Tuesday, July 31, 2012

Underemployment in the States

The Labor Department released a new set of statistics yesterday looking at the problem of underemployment in America. While the official unemployment rate of 8.2 percent is worrisome enough, there are also a sizable number of people who have part-time jobs but want to find a full-time position. Adding the number of underemployed to the picture brings the number up to 15.3 percent, for what the federal government calls U-6.

Here in New Jersey, the official unemployment rate is 9.2 percent, or ranked 40th among the 50 states. But our percentage of underemployed is relatively low, at 6.3 percent, which is below the national average. Adding together our unemployed and underemployed, we edge up to 37th in the nation. 

The worst states for underemployment are out west: Nevada's combined percentage of unemployed and underemployed is a whopping 22.1 percent, while California's is 20.3 percent. The best states, by far, are the Dakotas. South Dakota's combined percentage is at 8.6 percent, while North Dakota's is just 6.1 percent.

Monday, July 30, 2012

Rise of the Mega-Caps

The shining star of the stock market for 2012 so far has to be the mega-caps. As Paul Lim pointed out in yesterday's New York Times, the 50 biggest American stocks in terms of market capitalization - as measured by the Russell Top 50 index - have risen by more than 14 percent so far this year. The Russell 2000, made up of small-cap stocks, is up just 1 percent. In July alone, a tough month for most of the market, the mega-caps are up 2 percent, while the small caps have dropped by 1 percent.

One of the chief factors driving the larger stocks is that they are more likely to pay dividends. The 50 mega-caps pay an average divident yield of 2.2 percent, while the small caps pay just 1.5 percent.

It's been a huge change for the mega-caps over the past decade, after they were greatly overvalued in the dot-com bubble era. As Lim points out, in 2000, the average price-to-earnings ratio for the mega-caps reached 33. Now that number is all the way down to 13 - and with midcaps at 16 and small-caps at 20, the big stocks look like a relative bargain.

Friday, July 27, 2012

Today's GDP Figure

The first estimate of the nation's second quarter GDP came out this morning from the Commerce Department, and the best thing you can say about it is that it could have been a lot worse. The economy grew at 1.5 percent in the second quarter, which is down some from the first quarter's reading of 2 percent. But the expectation from economists - depending on which survey you believe - had been down to 1.3 or 1.4 percent.

The biggest culprit in the slowing economy is consumer spending. The figures showed that it household consumption grew at 1.5 percent in the quarter, which is the lowest rate of growth we've seen in a year. Spending had grown at a 2.4 percent rate in the first quarter of 2012.

The Commerce Department also released revised and presumably final GDP figures for the previous three years, and while some quarters showed significant changes, the overall differences were minor. For the period from the beginning of 2008 (two months after the official start of the recession) to the end of 2011, the overall rate of GDP growth went from 0.4 percent to 0.3 percent. For 2011 alone, real GDP was revised upward by 0.1 percent. 

Thursday, July 26, 2012

The Apple Drop

If there was any remaining doubt about who the 800-pound gorilla of the stock market is, Apple erased it yesterday. We've seen the computer behemoth elevate the entire market with better-than-expected earnings results; now we've seen it sink the entire market with some rare disappointing results.

Apple reported profits for the second quarter of $9.32 a share, which was a 21 percent increase over the previous quarter. But the consensus analysts' estimates expected even more, with a target profit of $10.37 a share. The rare earnings miss - just Apple's second quarterly miss since 2003 - sent the shares down by more than 5 percent.

With Apple still reigning as the most valuable stock in the world, that drop affected the entire equity universe. The S&P 500 had been up by 0.4 percent earlier in the day, but Apple's drop sent the whole index into negative territory, losing 0.1 percent. All by itself, Apple accounted for the difference between an up day for the S&P and a down day.

Wednesday, July 25, 2012

Ready for a Bounceback?

The American Association of Individual Investors publishes a weekly survey of investor sentiment, and the latest one shows that investors have turned sharply negative. The number of people describing themselves as bullish has dropped to 22.2 percent, following the biggest single weekly decline in that measure since April.

Is that bad news for the stock market? Not necessarily. A researcher at the Web site Seeking Alpha has looked into how the investor sentiment reading correlates with movement in the markets, and found that when the bullish sentiment drops below 25 percent, the S&P 500 has a strong tendency to go up over the next six months. In other words, the more pessimistic investors get, the more likely we are to see a rebound in the equity market.

One obvious example: The all-time record for bearish sentiment in the AAII survey was set on March 5, 2009, when 70.3 percent of the respondents described themselves as pessimistic on the stock market. The S&P bottomed out the very next day, and has nearly doubled in the period since then.

