Monday, April 30, 2012

Job Situation Still Precarious

According to a Gallup poll released last week, the employment situations remains highly precarious in the minds of many Americans. Even as the unemployment rate has been inching downward, 21 percent of all Americans still think it is highly or very likely that they will lose their jobs in the next 12 months. In 2007, before the recession hit, that same number was just 12 percent.

Only 38 percent of all employed Americans say they are not at all likely to lose their jobs in the next year. That's the lowest that figure has been in all the time Gallup has been asking the question, ever since 1975.

And if people do get thrown out of work, they are very pessimistic about landing on their feet. Less than half of all people, just 42 percent, say that they could find just as good a job as their current situation if need be. As recently as 2007, that same figure was 64 percent.

Friday, April 27, 2012

Inside the GDP Number

Like the latest unemployment figure, the GDP growth figure released by the Department of Commerce this morning was a mild disappointment - not terrible, but not strong enough to inspire a lot of confidence, either. The first estimate for growth in the first quarter of 2012 was 2.2 percent, a step down from the 3.0 percent we had in the fourth quarter of 2011 and a bit less than the 2.5 percent that seemed to be the consensus of the economists.

The bright spots for the economy included exports, which rose 5.4 percent for the quarter, exactly double their increase in the fourth quarter of '11. Motor vehicle output added 1.12 percent to the total GDP. Durable goods continued to be a strong category, rising 15.3 percent this quarter, after an increase of 16.1 percent the previous quarter.

But nonresidential real estate - office and retail building, mostly - continued to be a real drain. Nonresidential structures dropped by 12.0 percent on the quarter. And the federal government continued its trend of spending less: federal consumption and investment expenditures dropped 5.6 percent, after falling 6.9 percent the previous quarter.

Thursday, April 26, 2012

The Fed Speaks

The Federal Reserve Open Market Committee released the minutes of its latest meeting yesterday, and has so often been the case lately, it has decided to do... nothing. No more large-scale purchases of Treasury bonds were announced, and interest rates will stay at their near-zero levels for the time being.

There were two forecasts that came out of the meeting, though, that might have some significance for investors and some impact on the larger economy. First of all, a plurality of the members of the Fed now agree that interest rates are likely to be hiked again sometime in 2014.

Secondly, the predictions for the unemployment and inflation rates - the two elements of the Fed's twin mandate - were tweaked. In January, the Fed had predicted that unemployment would be between 8.2 and 8.5 percent at year's end; now, that same forecast is down to 7.8 and 8 percent. The year-end inflation rate, pegged at 1.4 to 1.8 percent in January, has been revised upward to 1.9 to 2 percent. 

Wednesday, April 25, 2012

Apple Rolls Along

The biggest news on Wall Street yesterday didn't happen till after the closing bell, when Apple announced its latest quarterly earnings. And this one was another doozy: Revenues came in at $39.2 billion, easily beating the analysts' consensus of  $36.8 billion. Earnings per share were $12.30, well ahead of the estimates of $10.04 a share.

Compared to the numbers from a year ago, Apple's latest figures are very strong. The company reported revenue of just $26.5 billion in the second quarter a year ago, and earnings per share have nearly doubled since then. But they're also a step down from the first quarter of this year, when Apple reported an astonishing total of more than $46 billion in revenue.

So the question for investors and Apple fans will be, which is more important? The fact that Apple blew past the analysts' estimates, or the fact that the numbers have declined from the previous quarter? We'll probably find out the answer sometime today.

Tuesday, April 24, 2012

Will People Listen?

The Wall Street Journal reported yesterday that E.F. Hutton is making a comeback in the brokerage business. Once upon a time, back in the 1970s and 1980s, Hutton was one of the most recognized names in Wall Street, due to the impact of its long-running commercial slogan: "When E.F. Hutton talks, people listen."

People listened to E.F. Hutton for a long time - it was old enough to have had its offices destroyed by the San Francisco earthquake of 1906 - until 1988, when the firm merged with Shearson Lehman, then a subsidiary of American Express. The new company was called Shearson Lehman Hutton. That firm became Smith Barney Shearson in 1993 when it was bought up by Smith Barney, an old-line investment bank with a well-known tagline of its own: "We make money the old-fashioned way. We earn it."

That seemed to be the end of the Hutton name, until a couple of old E.F. Hutton employees decided to revive it. It remains to be seen whether people are still willing to listen.

