Friday, March 30, 2012

The Problems of Divided Government

Is the major problem with the federal government the fact that it can't get anything done? That's the upshot of a recent poll by Gallup, which asked American investors what their major political concern was. Even more than the federal budget deficit or the unemployment rate, the investors said their biggest worry was "a politically divided federal government."

It hasn't always been this way. When this same question was asked back in September of last year, both the unemployment rate (cited by 83 percent of investors) and the deficit (cited by 79 percent) were of greater concern than the divided government, which was cited by 74 percent of the respondents. While the last of these is pretty much unchanged in the new survey, with 73 percent of the investors calling it a major concern, those worried by the deficit dropped to 66 percent, and those worried by unemployment dropped to 62 percent.

Interestingly enough, one issue that has fallen off in importance for investors is the price of energy. Back in September, 62 percent cited it as something that could affect the investing climate, but in the latest survey - after a month of constantly rising gas prices - only 53 percent now say so.

Thursday, March 29, 2012

CEOs Getting More Bullish

Among the people who are growing more optimistic about the near-term future, you can add America's CEOs. The Business Roundtable just released the results of its first-quarter survey, and it found that in general, CEOs expect the economy to continue expanding, and predicted that their own sales, capital spending and hiring were likely to increase over the next six months.

A whopping 81 percent of the respondents said they expect their corporation's sales to be up over the next six months. That's up from 69 percent who said so when this survey was conducted in the fourth quarter of 2011. Nearly half, or 48 percent, said their company's capital spending would be increasing, up from 32 percent who said that in the previous quarter. Forty-two percent said their hiring would increase, versus only 16 percent who said it would be decreasing.

The 128 CEOs surveyed also predicted that U.S. GDP would increase by 2.3 percent in 2012. That's up from the 2.0 percent that the same group predicted last quarter, and up from the 1.7 percent the American economy grew by in 2011.

Wednesday, March 28, 2012

Dividends Continue to Grow

Dividends continue to be one of the hottest topics in the investing world, in the wake of the announcements of a new payout from Apple and a greatly increased one from JPMorgan Chase. There are now 393 companies issuing dividends, according to a report from FactSet, which is the highest that figure has been in 12 years. On a per-share basis, dividends now amount to $26.78, which is up a full 16 percent over the same time frame a year earlier.

The fastest-growing sectors in terms of offering dividends are financials, materials and technology. In the past year, those three sectors have increased their average dividends by 40 percent, 28 percent and 23.5 percent, respectively.

The most surprising among these is the technology sector. Traditionally, tech stocks have resisted offering dividends because they're perceived as something offered by older companies, ones that have gotten past their growth phase. But now most tech stocks - 53.5 percent - are offering dividends. Ten years ago, in 2002, that figure was just 18 percent.

Tuesday, March 27, 2012

A Big Year for Manufacturing

America's much-beleaguered manufacturing industry, which has been all but left for dead in some economic circles, roared back strongly in 2011, according to figures just released by the U.S. Census Bureau. After-tax profits for U.S. manufacturing corporations were $598 billion last year, which is not just a record but smashed all the old records. It was a jump of more than 25 percent over the previous high, set the year before in 2010.

During the recession, in 2008 and 2009, manufacturing was really in the doldrums, with profits of less than $300 billion in each year. So the 2011 figure is more than double where we were just a couple of years ago. It's also well above the pre-recession high, $470 billion, set in 2006.

All told, the manufacturing output in this country grew by 4.7 percent in 2011, more than three times the overall rate of GDP growth, which was 1.7 percent. And manufacturing has continued on that track into the new year: for the past 12 months ended in February, that growth rate is now up to 5.2 percent.

Monday, March 26, 2012

Going BATS

So what happened on Friday when the entire stock market seemed to go haywire for a few seconds, and Apple dropped 9 percent in a matter of minutes? The trigger was an IPO for a company called BATS Global Markets, which runs its own trading platform. Somehow, the introduction of that offering caused an Apple trade to register about $50 below where the stock had been trading. In addition to Apple, other Nasdaq-listed stocks that started with A or B plunged as well.