Tuesday, July 24, 2012

Getting the Help You Need

Everybody understands what a daunting task it is to save properly for retirement, and what an important job it is. A new survey from LIMRA confirms how critical it is for people to get help with their retirement planning. The survey found that 71 percent of all Americans who work with a financial advisor feel confident about their ability to afford the lifestyle they wanted to have in retirement. Among those who haven't been working with a financial advisor, only 43 percent said the same.

Of those who work with an advisor, 61 percent said they make regular contributions to a 401(k) or IRA. Only 38 percent of those who don't work with an advisor could say the same. Even controlling for income, those with an advisor are much more likely to contribute to a retirement savings plan.

There really is no substitute for the education, information and discipline a good financial advisor can provide you as you plan for your retirement. If you feel like you could use some help getting your financial plans in shape to provide for the retirement you want and deserve, give me a call.

Monday, July 23, 2012

The Fall in Household Debt

As the economy slowly rights itself, Americans continue to spend down their debt. During the first quarter of 2012, American households had 2.11 times as much in assets - bank deposits, stock holdings, and other assets - as they had in debt, including mortgages, credit card debt, car-payment obligations, etc, according to figures compiled by Deutsche Bank. That figure is up sharply from the figure for the fourth quarter of 2011, when it was 1.99.

That increase is the biggest jump between quarters that we've seen for that number since 1999. Such an unusual change in Americans' spending and saving habits suggest that we might be seeing the economy in the midst of making a significant turn on that issue.

Debt as a percentage of GDP has now returned to the levels it was at before the economic crisis, after reaching a peak in the first quarter of 2009. Looking at the combination of household and financial debt combined, that number as a percentage of GDP is now the lowest it's been since the fourth quarter of 2002.

Friday, July 20, 2012

Millionaires Bullish on America's Future

Despite the continued signs of sluggishness in the economy, America's millionaires are more optimistic about our financial future than they've been in years. That's the upshot of a new poll out from Fidelity Investments, which surveyed 1,000 households with more than $1 million in investable assets. The respondents gave the "future of the financial environment" the highest rating it's had since the creation of this particular survey, back in 2006.

The biggest factors fueling that optimism are a positive outlook on business spending and confidence in consumer spending. Both of those factors got a higher reading in 2012 than they had previously in the entire history of the survey.

While they're bullish on the future, the millionaires had a very different opinion about the state of the economy as it stands now. The "current financial environment" got a sharply negative score, with the key factors being a lack of confidence in real estate and the overall economy, as well as a lack of business spending. You'll recall that business spending was one of the factors that made the long-term picture so bright; apparently the respondents expect that to increase greatly in the coming years.

Thursday, July 19, 2012

"Modest to Moderate"

The latest edition of the Fed's eight-times-a-year-snapshot of regional economic conditions, better known as the Beige Book, was issued yesterday just as Fed chair Ben Bernanke took to the Hill to meet with Congress.  According to the Beige Book, the economy is growing at a "modest to moderate" pace these days. Three of the Fed's twelve districts reported modest growth, while five others reported it as moderate.

Here in New Jersey, the news isn't even that good. Both the New York and Philadelphia districts, which divide our state in half, reported that economic activity was expanding at a slower pace than in the previous reporting period.

That was the tepid environment in which Bernanke faced Congress. And while he admitted that there was more the Fed could do to boost the economy, he gave no hint of future plans, except to say that he wouldn't reconsider the Fed's inflation target of 2 percent. Perhaps we'll hear more when the Fed holds its next Open Market Committee meeting, at the end of the month.

Wednesday, July 18, 2012

Strength in Muni Bonds

Through all the turmoil surrounding the investing landscape these days, one asset that has remained very strong in popularity is municipal bonds. We've talked in the past about the net outflows that equity funds have seen this year; municipal bond funds are the exact opposite. Muni funds took in $653 million last week, marking the 13th straight week in which they had net inflows.

As a result of all of this demand, earlier this week, the yields on 30-year municipal bonds fell to record lows, as investors continued to look for safe havens. The 30-year yield is now just 2.92 percent. Remember, as the demand - and the price - of bonds goes up, their yields go down.

Much of that movement has taken place recently. The yield on 30-year muni bonds has dropped by 24 basis points in the past month alone. The yield on 10-year bonds has dropped 12 basis points in the past month.

Tuesday, July 17, 2012

The Slowdown in Retail Sales

Some disappointing news for the economy: The Commerce Department released figures yesterday showing that retail sales dropped by 0.5 percent in June, following on the heels of a drop of 0.2 percent in May. Not only does the reflect a slowdown in consumer spending - the engine that drives so much of our economy - but it also resulted in growing business inventories. They rose by 0.3 percent in May, signaling that business spending may slow in the coming months.

One bright spot in the Commerce figures: Auto sales continued to be strong in May, even as other purchases were declining. Cars and trucks sold at an annual rate of 14.1 million in June, up from 13.7 million in May.