Monday, April 23, 2012

Listening to Earnings Calls

Some researchers at the Harvard Business School recently found a clever way to assess what CEOs' plans for their companies really are. They looked through the transcripts of more than 150,000 earnings calls to see what the boss most had on his mind at that point. Then they sorted the words and phrases that had been used by different sectors.

The results: CEOs of pharmaceutical and apparel companies tended to take a longer view of things. Their conference calls were peppered with terms like years, long run and trend. At the other end of the spectrum were CEOs from electronic-equipment companies and banks, whose word choices reflected a much more short-term view. They tended to say things like weeks, short run and latter half of the year.

The researchers also followed up by looking at the performance of the companies' stocks after the earnings calls. Not surprisingly, the CEOs who revealed themselves to be more short-term-oriented also ended up with stocks that were more volatile.

Friday, April 20, 2012

Donations on the Rise

People who signed off on their tax forms earlier this week might be wondering if it's time to ramp up their charitable donations for next year. If you've considered that, you're not alone: According to American charities surveyed by the Nonprofit Research Collective, 53 percent of them saw their contributions increase in 2011. Another 16 percent said their donations were flat, and less than a third saw contributions drop during the year.

As recently as 2009, nearly half of all charities - 46 percent - said their contributions dropped during the year. In contrast, the survey found that in 2012, some 70 percent of the charities expect their take to increase.

In addition to the improving economy, a big reason for the growth in charitable donations is the rise of online giving. Almost 60 percent of the charitable institutions surveyed said their number of online donations had increased in 2011.

Thursday, April 19, 2012

Earnings From the Tech Sector

Earnings season is off to a sluggish start, with some prominent tech companies coming out of the gate in somewhat disappointing fashion. First off, IBM fell short of the consensus of its revenue expectations. Even though it did beat expectations on its earnings, the market was no impressed, and drove Big Blue's stock down by 2.4 percent.

Intel was a similar story. It beat its earnings estimates, and just barely beat its revenue estimates, but that wasn't enough for investors. Its profit margins were down from the previous quarter, and Intel's share price dropped 1.7 percent on the day. As usually happens, the expected earnings had already been factored into the share price, which means barely beating expectations was not enough to bolster a share price.

These tech companies have become a bit of a sideshow this earnings season - the bigger news comes next Tuesday. That's when Apple, which is just the largest tech company but by far the largest company in the U.S., releases its first quarter earnings report.

Wednesday, April 18, 2012

Bumps in the Road

There were a couple of dark spots in for our economy in reports released yesterday. First of all, manufacturing, which had looked strong in recent months, stumbled a bit in March. Production at U.S. factories dropped by 0.2 percent in March, the first time in four months that it's fallen. It might be more proper to look at that small decrease as a plateau: It followed three months in which manufacturing productivity grew by 3.4 percent. That represents the biggest three-month gain for manufacturing since 1984.

Also in March, the number of new homes being started dropped suddenly. New homes had been started at an annual rate of 694,000 in February, but they dropped to a rate of 654,000 in March, a decrease of 5.8 percent. That's the lowest that number has been since October.

At the same time, though, the number of new building permits rose 4.5 percent in March, to an annual rate 0f 747,000. So there's a possibility that the drop in housing starts, as well as the drop in manufacturing, might just be a blip.

Tuesday, April 17, 2012

Some Good News for Tax Day

Happy Tax Day! Or not so happy, as the case may be, but for most taxpayers, this is actually a good time of year. According to the IRS, during fiscal year 2011, 83 percent of all taxpayers - that's 119 million individual tax returns - got refunds. The final toll of all those refunds was $338 billion.

More good news: The IRS isn't quite as diligent about its audits as you might think. For fiscal year 2011, just 1.1 percent of all individual income tax returns got examined by the government. And taxes are getting easier and easier to file. More than three quarters of all individual returns are now filed electronically.

And now the bad news: The taxman took in a whopping $2.4 trillion last year, from a total of 234 million tax returns. In that light, the $338 billion in returns was just a drop in the bucket.

Monday, April 16, 2012

Rough Week on Wall Street

Last week was a bit of a disaster for the stock markets, with all three major indexes posting their biggest weekly losses of the year. The S&P 500 lost 2 percent of its value, the Dow Jones industrial average lost 1.6 percent, and the Nasdaq lost 2.3 percent. Tuesday was the single worst day for the Dow all year, when it dropped 213 points.