But that's nothing compared to what happened to BATS Global itself. Its shares went on sale at $16, and within seconds had plunged all the way down to four cents a share before trading was halted. Before the day was over, BATS - which blamed a software glitch for all the problems - announced it was canceling the IPO.

What's most embarrassing about all this is that BATS - which stands for Better Alternative Trading System - markets itself as an alternative to the NYSE and Nasdaq. This was the first IPO traded on the new system. It remains to be seen if there will ever be a second.

Friday, March 23, 2012

Confidence Reaches Positive Territory

Consumer confidence has been growing in recent months, but in large part that's simply because it had been beaten down for so long. It's been a very long time since we could say that the American consumer was actually confident about the economy - until now. Every month, Bloomberg News surveys people on the question of whether the economy is getting better, getting worse, or staying the same. The gauge finally climbed into positive territory in March, reaching a 1. It had been at negative 7 in February, and negative 45 as recently as October.

All in all, that's the most optimism Americans have felt since 2004. Thirty-four percent of those surveyed said the economy was improving, which is the highest that figure has been since January 2004.

A big part of that is that the unemployment situation continues to improve. After the monthly employment report showed that we added 227,000 new jobs in February, the weekly numbers have continued to be strong. New jobless claims for last week were just 348,000 - the lowest that figure has been since February 2008.

Thursday, March 22, 2012

Buffett vs. the Hedge Funds

Four years ago, Warren Buffett made a bet with the managers of a hedge fund that a simple investment in the S&P 500 would outperform a fund of hedge funds over the ensuing ten years. This year, Buffett's side has nosed ahead. With Buffett's Vanguard 500 fund up 9 percent in the first two months of this year, the Buffett side is now up about 2.9 percent over the course of the bet.

That's after suffering huge losses up front, which the hedge funds were able to mitigate somewhat. In 2008, the first year of the bet, the fund of hedge funds lost 24 percent of its value - while Buffett's Vanguard fund was losing 37 percent. The S&P has tended to outperform the hedge funds since then, but what really harms the hedge fund side is the massive fees that its investors have had to pay. Hedge funds normally charge a 2 percent management fee and a 20 percent performance fee, while the fund of funds tacks on additional charges of 1.25 percent of assets and 7.5 percent of gains.

Buffett was banking on those fees being enough of a handicap to push his side of the bet over the top. The plan is that on December 31, 2017, the winner will get the loser to donate $1 million to the charity of his choice.

Wednesday, March 21, 2012

The Apple Dividend

Apple's announcement of its first dividend in over a decade sent its stock even further upward this week. Apple last paid a dividend in 1995, which is before Steve Jobs had even returned to the company he founded. Now, stockholders can expect to get $2.65 a share each quarter for the foreseeable future.

It's not unusual for high-tech companies to refrain from offering dividends. Fast-growing companies generally don't pay out dividends until they become settled, profitable businesses, so there's some sense among tech companies that only those that are past their primes pay out dividends. Google, for example, doesn't pay a dividend, even though it has roughly $45 billion in cash on hand., Dell and eBay also don't pay dividends.

Paying out the dividend doesn't figure to slow Apple down very much. The first year's payout will cost the company roughly $10 billion. Meanwhile, over its last fiscal year, Apple's cash hoard grew by $31 billion.

Tuesday, March 20, 2012

Treasurys on the Rise

The Federal Reserve's modestly positive report on the economy, issued last week, immediately sent the price of the ten-year Treasury bill downward. If the state of the American economy is strengthening, investors feel more comfortable moving into stocks and other, riskier investments and moving away from the security of Treasury bonds. Selling off the Treasurys, and driving their price down, is a good sign for the economy.

Even better is that the trend has continued. It wasn't just a one-day blip; the price of ten-year Treasury notes has now, as of yesterday, fallen for nine straight days. That's the longest such stretch we've seen since June 2006.

Yields, remember, move in the opposite direction from bond prices, so the yield on the ten-year Treasury was up 8 basis points on Monday, finishing the day at 2.38 percent. That's the highest that figure has been since last October 28.

Monday, March 19, 2012

What's Fueling Inflation

The consumer price index rose by 0.4 percent in February, which is the strongest increase we've seen in that figure in almost a year. Are we in for a bout of inflation, the kind that many financial pundits have been expecting for a while?