Overall, though, these figures will put a damper on the GDP growth for the second quarter of 2012. The Commerce Department releases its first estimate of that number at the end of next week, on July 27. We'll be keeping an eye on it.

Monday, July 16, 2012

Gas Prices: Bouncing Back Up?

One bit of good news for the American consumer this summer has been the falling price for a gallon of gasoline. Nationwide, a gallon of gas costs an average of $3.41 now, down from a peak of $3.97 back on April 6. Here in New Jersey, we're a bit better than the national average, with gas costing an average of $3.38 a gallon.

But we may be seeing the end of this trend. U.S. crude oil prices reached a trough on June 28, about three weeks ago, but they've been rising ever since, increasing by a total of 13 percent. The local prices have already start trickling upward, with the cost of a gallon in New Jersey now sitting at 7 cents higher than it did a week ago.

For the record, the highest nationwide average price for a gallon of gas was recorded on July 11, 2008, when it peaked at $4.11. Things never got quite that bad here in New Jersey: Our record high was $3.98 per gallon, set in that same summer of 2008.

Friday, July 13, 2012

What's Driving the Trade Deficit

America's trade deficit dropped significantly in May, the Commerce Department reported yesterday, falling to a level of $48.7 billion, which is the lowest it's been since February. Most of the time, a narrowing of the trade deficit means that either we exported more goods and services, imported less, or both. This time, though, the primary trigger doesn't seem to have been either one of those.

With the price of oil dropping recently, the cost of importing goods has been dropping along with it. Not only do we import a lot of oil for energy purposes, but a big chunk of costs for other imports involves transporting items from far distances. In fact, the Labor Department released another report showing that the price of imports fell 2.7 percent in June. The biggest factor: The cost of fuel imports declined by more than 10 percent. Overall, the decline in the cost of imports was the largest in more than three years.

Going back to May, the amount of money we spent importing goods decreased by $1.6 billion, a big driver of the falling trade deficit. But that doesn't mean the amount of goods we imported or the value fell - just how much we spent for them.

Thursday, July 12, 2012

The Worldwide Wealthy

It should be no surprise that wealthy people around the world have had it just as bad, if not worse, than the wealthy here in the United States. The economic downturn was worse in Europe, obviously, than it was here. That's a big reason that the World Wealth Report 2012 found that the aggregate wealth of high-net-worth people around the world declined by 1.7 percent last year.

To be sure, the overall number of millionaires rose, by 0.8 percent. But the higher you go on the wealth scale, the more that people felt the economic downturn. Worldwide, people with more than $30 million in investable assets saw their wealth decline by 4.9 percent. The raw number of people with $30 million or more declined by  2.5 percent.

The big culprit here is an almost unprecedented level of volatility. Last year was the second-most volatile for worldwide markets in the past 15 years, with global equity market capitalization dropping by 18.7 percent..

Wednesday, July 11, 2012

Looking Ahead to Earnings Season

Second-quarter earnings season kicked off yesterday, with Alcoa, traditionally the first company to report, announcing it had earned a grand total of zero cents per share. What might we expect from the rest of the earnings reports? As the investment researcher Ed Yardeni notes, companies have been very pessimistic lately. From April 5 through last week, American corporations have cut their earnings estimates by an average of 3.3 percent.

The donwgrades have been very broad-based; according to Yardeni, nine of the ten S&P sectors have cut their average estimates. The financials have led the way, lowering their estimates by an average of 7.7 percent. The one sector that hasn't cut its estimates is telecom services, which has increased them by 3.3 percent.

So should we be expecting a disappointing earnings season? Not necessarily; companies have long learned to downplay expectations, since it's so important that they not miss their earnings estimates on the downside. On the other hand, it can't be a good sign that so many companies have diminished expectations.

Tuesday, July 10, 2012

Pulling Out the Plastic

If Americans are using their credit cards more, is that good news or bad news for the economy? Well, it can be a little bit of both. When people are running short of disposable income, they will often turn to their credit cards to fill the gap, especially if it's more of a cash-flow issue instead of a long-term concern over income. And consumer credit is a way to expand the consumer economy without having to inject more cash into it.

So the news that consumer credit jumped by $17 billion in May is significant for a couple of reasons. That's nearly double the $9.9 billion increase in credit we saw in April. Counting just revolving debt - which is mostly credit cards - the increase was $8 billion, which is the largest that figure has been since November  2007.

That's also a pretty sizable change for the way people think about the economy. Does it mean that consumers are feeling more confident about their finances going forward? Or are they simply running short of disposable income? It's hard to say, but either way, that extra $17 billion pumped into the economy is a good thing for all of us.

Monday, July 9, 2012

What's the Libor Scandal About?

You've probably heard the stories out of the U.K. about Barclays, one of the leading British banks, being forced to pay huge fines for manipulating the Libor (for London Interbank Offered Rate), which is the rate at which banks loan each other money. It might sound like a complicated, highly technical affair, but the effects are far-reaching.

