a thing of the past. According to the New York Times, profits from high-speed trading are down 35 percent from last year, and down a staggering 74 percent from their peak in 2009.

These high-speed traders accounted for more than 61 percent of all stocks bought and sold in 2009. But now that number is down to 51 percent and falling fast, which is probably just as well for long-term investors.

One area in which high-speed trading is still growing strong is currency trading. As recently as 2010, high-speed trading accounted for just 12 percent of all currency trades, but that figure has more than doubled, going up to 28 percent now.

Working Hard, or Hardly Working?

We all know people who like to brag about how many hours they put in at work: Fifty hours a week, or sixty, or even seventy or more, which means they're putting in ten hours a day, seven days a week. It's almost more than normal humans can bear.

It should come as no surprise that a recent study conducted by researchers at the University of Maryland confirms what we've always suspected: These people are lying. People who claim they work 55 to 64 hours a week, the study found, tend to exaggerate that number by about 10 hours. Those saying they work 65 to 74 hours a week are generally off by more like 20 hours.

In general, people overstate their work hours by about 5 to 10 percent. So if you're not working his weekend, don't feel guilty: Your colleagues probably aren't working as much as they claim to be, either.

A Big Day for Earnings

Today may be the biggest day of the current earnings season, with three Dow components slated to report, as well as two other hugely important stocks: Google and Morgan Stanley. Here's what to watch for:

Morgan Stanley While other banks have surprised on the upside this quarter, Morgan Stanley looks like it will be a disappointment. The analysts' consensus for earnings of $1.14 a share would be a 79 percent decline from the same quarter a year earlier.

Verizon This Dow stock is forecast to post earnings of 65 cents a share, up 15 percent from a year earlier. It will also provide a hint as to how Apple will do, since so more than 3 million iPhones rely on the Verizon network.

Travelers Its third quarter earnings forecast of $1.54 a share would be double the figure from a year earlier. Travelers has been one of the Dow's top performers, up 21 percent so far this year.

Microsoft Its earnings are expected to be just 56 cents a share, down 17 percent from the year before. Microsoft's fortunes may turn on October 26, when it introduces its Surface tablet.

Google Quarterly earnings are expected at a whopping $8.74 a share, although that's an increase of just 9 percent from a year earlier.



 

The Good News in Housing

In a welcome bit of good news for the economy, housing starts surged forward in September, according to figures released today by the Commerce Department. The 15 percent gain in new home construction for that month put housing starts overall at their highest level since 2008.

And there are signs that this housing recovery could have some legs. Commerce also reported that new building permits increased by 12 percent, signaling that the boom in construction could continue for some time. And the third quarter of 2012 marked the sixth consecutive quarter in which housing starts improved.

Remember, the Fed's latest round of quantitative easing involved buying up mortgage-backed bonds. All this activity seems to be putting the still-shaky housing market back onto much more stable footing.

Closing In on a Record

This week's issue of Barron's magazine celebrates the fact that the Dow Jones industrial average is closing in on its all-time high, which it reached just over five years ago on October 9, 2007. The Dow closed that day at 14,164.53; it closed yesterday at 13,424.23, or 5.5 percent short of the record. That puts it around one really strong week away from setting a new record.

The S&P 500 also peaked on October 9, 2007, reaching its all-time high of 1565.15. The closest it has come to reaching those heights again was on September 14 of this year, when it peaked at 1465.77, or 6.8 percent short of the record. Yesterday's close of 1440.13 left it needing a gain of about 11 percent to get back to that all-time high.

The Nasdaq, on the other hand, is still a long ways away from its record highs, achieved during the dot-com days. It peaked way back on March 10, 2000, when the index closed at 5048.62, but it hasn't even been above 4000 since September of 2000. Yesterday's close of 3064.18 left it a whopping 65 percent shy of its all-time high.

