Friday, August 31, 2012

The Habits of ETF Investors

Exchange-traded funds have long had the reputation of being a vehicle that's most popular with frequent traders, but they've been moving more into the mainstream lately. According to a recent Vanguard study, the majority of their customers’ trades in ETFs – 62 percent of them – were the result of strategic allocation decisions and were expected to be held for more than a year. That’s less than the 83 percent of all mutual funds trades that fell into the same category, but it’s in the same ballpark.

But they still remain a very popular vehicle for day-traders. Vanguard found that State Street’s widely held SPDR S$P 500 ETF – a huge fund that contains nearly 10 percent of all ETF assets – has a turnover ratio of greater than 30 percent a day. That suggests that the average holding period for SPDRs is just three days.

Here’s another fact that is indicative of the mindset of the average ETF investor: About 16 percent of all people who are invested in Vanguard’s mutual funds log on to every day. But more than twice as many – 36 percent – of Vanguard’s ETF clients log on to the site daily.

Thursday, August 30, 2012

Dog Days

August is generally a pretty sleepy month for the stock market, but the current month is taking this to extremes. With two trading days left before the calendar turns over, the S&P 500 has been trading in about as narrow a band as we've ever seen. The S&P crossed the 1400 mark back on August 7, closing that day at 1401.35. In the three-plus weeks since then, the index has never managed to crawl above 1420, or sink lower than 1400.

The biggest single-day gain was 10 points; the biggest single-day loss was 11 points. Maybe the most emblematic day was August 20, when the market opened at 1418.16, and closed at 1418.13. That's a loss of .03 points, or 0.00002 percent of the market's value.

Does it mean anything for the future? Probably not. The lack of movement coincides with August's customary slowdown in volume, as traders and individual investors take their vacations. We'll likely see a lot more movement after Labor Day - although in which direction is anyone's guess.

Wednesday, August 29, 2012

Slowing Markets in China

It's been fairly well known that Europe is encountering severe economic problems again, with several of the EU nations sinking back into recession, but China's financial slowdown may be even worse. Given the nature of China's heavy-handed government, it's hard to come by reliable economic figures, but we can tell that the country's stock market has been performing abysmally lately.

For a long time, China's Shanghai composite index tracked our own markets here in the U.S. pretty closely, only in stronger terms. From 2005 to 2007, while U.S. markets were bullish, the Shanghai more than quadrupled. The Shanghai crashed in 2008, just as our markets did, and ended up losing an astonishing 70 percent of its value. Both countries' markets began rebounding in 2009.

That's where the parallels end. While American stocks have been strong ever since March of 2009, the Shanghai index is down about 40 percent from where it stood in July 2009. And if the economic slowdown in China is as bad as some watchers fear, it may be a long while before the market makes up that ground.

Tuesday, August 28, 2012

Reading the Bulls

There are a lot of different measures out there purporting to tell which direction the market is headed, but one intriguing, real-world one is something called the Rydex Asset Ratio. The Rydex ratio is a pretty simple formula: It looks at all the funds in the Rydex family and figures the following:

(Money Market + Bear Fund Assets)
(Bull Fund Assets + Sector Fund Assets)

The less optimistic people are, the higher the numerator gets, and vice-versa: a very simple and elegant formula, and based totally in what actual investors are doing right now. Right now, the ratio is the lowest it's been in several years, with far more invested in bullish and sector funds than money market or bearish funds.

But this is a contrarian indicator, and research has found that when investors are at their bullish, the market is due for a fall. The last time the Rydex ratio was more bullish than this, it was in 2000, and the dot-com market was about to collapse. Food for thought.

Monday, August 27, 2012

Stock Funds Staying Afloat

One of the biggest trends in investing this year has been the money that has been flowing out of domestic stock funds. For the week ended August 15, these mutual funds lost a total of $2.7 billion from investors pulling their assets out. That brings the total for the year to a net outflow of a whopping $69 billion.

But there are some types of funds that have managed to keep their heads above water. In July, for instance, American health-care stock funds added a total of $327 million in net investments. During the same month, utilities funds added $113 million.

On the other hand, many sectors continue to see assets being drained out of them. Both the financial stock funds and industrial stock funds lost $38 million in net investments during the month of July. The biggest loser, though, was tech stock funds, which lost $203 million in assets over the course of the month.