Not necessarily. The increase in prices for last month is almost entirely attributable to the rise in gasoline prices, which tend to move independently of other consumer prices. That's why the government strips out food and gas prices for its so-called core inflation measure. That rose just 0.2 percent in February, and has risen 2.9 percent in the previous 12 months. It's down a full point from the 12-month increase as of last September.

Nationwide, the price of gasoline has risen 31 percent in the past month. We continue to get a break compared to the rest of the country in this area: The average price of a gallon of gas is just $3.62 here in New Jersey, as opposed to the national average of $3.81.

Friday, March 16, 2012

Dividends Looking Strong

Yesterday, we discussed how the results of the recent stress tests allowed several major American banks to raise their dividends. Now, Standard & Poor's has found that this activity has pushed the dividends to record highs. According to S&P, announced dividends suggest a payout rate of $29.02 per index share.

That's a record for that figure. The highest number previously recorded was $28.96 in June 2008, just before the market crash. It bottomed out little more than a year later, in August 2009, when the dividend level reached $21.44. The biggest issue with that drop were the financials, which accounted for 30 percent of all of the S&P 500's dividends as recently as 2007. They now contribute just 13 percent.

On the other hand, while the raw number is at a peak, the percentage is far from it. The average company in the S&P 500 is now paying out just 30 percent of its profits as dividends, while the historical average is 52 percent.

Thursday, March 15, 2012

The Stress Tests

Federal regulators administered a new round of stress tests to major U.S. financial institutions this week, and the results were, for the most par, highly encouraging. JP Morgan's results were so positive that the bank promptly went out and launched a $15 billion stock buyback plan and raised its dividend by a nickel. The big loser was Citibank, which had its bid for a buyback plan rejected on account of falling short of some capital requirements.

So what were these stress tests? Basically, the regulators simulated another financial crisis or a return to a recessionary economy, and noted the amount of capital the banks would then have on hand. The idea is that banks should still have enough money to lend businesses in an economic downturn, so we don't suffer through the kind of credit freeze that exacerbated the last recession.

It turns out that the previous round of stress tests helped the banks get through this one much more healthily. As a reult of the earlier tests, lenders were asked to raise an additional $75 billion in capital, while no funds had to be raised after the most recent round. All told, the regulators found that banks had increased their Tier 1 common capital - reserves kept on hand in order to absorb losses - by 81 percent.

Wednesday, March 14, 2012

The Fed Stands Pat

The Federal Reserve did something yesterday that is probably good news for investors: nothing. For now, at least, the Fed plans to keep interest rates at near-zero levels and to continue buying long-term bonds as part of Operation Twist, but it does not plan to embark on another round of quantitative easing to help buoy the economy. The economy, the normally pessimistic Ben Bernanke seemed to be saying, is finally doing OK all on its own.

The Fed has a dual mandate of bolstering employment and restraining inflation, so it was interesting to see what they had to say about the recent increase in gas prices. Rising gasoline prices can help fuel inflation because it's so important to so many corners of the economy, but the Fed thinks the effects will be short-lived. "The recent increase in oil and gasoline prices will push up inflation temporarily," the report said, "but the FOMC [Fed Open Market Committee] anticipates that subsequently inflation will run at or below the rate it judges most consistent with its dual mandate."

The economy itself generated some positive news yesterday as well. Retail sales were up strongly in February, by 1.1 percent over the same month a year earlier. Not only that, but sales figures from January were revised upward, from the 0.4 percent initially reported to a healthier 0.6 percent.

Tuesday, March 13, 2012

Insider Report

One somewhat hidden technical indicator that a lot of investing experts keep an eye on is the amount of selling being engaged in by corporate insiders. Insiders must disclose any trading they are doing in the company's stock, of course, which makes it possible to track the ratio of the amount of shares being bought by insiders to those being sold. The idea is that these insiders must know, as well as anyone does, the true state of their businesses and the economy.

And recently, the ratio has been moving in the wrong direction. By the end of February, the sell-to-buy ratio stood at 6.56 to 1. A month earlier, at the end of January, it was at 5.77 to 1. Back in October 2011, the ratio dropped below even, with more insiders buying their stocks than selling them.