Scary Doings in October

Coming up this Friday is the 25th anniversary of the single-biggest drop in the history of the stock market: the infamous Black Friday, October 19, 1987. On that day, the S&P 500 lost more than 20 percent of its value, which is more than twice as much as it's fallen on any other day in history, except one.

That one exception also happened in October - the crash on October 28, 1929, that kicked off the Great Depression. The S&P 500 lost 12.3 percent of its value that day. While we saw some bounceback in the market back in 1987, on the next trading day in 1929, on October 29, the S&P dropped another 10.2 percent, marking the third-worst day in market history.

Also among the top ten biggest market drops is yet another October day; back in 1937, on October 18, the S&P dropped by 9.3 percent. So four of the worst ten single-day losses happened in October. Let's hope we avoid that fate in the next three weeks.

A Big Day for IPOs

The IPO market got a bit of a black eye earlier this year after the over-hyped, underperforming Facebook offering. But it appears to be coming back to life now. Yesterday there were four brand-new stocks that came to the market, and all four of them increased by more than 20 percent right out of the box.

If you lived through the dot-com-mania of the late 1990s, that might not seem so impressive. But according to research done by Dealogic, there haven't been four IPOs with that kind of pop on the same day in 12 years.

The big four are:

Shutterstock, up 29 percent
Intercept Pharmaceuticals, up 26 percent
Realogy, up 23 percent
Kythera Biopharmaceuticals, up 20 percent

And lest you think these are all microcaps, the Realogy offering raised $1 billion, making it the third-largest IPO of 2012.

The Rise - and Fall - of Stocks

It's startling to take a step back and realize that it wasn't so long ago that owning stocks was considered a rare and privileged thing.In 1980, according to figures compiled by the Investment Company Institute, just 19 percent of all U.S. households owned equities. By 1999, fueled by the rise of 401(k)s, nearly half of American households – 48.2 percent – held equities in one form or another, whether that was stocks, mutual fund or annuities.

But it wasn’t just retirement plans; 35.5 percent of households owned stocks outside of an employer-sponsored retirement plan. The bull markets of the 1980s and 1990s brought a huge number of small investors into the equity markets.

Those numbers have been pared back over the past decade, though. Equity ownership climbed to 53 percent of American households in 2001, but has since fallen back to 46.4 percent. The crash of 2008-2009 seems to have scared a lot of people away for good.

Bonds Bottoming Out

With interest rates running at historic lows, it is incredibly cheap for companies to borrow money right now. But with investors still spooked by the stock market, it's also very easy to sell high-quality bonds. Put those two trends together, and you get $92 billion in investment-grade 30-year corporate bonds sold so far in 2012. That's 26 percent more than was sold in all of 2011. You have to go back to 1995 to find a full year with as much corporate paper being sold - and we're not even halfway through September.

As a result, the yields investors are getting on these bonds are quite low. The average yield on a 30-year corporate investment-grade bonds is just 2.77 percent now. That's a record; the previous low (for data going back to 1973) before this year was 3.36 percent.

It's not just long-term bonds that have been dropping. Last month, D.R. Horton, a home-building company, issued $350 million in 10-year bonds, at a yield of just 4.375 percent. That's the lowest ever for a 10-year corporate bond.

What Investors Don't Know

Sometimes you hear it said that the stock markets run on perfect information, but that just isn't so. Many investors remain very much unaware of what is actually happening in the markets. For instance, the mutual fund firm Franklin Templeton recently surveyed 1000 American investors about the recent history of stocks, and the results were shocking.

Fully two thirds of the investors surveyed thought that the S&P 500 had lost ground in 2009, when in fact it actually gained 26.5 percent that year. Perhaps they were confused by the fact that 2009 was when the S&P hit its lowest point in the recent downturn, but roughly half, or 48 percent, also thought the index had declined in 2010. In reality, the S&P rose 15.1 percent that year.

That may help explain why there is nearly $6 trillion now parked in money market accounts or other cash equivalents, missing out on this bull market we've ben experiencing the past three years. When it comes to something as important as your financial future, it pays to stay well-educated.