The biggest losers were in the financial sector, where Bank of America lost 5.3 percent of its value in the course of the week, the biggest drop among the 30 Dow stocks. J.P. Morgan and Wells Fargo weren't far behind, falling by 3.6 percent and 3.5 percent, respectively. Overall, the S&P's financial sector index lost 2.8 percent for the week.

Was there any good news? Apple reached a milestone on Tuesday, when its market capitalization reached a stunning $600 billion. It's still a little bit short of the all-time record high market cap, set by Microsoft on December 30, 1999 - one day before Y2K arrived - when its total value peaked at $621 billion.

Friday, April 13, 2012

Stock Funds Still Hurting

The news just keeps getting worse for domestic equity mutual funds. We've noted before that inflows into these funds has slowed to a trickle, but the week ended April 4th marked a new low for the year. During that week, investors pulled a net of $4.27 billion out of American stock funds. That category has now lost $19 billion on the year to date.

Meanwhile, every other category is still taking on more and more assets:

* Hybrid funds took in $1.1 billion for the week ended April 4th.
* Foreign equity funds took in $1.22 billion on the week.
* Municipal bond funds took in $572 million.
* And corporate bond funds continue to be extremely popular, with inflows of $9.09 billion for that single week.
* All told, mutual funds had a net inflow of $7.71 billion on the week.

Thursday, April 12, 2012

The Fears of the Baby Boomers

The Baby Boom generation is famously facing its retirement years, with the first post-WWII babies having turned 65 last year. But they are still very uneasy about their retirement prospects, especially for the long term. The Insured Retirement Institute surveyed Americans ranging in age from 50 to 66, and found that the majority of them expect their financial picture to be get worse as they age.

Sixty-two percent of the respondents said that they expect their personal financial situation will be worse off in five years than it is now. Sixty-four percent expect to have to rely on income from jobs they'll take on after their retirement. The number of people expecting to retire after the age of 66 is up to 35 percent, whereas it was 28 percent a year earlier.

It doesn't have to be this way, of course. With proper financial planning, you should be able to enjoy a comfortable retirement, where the only job you need to take on is baby-sitting your grandchildren. If you're concerned about where your finances will be five years from now, feel free to give me a call.

Wednesday, April 11, 2012

The Demand for Bonds

The American corporate-bond market continues to show a lot of popularity, even with the solid returns posted by the stock market so far this year. Investment-grade corporate bonds and ETFs took in a remarkable $28 billion from individual investors for the first quarter of 2012. That's more than the combined total they took in over the last two quarters of 2011.

At the same time, the yields on the bonds has been dropping, which shouldn't be a surprise to anyone. As bonds become more popular, the interest the issuers need to pay to get people to finance their debt drops. So as all that money has been pouring into bonds, the average yield on corporate bonds has dropped from 3.8 percent to 3.4 percent through the first quarter.

And, oddly enough, companies aren't issuing great amounts of this debt. Barclays estimates that the total amount of investment-grade bonds issued this year will be the lowest since 2007. That leaves an awful lot of bond investors chasing after a dwindling number of bonds.

Tuesday, April 10, 2012

Buying It Back

We all wish we were better at knowing just when a stock was about to dive or about to take off, but a recent study shows that even executives buying their own stock are unable to know that. The research firm FactSet tracks repurchases of a company's own stock by top execs, and found they are much more likely to buy high and sell low, rather than the other way around.

The recent peak for repurchases of stock came at the outset of the stock market downturn, back in the fourth quarter of 2007. During that quarter, companies listed in the S&P 500 spent $141.7 billion buying back their own stock. That number plunged along with the larger market, until the first quarter of 2009, when those same companies bought back only $30.8 billion of their own stock. In retrospect, the market was a tremendous bargain at that point, but the company leaders didn't see that.

They seem to be getting better at this, though. There were more repurchases by S&P 500 in the third quarter of 2011, when stocks were notoriously sluggish, than they were in the fourth quarter, when the market began to rebound.

Monday, April 9, 2012

The Cost of a Penny

As you probably heard, the Canadian government announced last week that it would no longer manufacture pennies, in part because it costs the Canadian government 1.6 cents to manufacture and distribute each penny. This has sparked renewed calls here in the U.S. for our own government to eliminate the penny; each of our pennies costs 2.41 cents to produce and distribute.

All those pennies add up. The U.S. government lost $60.2 million on the manufacture of pennies in 2011. That's a sharp increase from the $27.4 million they cost us in 2010, and the $19.8 million we spent in 2009.