The insiders certainly knew what they were doing in October, since the Dow Jones industrial average has risen by about 25 percent since then. It remains to be seen whether the current insider outlook reflects the state of the market now - where the Dow has stubbornly refused to surge past the 13,000 mark in recent weeks - or is an indicator of where we're still headed.

Monday, March 12, 2012

Borrowing on the Rise

The Federal Reserve released its Flow of Funds report at the end of last week, and this document contained the fact that American household debt increased by 0.25 percent in the fourth quarter of 2011. That's a tiny movement, almost not enough to be detected, yet it may be highly significant nevertheless. It's the first time we've seen any increase in household indebtedness since the second quarter of 2008.

American families borrowed $43 billion in the final three months of 2011. Even in 2008, the last time we saw that number above water, the amount of household debt incurred for the entire year was just $13.7 billion. Americans racked up $170 billion in consumer credit in the fourth quarter alone, which is more than we've seen in any year since before the recession started in 2007.

We watch the consumer confidence numbers pretty carefully to see whether Americans are ready to start spending again, but this provides much more concrete evidence that they are, in fact, confident about this economy. And the fact that so much more money has begun circulating through the system is good news for all of us.

Friday, March 9, 2012

The February Jobs Report

Despite the fact the economy added 227,000 jobs in February, the unemployment rate remained stuck at 8.3 percent, according to figures released this morning by the Bureau of Labor Statistics. The private sector grew by 233,000 jobs, while the public sector continued to shrink, although marginally. We're pretty much in a holding pattern in most areas: the total number of unemployed (12.8 million), number of long-term unemployed (5.4 million) and number of people employed part-time involuntarily (8.1 million) were all more or less unchanged.

So the 227,000 new jobs were just enough to keep up with increases in the population of the work force. Where did those jobs come from? The professional and business services sector added 82,000 jobs, although 45,000 of those were in temporary help services, which isn't a good sign. Health care and social assistance added 61,000 jobs, leisure and hospitality added 44,000, and manufacturing added 31,000. The food and drink industry, which is a subsector of leisure and hospitality, continued to be very strong, with 41,000 new jobs created in February.

Very few job sectors suffered losses of that magnitude. The biggest losers for February were construction, which lost 14,000 jobs, and, surprisingly enough, general merchandise stores, i.e., Target and Wal-Mart. That group dropped 35,000 jobs on the month.

Thursday, March 8, 2012

Who Owns Mutual Funds?

The Investment Company Institute, which is the trade association for the mutual fund industry, has just come out with its profile of the fund business for 2011. Last year, the average owner of mutual fund shares was "middle-aged, employed, educated, married or living with a partner, and shared investment decision making with his or her spouse or partner." That's all to be expected, but the financial picture the report paints is a little more interesting.

The ICI describes the typical fund owner as "of moderate financial means, with $80,000 in household income and $200,000 in household financial assets." That makes mutual funds sound like a very middle-class investment, yet these households had an average of $120,000 invested in four mutual funds, including at least one equity fund. Of all mutual-fund-owning households, 42 percent, or nearly half, had assets greater than $250,000.

Many investors are retired, of course, and living off their investments. That would explain why assets for mutual fund investors are fairly high, while their annual income is relatively low.

Wednesday, March 7, 2012

A Thousand Percent

Everyone understands that the situation in Europe remains very precarious, that the economies there are threatening to tip back into recession. And the epicenter of the Euro crisis is Greece. The Greek situation has shown some signs if improvement in recent months, but here's a sign of how dire its economy remains: For a brief time on Monday, the yield on a one-year Greek government bond reached 1,000 percent.

That's right: If you had paid $1,000 for a one-year bond from the Greek central bank on Monday afternoon, you could have expected to receive a whopping $10,000 when it comes due in a year. The government there has become so untrustworthy that it was forced to promise ten times what it borrowed just to get investors to loan it money.

Part of the issue there is that Greece is expected to reach an agreement with its bondholders in a couple of weeks to give a haircut to all its bonds and reduce its indebtedness. So it's likely that no investors will ever see that tenfold return. At any rate, by Tuesday, the yield on the Greek one-year bond had settled back to 949 percent.