The Problem With Small Businesses

Despite the fact that the headline unemployment rate dropped on Friday, it's clear that jobs growth in this country has been sluggish for a long time, and one thing that has held the recovery back over the past couple of years.  One problem has been that new businesses have been opening at a slower rate in recent years. After remaining fairly steady at around 600,000 new businesses per year for about 15 years, the number dipped to around 500,000 in 2010, and has yet to fully recover.

But that's not the only issue. The average number of employees at each of those new businesses has declined even more sharply. Back in 1999, the typical new business employed eight people; by 2011, it employed fewer than five.

Put the two trends together, and the total number of people employed by new businesses has taken a real hit. New businesses employed nearly 5 million people per year in 2000, but that number dropped to 2.5 million by 2011. Note that this is not solely an artifact of the recession: The figure had dropped to 3.5 million by 2005.

A Notch Down for Unemployment

According to figures released this morning by the Bureau of Labor Statistics, the economy added 114,000 jobs in September. That number is somewhat below the average we've seen for the year, which is 146,000 new jobs per month. Still. the headline unemployment figure dropped relatively sharply, from 8.1 percent to 7.8 percent.

Maybe the biggest reason for that was that the jobs figures for recent months got revised upward. August's disappointing number of 96,000 was revised up to 142,000. And July's figure, initially reported at 141,000, was revised to a very solid 181,000. Sometimes the unemployment rate drops because the number of people in the labor force falls, but that wasn't the case this time; the civilian labor force rose by 418,000 in September.

So now we have an unemployment rate below 8 percent for the first time since January of 2009, when it was also at 7.8 percent. The rate had been stuck between 8.1 and 8.3 percent for all of 2012 prior to this latest release.  

A Downbeat Earnings Forecast

Earnings season starts again next week, and many companies have been issuing guidance numbers as to what analysts and investors should expect. And those numbers have been disappointing, to say the least. Roughly 80 percent of companies that have made pre-earnings announcements have made negative ones, according to Strategas Partners.

Strategas says there haven't been so many negative announcements since 2001, when we were in the midst of the dot-com collapse. The consensus from the Wall Street analysts is that earnings for the S&P 500 will decline by about 1.7 percent, according to data from S&P Capital IQ.

As is traditional, Alcoa will kick off earnings season when it makes its announcement next Tuesday. Wednesday brings reports from Marriott, Family Dollar and Monsanto - a broad enough group such that we might have very quickly a good idea of where this season is headed.

Rainy Day People

Some interesting findings out this week from Gallup, which has been polling American investors on how much money they have set aside for a rainy day. The vast majority of people with $10,000 or more in investable assets - 81 percent - report that they do indeed have such an emergency fund.

But just because some money has been put away, that doesn't mean there's an awful lot of it. Only 30 percent of investors say they could live off their emergency funds for a year or more. Around half, or 51 percent, said they could live off their rainy-day money for six months or less. The numbers are much higher for retirees; fully half of them say they could live for a year on their emergency money.

Where do people keep this money? More than half - 55 percent - have it stashed away in a savings or checking account. Only 15 percent of all investors keep their rainy day money in stocks or bonds.

Little Big Stocks

The third quarter was a good one for large-capitalization stocks, with three of the members of the Dow Jones industrial average gaining more than 13 percent: Home Depot, J.P. Morgan Chase and Procter & Gamble.  But it's in the tiny stocks that you really see the big gainers.

Here are the ten stocks listed on any exchange that posted the strongest third-quarter gains:

Sarepta Therapuetics, up 313.5 percent on the quarter
IMPAC Mortgage Holdings, up 7.35 percent
Zale Corporation, up 156.5 percent
Wizzard Software, up 149.5 percent
GenMark Diagnostics, up 112.2 percent
WSB Holdings, up 108.5 percent
Savannah Bancorp, up 106.2 percent
Fidelity Bancorp, up 104.6 percent
Primero Mining, up 102.3 percent
Transcontinental Realty, up 97.1 percent

An Unlikely September

September came to an end yesterday, and it turned out to be a pretty good month for the stock market. This is notable because September has historically been the worst month for stocks. Since 1950, the S&P 500 has dropped an average of 0.5 percentage points during the month, and September is the only calendar month over that period in which the S&P has fallen more often than it has risen.