To calculate Libor, member banks are supposed to report the rate at which they could realistically borrow money, based on the inter-bank offers it receives. But there have been stories that banks - and not just Barclays - were encouraged to report rates lower than those that had been offered, in order to keep rates reduced. 

A great number of institutional investment vehicles, including here in America, have their bond rates pegged to the Libor rate, as do mortgage rates, credit cards, and other loan rates. Many governments and municipalities have their debt rates set to float along with Libor, so if that rate changes, the amount that needs to be paid back on their bond offerings will often go up. The cost of manipulating Libor by just a few basis points can run into the millions of dollars for a debt offering - and may have put trillions into the banks' own coffers.

The head of Barclays has already resigned, and the bank has paid $450 million in fines. But this scandal appears to be far from over.

Friday, July 6, 2012

Another Disappointing Jobs Report

The June unemployment report, released this morning by the Bureau of Labor Statistics, was more of the same from the previous two months, with just 80,000 jobs added to the economy. For the second quarter of 2012, we averaged just 75,000 new jobs per month, after averaging 226,000 jobs added per month in the first quarter. The overall unemployment rate was unchanged, at 8.2 percent.

No particular sector showed a great number of new jobs added - or jobs lost, for that matter. The biggest addition was in professional and business services, which saw 47,000 new jobs in June. But even there, 25,000 of those jobs were in temporary help services, which is hardly a spot where growth is encouraging.

Economists estimate that the economy should be creating about 125,000 jobs per month just to keep pace with population growth. A rate closer to 75,000 jobs per month is a recipe for stagnation. All told, the number of unemployed people in the country remains at 12.7 million.

Thursday, July 5, 2012

First-Half Winners

The other day we looked at how the broad market indexes fared over the first half of 2012. Now let's take a look at the stocks that have been the biggest winners so far this year. These are the five stocks in the S&P 500 that have gained the most this year:

1. Sears, up 86 percent
2. TripAdvisor, up 80 percent
3. Expedia, up 67 percent
4. Pulte Group, up 66 percent
5. Regions Financial, up 56 percent

None of the 30 stocks in the Dow Jones industrial average reached those lofty heights, but several of them posted impressive gains. Here are the top five Dow stocks for the first half of 2012:

1. Bank of America, up 45 percent
2. Disney, up 29 percent
3. Home Depot, up 26 percent
4. American Express, up 23 percent
5. AT&T, up 17 percent

Wednesday, July 4, 2012

Thoughts for Independence Day

"Those who won our independence believed liberty to be the secret of happiness and courage to be the secret of liberty." ~Louis Brandeis

 "You have to love a nation that celebrates its Independence every July 4, not with a parade of guns, tanks, and soldiers who file by the White House in a show of strength and muscle, but with family picnics where kids throw Frisbees, the potato salad gets iffy, and the flies die from happiness. You may think you have overeaten, but it is patriotism." ~Erma Bombeck

"I would rather be exposed to the inconveniences attending too much liberty than to those attending too small a degree of it." ~Thomas Jefferson

Tuesday, July 3, 2012

Halfway Home

The year reached its halfway point over the weekend, which makes this a good time to look back at how the markets have been doing.  We have had an awful lot of volatility, but the overall picture remains pretty good.

* The S&P 500 finished up a solid 6.9 percent. But it was also up 5.4 percent through the first half of 2011, before losing 4.7 percent in the second half of the year.

* The Dow Jones industrial average is up a more modest 3.8 percent this year. But it was up 8.7 percent in the first half of last year as well, before dropping 2.9 percent in the second half.

* The Nasdaq has been the strongest of the major indexes, rising 11.4 percent so far this year. But it too rose solidly in the first half of 2011, gaining 6.1 percent, before giving it all back in the second half.

So yes, the first six months of this year have been encouraging. But be warned - we've seen this movie before.

Monday, July 2, 2012

The Ups and Downs of GDP

The Commerce Department released its third and final estimate of its first quarter GDP figure late last week, and it was unchanged from the second estimate, remaining at 1.9 percent. But despite the stability of the overall figure, many of the components of the GDP were significantly revised.

The biggest change was to corporate profits. The original estimate showed corporate profits having risen by $11.4 billion in the first quarter, but they're now figured to have dropped by $6.4 billion. But all in all, the growth has been relatively stable. Corporate domestic profits increased by $26.3 billion in the first quarter of 2012, after having increased by $29.9 billion in the fourth quarter of 2011.

In other categories, the largest upward revisions came from an increase in  nonresidential fixed investment and an overestimate of the number of imports we took in for the first quarter. These were almost exactly offset by downward revisions to exports, personal consumption expenditures, and inventory investment, leaving the GDP figure unchanged. The second quarter GDP estimate is due out at the end of this month, on July 27.