Tuesday, March 6, 2012

Three Years of Bouncing Back

This week marks the three-year anniversary of the low point of the Dow Jones average during the recession and financial meltdown. On March 6, 2009, three years ago today, the Dow bottomed out at 6,469 in intraday trading. Its lowest close would come three days later, on March 9, when it finished the day at 6,547.

The Dow has nearly doubled since that point. On its way back up from that historic low, it has risen much faster than it did the first time it climbed this high. Here's a look at some of the historic milestone numbers the Dow passed on its way down prior to hitting bottom three years ago, as well as on the way back up (dates are noted for when the Dow closed at each figure):

  • 12,000 On the way down: June 19, 2008. On the way up: February 1, 2011
  • 11,000 On the way down: September 26, 2008. On the way up: October 8, 2010
  • 10,000 On the way down: October 3, 2008. On the way up: October 14, 2009
  • 9,000 On the way down: January 2, 2009. On the way up: July 23, 2009
  • 8,000 On the way down: February 9, 2009. On the way up: April 3, 2009
  • 7,000 On the way down: February 27, 2009. On the way up: March 12, 2009

Monday, March 5, 2012

The Lowering Demand for Oil

To follow up on last week's discussion of oil prices, it's helpful to note the extent to which American consumption of oil has been declining. It's not clear whether this is in direct response to the recent runup in gas prices, but last week, the Energy Department said that demand for gasoline over the four weeks ended Feb. 24 was 6.7 percent lower than it had been a year earlier.

Those trends have been in evidence for a long, long time. In December 1981, energy expenses accounted for 7.8 percent of all the disposable income in the United States, but in December 2011, that figure was down to 5.5 percent. Interestingly enough, the inflation-adjusted price of a gallon of gas was approximately the same at both times, at around $3.30.

The basic laws of supply and demand would indicate that lowered use of oil should help bring its price down. That may be the primary thing that will dampen the prices we've been paying at the pump recently.

Friday, March 2, 2012

The Price of Oil

What kind of effect does a runup in oil prices have on the stock market? Recent research shows that it could have a positive impact on your portfolio. For one thing, oil prices tend to signal an inflationary trend, and while inflation may make some things more difficult, stocks tend to rise along with that inflation figure. Rising oil prices can also be a sign of a strong economy, which is also good for stocks.

Nadeem Walayat, writing for the Market Oracle site, has demonstrated that the graph of the price of a barrel of oil and the trendline of the Dow Jones industrial average have moved in the same direction more often than not over the past decade. Especially since the financial meltdown in 2008, the two have tended to be highly correlated with each other.

The one prominent exception to that relationship is an oil shock. A sudden spike in oil prices is likely to curb demand for energy from all corners of the economy, and create a slowdown in economic activity. There is a huge difference in economic effects between an orderly movement in crude oil prices and a sudden shock. The current upswing in oil prices has not – at least not yet – risen to the level of an oil shock.

Thursday, March 1, 2012

Good News, Bad News

Do you want the good news or the bad news first? We had a little bit of both yesterday regarding the country's economic growth. Let's start with the good news: The Commerce Department revised upward its initial estimate of GDP growth in the fourth quarter of 2011, moving the figure up from 2.8 percent to 3 percent. That shows an even stronger upward movement from the 1.8 percent growth we had in the third quarter.

But the question is, how long is that going to last? The bad news is that Federal Reserve chairman Ben Bernanke threw a little bit of cold water on the numbers yesterday in his semiannual report on the economy. The Fed's forecast calls for GDP growth of 2.2 percent to 2.7 percent for 2012. That's somewhat down from the fourth quarter of '11.

Bernanke cited flat incomes as part of the reason for his pessimism, meaning the Fed may not have processed another bit of revision from yesterday: Commerce also revised upward its estimate of income growth from both the third and fourth quarters of 2011. Incomes are now believed to have grown a relatively robust 1.4 percent in the fourth quarter, and rose 0.7 percent in the third - after the initial estimate had pegged it at a 1.9 percent drop. That's a huge turnaround, and is probably a reason to believe the good news rather than the bad news.