But 2012 has turned into a different story. Despite a little slip over the past week, the S&P 500 index still finished the month up by a solid 2.4 percent.

And in fact, the tradition for Septembers may be turning around. Last year, the month was a complete disaster, with the S&P slipping by about 7 percent, and in 2008 September was the epicenter of the financial collapse; the index lost about 9 percent that month. But even with those two, 2012 gives us seven out of the past nine Septembers in which the index has gained ground.

Revisionist History

We got two bits of economic revision from the official government sources yesterday, one of them good and one of them bad. The bad news was that the estimate of GDP for the second quarter slipped from the previous reading of 1.7 percent all the way down to 1.3 percent. The slippage was attributed to weaker consumer spending and reduced farm inventories, which were hit hard by the drought.

On the other hand, the employment numbers for the past year got revised upward. After carefully reviewing state unemployment rolls, the Bureau of Labor Statistics announced that an additional 386,000 jobs had been created between April 2011 and March 2012. The Labor Department reviews the state records once a year to check the accuracy of its already-released figures.

The lower job-creation numbers we've seen over the past couple of months remain, to this point, unchanged. Also unchanged is the official unemployment rate, which is derived using somewhat different methods. It remains at 8.1 percent.

QE3 and Inflation

One of the big fears of a program like the Federal Reserve's recently announced third round of quantitative easing is that pumping all that money into the economy will stoke fears of inflation. And indeed, immediately after Ben Bernanke announced the Fed's latest bond-buying effort, there was a bit of inflation frenzy. The spread between the ten-year Treasury bond and the ten-year Treasury Inflation-Protected Security (TIPS) - which should reflect what investors expect inflation to average over the next ten years - was at 2.38 percentage points before Bernanke's announcement.

After the announcement, though, the TIPS spread jumped to 2.67 percentage points. That's the highest that the spread had been since way back in May 2006, and the trajectory of the growth was a bit frightening.

But since that initial burst, the inflation spread has been declining. As of yesterday, the TIPS spread was back to just 2.44 percentage points. At this rate, before long it could be back to the pre-QE3 level.

Consumer Confidence Inches Upward

There was a significant jump in the consumer confidence figures released yesterday, as the Consumer Confidence Index reached its highest level in seven months. Nearly every aspect of the index showed improving conditions, a marked change from August, when the confidence reading fell.

At the same time, a closer look at the numbers shows that this economy is still a long way from where consumers would like it to be. The number of people saying that jobs are plentiful rose - but still just 8.3 percent of the respondents said that, up from 7.2 percent in August. Likewise, the percentage of people saying that jobs are hard to get also declined - from 40.6 percent in August to 39.9 percent in September.

At least the trends are all in the right direction. And there was another, longer-ranging piece of good news regarding America's consumer habits: The Labor Department reported that the average American household spent $49,705 in 2011, up 3.3 percent from 2010 and the highest level we've seen since 2008.

Slow and Steady Wins the Race

"Boring" is a pretty underrated virtue for a stock market. What we've seen in the past couple of months from the Dow Jones industrial average may have been pretty dull, but it's also been pretty good for investors. According to information compiled by the Bespoke Investment Group, yesterday marked the 63rd trading day since the Dow has seen a daily decline of greater than 1 percent.

That's a nice little sustained run, dating back to June 25, or three full months of calendar time. We've only had 16 such quarters in which the Dow has avoided a 1 percent daily loss since 1900, according to data from Sundial Capital Research.

And the good news is, Sundial also found that such consistent performance tended to lead to more good news. After each of those quarters without a single significant daily drop, the Dow showed positive returns for the ensuing six months, with an average gain of 6 percent.