But if we move to get rid of the penny, what does that mean for the nickel? We lose money on each nickel we produce, too; each one costs 11.18 cents. So we lost $56.5 million making nickels last year, too. The Obama administration is now seeking to change the composition of the nickel to make them cheaper to produce. Maybe that will be enough save them.

Friday, April 6, 2012

The March Jobs Report

The new unemployment figures released by the Bureau of Labor Statistics this morning were mildly disappointing: After two straight months in which the economy added more than 200,000 jobs, we gained just 120,000 more jobs in March. Still, that was enough to drive the overall unemployment rate down by a percentage point, from 8.3 percent to 8.2 percent.

Most of the employment categories were little changed from February. Perhaps the most encouraging change was in the category of involuntary part-time workers - people who are working part-time, but want to work full-time. The number of people in that group fell by 400,000. The other bit of good news is that both January and February's number of new jobs was revised upward: January went from 275,000 to 284,000, and February went from 227,000 to 240,000.

The sectors that added the most jobs in March included manufacturing, up by 37,000; food services and drinking places, also up by 37,000; professional and business services, up by 31,000; and health care, up 26,000. The sector shedding the most jobs was general merchandise stores; that area lost 32,000 jobs on the month.

Thursday, April 5, 2012

Cutting the Boss' Pay

It's almost become an American pastime to criticize excessively compensated CEOs, especially when the corporations involved aren't performing well. According to a new research study, there's a reason aside from basic fairness to be concerned about this. As it turns out, there's a direct correlation between cutting a CEO's pay and the resulting performance of his company's stock.

A team of researchers looked at 927 instances between 1994 and 2005 in which a CEO's pay was cut by at least 25 percent. In the year in which the CEO's pay was lowered, the median stock return for the companies involved was a loss of 8 percent. But in the year after the pay cut, the median stock in the study increased by 10 percent.

Cutting a CEO's pay is more common than generally believed, and is much more common than simply firing the CEO. The same study found that the boss was twice as likely to have his or her pay cut drastically than to simply be replaced.

Wednesday, April 4, 2012

The First Quarter's Big Winners

Yesterday we looked at the big-picture results for the first quarter of 2012. Now let's take a look at individual stocks. Here are the ten biggest gainers in the S&P 500 for the first three months of the year:

1. Sears Holdings (up 117 percent)
2. Bank of America (up 76 percent)
3. Netflix (up 72 percent)
4. Whirlpool (up 60 percent)
5. Federated Investors (up 55 percent)
6. (up 54 percent)
7. Regions Financial (up 53 percent)
8. Apple (up 53 percent)
9. (up 52 percent)
10. Pulte Group (up 50 percent)

You'll notice that several of those stocks, like Sears, Bank of America, and Netflix, have posted huge gains in large part because they were beaten up so badly in 2011. Ironically, those three stocks had nearly identical years last year: Sears was down 57 percent in 2011, B of A was down 58 percent, and Netflix was down 59 percent.

Tuesday, April 3, 2012

A Strong Quarter

The first quarter of 2012 ended last Friday, with a very positive record for the stock markets. The S&P 500 finished the quarter up 12.59 percent. The Dow Jones industrial average closed the quarter more slowly, gaining just 8.84 percent, but the Nasdaq rose by 18.67 percent.

There were gains nearly everywhere you look. According to Morningstar, the worst-performing investing style for the three months was large-cap value, which still returned 8.25 percent. At the other end of the spectrum, large-cap growth stocks returned 17.5 percent, the best performer among the investing styles. The top sector for the quarter was financial services, up 22.29 percent; the worst - and the only sector to lose value - was utilities, which were down 1.51 percent.

One odd thing about the gains is how smooth they were. In 2011, when the markets were basically flat, there were 68 trading days where the S&P 500 moved up or down by more than 2 percent. That kind of volatility has been mostly absent this year. So far in 2012, we've had only one such day.

Monday, April 2, 2012

Dropping Defaults

One nice piece of fallout from the improved economy is that the number of corporate defaults has fallen away to very low levels. There were 53 corporations that defaulted in the entire world in 2011, according to Standard & Poor's. That's down from 81 defaults in 2010, and a whopping 265 in 2009.

This bit of news is of great importance to investors in high-yield bonds, what used to be called junk bonds. Companies at risk of default are the ones that are going to need to issue high-yield debt. Of all the corporations that defaulted last year, only one had a credit rating better than junk status.

That's not to say that companies with a rating that forces them into high-yield debt are at any great risk of defaulting. Among American corporations with junk status, just 2 percent of them went into default in 2011.