Taking the Long View

This has been a very good year for the stock markets, with the S&P 500 index returning around 16 percent so far for 2012. The performance has been strong enough that the ten-year returns for that index are now up to 6.5 percent (including reinvested dividends). Even with the precipitous plunge we had in 2008-2009, the long-term averages for equities are looking very good.

Even so, the bond market has been considerably stronger. According to figures compiled by Morningstar, corporate bonds have returned 8.4 percent annually over the past ten years. Even U.S. Treasury bonds, which have had historically low yields lately, have returned more than the S&P 500 over that decade.

Does that mean bonds are now likely to offer higher returns than stocks? Of course not; past performance, as they say, is no guarantee of future results. And without a chasm like we saw in the stock market when the financial sector collapsed, equity returns could very well be higher over the next ten years than they were over the past ten.

Small Cap Troubles?

One of the recent bright spots in the market recently has been small-cap stocks. The benchmark Russell 2000 index is up 13 percent since June, a return that’s better than the mark put up by either the Dow Jones Industrial Average or the S&P 500. But will it last?

With earnings running so high lately, the market as a whole is still fairly low-priced according to historic norms. But small-cap stocks are less of a bargain than larger ones. According to data compiled by S&P Capital IQ, the S&P 500 collectively is trading at a price-to-earnings ratio of about 14, as opposed to a historical median of 18.2 since 1995, a difference of about 30 percent. The S&P 600, though, has a P/E of 19.9 as opposed to a historical median P/E over that same time frame of 21.4. For the small-cap index, then, the current difference is just 7.5 percent. 

What that means is that small-cap stocks are much closer to their historic valuations than larger stocks. It doesn't necessarily mean large caps will show more growth in the near future, but it is a point in the big stocks' favor.

What's Going to Turn Stock Funds Around?

We’ve mentioned at several points this year that domestic stock funds have been losing assets at a horrific rate lately; they saw another $14.2 billion in net outflows in the month of August. The mutual fund news source Ignites has asked its readership a simple question: When will this trend reverse? 

This question has implications not only for the mutual fund industry but for the wider stock market as well. More money flowing into the market, all other things being equal, would be good for stock prices.

The answers were fairly mixed. Roughly 31 percent, the highest figure for any response, said that steady employment and income growth is what will bring investors back to equities. Another 27 percent said the most important thing was government progress on taxes, spending and the deficit. Other answers getting some solid support include rising interest rates and several quarters of strong GDP growth.

Renewed Confidence in the Housing Market

There was another step forward for the housing industry this week, as confidence among home builders rose to its highest level since before the onset of the recession in 2007, according to the National Association of Home Builders. After rising for the fifth consecutive month, the confidence index hasn't been stronger than this since June of 2006.

All three facets of the index rose in September: builders' expectations for sales over the next six months, current sales conditions, and traffic from potential buyers. And regionally speaking, the biggest jump in the index was right here in the Northeast.

That's not a surprise, because we have seen some improvement in the market here in New Jersey. In the second quarter of this year, home prices in our state rose for the first time in five years, dating back to the first quarter of 2007. It has been a long time coming, but the housing market may finally be getting its legs under it.

Manufacturing Stumbles

There was some discouraging - and unexpected - economic news for our area yesterday, as the New York office of the Federal Reserve announced that its index of business conditions for manufacturers dropped sharply in September, after a previous drop in August. OVerall, this was the sixth consecutive month that the reading fell.

The New York Fed covers, among other areas, northern New Jersey, so this is a local story for us. The readings for both new orders and shipments both fell for the month. A panel of economists surveyed by Dow Jones had forecast that the overall manufacturing index would hold steady in September, but instead it fell by 6 points.

There is some optimism about the future, though. The reading covering general business expectations for the next six months, which was already in positive territory for August, rose even further in September. The employee expectations index rose for the month as well.

The Rise of the Smartphone

Got yourself a smartphone? These products were unheard of five years ago, but now many people find they can't live without them. The iPhone 5 was unveiled last week, and will be available at Apple stores at the end of this week. They will be part of an estimated 674 million smartphones that will be sold around the workd this year, according to figures compiled by Credit Suisse.

One remarkable thing about all this is how receptive people are to high-priced smartphones. Back in 2010, less than 20 percent of all smartphones cost more than $500. Last year, that number was up to 25 percent, and this year it's expected that up to 28 percent of smartphones will sell for more than $500.

The biggest benefactors of this will be Apple and Samsung. Their iPhone and Galaxy brands account for a whopping 87 percent of the high-priced smartphone market.

QE3 Is Here

To no one's surprise, Federal Reserve chairman Ben Bernanke announced a third round of quantitative easing yesterday. The Fed's plan isn't as broad as earlier rounds of easing have been - Bernanke says they expect to buy $40 billion worth of mortgage bonds every month for as long as it seems necessary to do so. Earlier rounds included buying as much as $600 billion worth of Treasury bonds.

While it's always dangerous to read too much into single-day swings, it appears that the market liked this move. The Dow Jones Industrial Average and the S&P 500 index both gained more than one and a half percent on the day. The S&P had its highest close since December 2007.

And of course investors should get excited, if the effects are anything like those of the earlier rounds of quantitative easing. During the first QE, from March 2009 to March 2010, the S&P rose by nearly 73 percent. And during the second round, from the end of November 2010 until the beginning of June 2011, the S&P 500 rose by 11 percent.

The Shrinking Middle Class

Do you think of yourself as middle-class? If so, your slice of the pie has probably gotten smaller in recent years. According to figures released by the Census Bureau yesterday, median household income for the middle class declined by $777 last year, to $50,054. That's a decline in real household income - adjusted for inflation - of 1.5 percent.

The middle 60 percent of American households now take in 46.6 percent of American income, down from 50 percent in 1990. But the people on either side of the middle class are doing all right. The bottom 20 percent saw its income say stable over the past year, while the top 20 percent saw its income rise by 1.6 percent.

The best news was for those at the top of the ladder, the top 10 percent, which includes households making $162,000 or more. Their share of the nation's income rose by 5 percent in 2011.

The Market Finds Separation

This summer's rally in the stock market was accompanied by an unusual phenomenon: Stocks became highly correlated to one another. When one stock or sector moved up or down, it was likely that they were all moving up or down.

But that seems to be dissipating now. The correlation among the S&P 500's ten sectors was at 89 percent in July, but that figure dropped to 85.7 percent in August, according to the ConergEx Group, a market-analytics firm. Now it's dropped even further, down to 83.7 percent.

This is generally considered a good sign for the market. It's healthier for investors when company fundamentals drive a stock's price as opposed to macroeconomic trends. It also provides an opportunity for  actively managed funds - such as the kind we use here at Echelon Wealth Strategies - could really add a lot of value to individual portfolios.

The Strategy of the Buyback

Apple has scheduled a massive stock buyback for later this month, with the expectation that the company will repurchase about $10 billion worth of its own shares. This is supposed to be an encouraging sign for stockholders. It's not just that Apple is confident enough in its future that it wants to own more of its own stock, but by removing those shares from the marketplace, the purchase should help buoy the price.

 

But it doesn’t always work that way. Like many individual investors, companies are all too often willing to buy their own stock when prices are high, and sell it when prices are low. In the recent past, stock buybacks by the S&P 500 peaked at $172 billion in the third quarter of 2007 – when the market was at its peak – and reached a trough at $24 billion in the second quarter of 2009, just after the market had hit bottom.

 

Consider the plight of Best Buy, which has bought back 98 million of its own shares since April 2010, according to the Wall Street Journal’s CFO Report. It paid about $30 a share for that stock, but it’s now trading just under $20, which means the buyback program has cost Best Buy around $1.2 billion.

Teenagers in the Work Force

Here's a follow-up to Friday's job report, in which the unemployment rate dropped despite the fact that the overall number of new jobs added was disappointing. That happened in part because so many people dropped out of the labor force, a total of 368,000 would-be workers.

The vast majority of those dropouts, though, were teenagers who might never have had full-time jobs before in their lives. According to the Labor Department, 209,000 people aged 16 to 19 dropped out of the labor force, as did an additional 218,000 people aged 20 to 24. The statistics may have a hard time accounting for younger people leaving their part-time summer jobs so they can go back to school.

Meanwhile, there was actually significantly growth in the labor force among older people. There were small upticks for the cohorts aged 25-34 and 35-44, and the number of people aged 55 and over entering the work force grew by a whopping 274,000 workers.   

Jobs Report Falls Short

We've got another good news/bad news unemployment figure out this morning: After some excitement earlier in the week, when the private ADP payroll figure suggested the economy might have created as many as 200,000 new private-sector jobs, the official number from the Bureau of Labor Statistics came in at just 96,000 new jobs. At the same time, though, the official unemployment figure dropped from 8.3 percent to 8.1 percent.

The private sector was responsible for the creation of 103,000 new jobs, with the government shedding 7,000 jobs for the month.Perhaps the most disappointing sector was factory jobs, which were down 15,000 on the month, after in increase of 23,000 jobs in July.

The unemployment rate dropped primarily due to an increase in the number of people leaving the work force. All told, 368,000 Americans stopped looking for work, for one reason or another, over the course of the month.That is not a positive sign for the economy.

Too Many ETFs?

One of the big investing trends of this year has been the  outflow of assets in equity mutual funds, much of which has happened in response to the rise of exchange-traded funds. But certain aspects of the ETF industry have been challenged as well: The Financial Times has reported that there are literally hundreds of ETFs on the market that lack the assets to remain financially viable.

And the numbers are getting worse. FT says that at the end of 2010, roughly 14.5 percent of all ETFs that had been around for six months had less than $25 million in assets or had traded less than $100,000 per day. Now that number is up to 27 percent.  Those funds falling below the viability threshold draw in just $35,000 a year in revenue - hardly enough to make it worth keeping them going.

What we may be seeing is that the ETF market has been over-flooded with new products, with more than 1400 total funds available now. That's a big reason why asset managers such as Russell Investments have decided to close up their 25 ETFs and exit the business.

The Vital Information

What should you know about your financial advisor? As part of the Dodd-Frank banking regulation, the SEC was tasked with talking to individual investors to gauge the breadth of their knowledge about various financial and investing topics, and one of the most interesting areas of the survey, released last week, touched on what people felt they should know about the professionals who handle their money.

The top three subjects that investors considered "absolutely essential" to know about their advisor:

* Information about their advisor's fees: 76.4 percent said this was absolutely essential
* Information about their advisor's investment strategies: 69.5 percent
* Information about their advisor's disciplinary history: 67.4 percent

All this information is vital to know, and any advisor who doesn't freely release it is someone you shouldn't be working with. If you have any questions about these or any other aspect of what we do here at Echelon Wealth Strategies, please feel free to give me a call.

Trends in Household Debt

One of the signs that our economy is growing is that people are continuing to pay down their household debt. Even as consumer spending has been increasing  - it was up 0.4 percent in July -  consumer debt fell by $53 billion in the second quarter.

At the end of the second quarter of 2012, total consumer indebtedness had fallen to $11.38 trillion, 0.5 percent lower than its level at the end of the first quarter of 2012. The biggest driver of this reduction has been the drop in real estate loans. Mortgage balances are down 0.5 percent from the first quarter of this year, and  home equity lines of credit balances dropped by 3.7 percent.

Aside from mortgages and HELOCs, household debt balances actually increased by 0.4 percent in the second quarter. One of the biggest causes was an increase of $14 billion in auto loans - good news for the continuing strength of our auto industry.