Friday, August 24, 2012

Home Prices Inch Upward

There was a bit of good news for the long-suffering housing industry yesterday: The Federal Housing Finance Agency said home prices jumped by 1.8 percent in the second quarter of this year. That may not sound like much, but it's the biggest quarterly increase we've seen since the fourth quarter of 2005. In year-over-year figures, home prices were up 2.2 percent from the second quarter of 2011.

At the same time, sales growth has been sluggish. Home sales grew by 2.3 percent in July, according to figures compiled by the National Association of Realtors, but that's the second-slowest rate of increase for any month this year.

What we could be seeing is the effect of all the foreclosures clearing out of the housing market. Foreclosed homes generally see for less than other housing stock, which is why prices are rising. And a lack of foreclosed homes on the market could also be returning us to a normal state of progress in overall sales growth.

Thursday, August 23, 2012

Looking for Signs of Deflation

There's an interesting report that's come out from the Atlanta office of the Federal Reserve looking at the prospects for deflation in the economy. The Atlanta Fed has long had a deflation project that takes into consideration the difference between the spreads on the five-year and ten-year TIPS, or Treasury Inflation-Protected Securities. It's a fairly complicated relationship, but basically the idea is that the ten-year TIPS protects against deflation better than the five-year TIPS, so the relative spreads should indicate how concerned investors are about the prospect of deflation.

The current reading shows that the prospects for deflation over the next five years sits at around 15 percent. That's pretty consistent with where it's been for the past couple of years; the last time the threat rose much above that was in the middle of 2010, when it peaked at around 30 percent. During the economic meltdown in late 2008 and early 2009, this measure had the likelihood of deflation pegged at about 80 percent.

And we did have a period of falling prices in there for a few months. More recently, the consumer price index has risen at 1.42 percent over the past 12 months, after increasing by an even 3 percent in 2011. It may well be that deflation is more of a concern at this point than a serious bout of inflation.

Wednesday, August 22, 2012

Explaining the S&P's Profits

We've seen two conflicting trends affecting the bottom line of the S&P 500 companies lately: Revenue growth has been slowing, while earnings have been increasing. According to Ed Yardeni of Yardeni Research, the S&P showed revenue growth of just 0.3 percent during the second quarter of 2012. Compared to the second quarter of 2011, revenue growth this year was a somewhat stronger 1.9 percent, but that's still the slowest pace for revenue growth since the third quarter of 2009.

But earnings have stayed solid, and are expected to continue to grow. The industry analyst estimates collected by Yardeni show a forecast of earnings for the S&P 500 rising at 5.7 percent this year. The same analysts expect earnings growth to double next year, to a level of 11.7 percent growth. 

What makes up the discrepancy between weaker revenues and stronger profits? Profit margins. For the S&P 500, profit margins were at 9.3 percent in 2011, and are expected to rise, clocking in at 9.5 percent this year and a 10.1 percent in 2013.  

Tuesday, August 21, 2012

Apple in the Dow?

When the rumor surfaced a couple of weeks ago that Apple might be added to the venerable Dow Jones Industrial Average, Apple’s price rose on the news. One might think that Apple, the very epitome of a modern, 21st-century corporation, might have nothing to gain from the Dow, which dates back to the age when investors followed their stocks via tickertape rather than online portfolios. 

But still, the stock rose by 2.6 percent on the day the rumor was printed by several reputable publications, following a supposition by Sanford Bernstein that Apple might be getting ready to join the Dow. other stocks have been added to the Dow without seeing such a bump; what's different about Apple?

Primarily, it's because membership in the Dow would likely be accompanied by a stock split. Apple’s share price is currently riding at over $630. The Dow weights its components by simple share price, which means that if Apple joined the index right now, it would have as much influence on it as the entire bottom half of the Dow stocks combined. IBM, with the largest share price of all the current Dow stocks, carries about a third of Apple’s weight.

Monday, August 20, 2012

Vacation Time

Did you get away on vacation at some point this summer? Most Americans do get some paid leave from their jobs, but it might not be quite as many of them as you think. According to data compiled by the Bureau of Labor Statistics, 59 percent of all American workers get some form of paid leave, while 39.7 percent do not. Another 1.1 percent of workers do not know, for some reason, whether they get paid leave or not.

Unsurprisingly, the more education a person has, the more likely they are to get paid vacation. Among Americans with a bachelor's degree, 71.6 percent of them got some type of paid leave, while only 34.9 percent of those without a high school diploma could say the same.

Most American workers do get some time away from work, though. If you add together both paid and unpaid leave, more than 90 percent of all U.S. employees get some sort of officially sanctioned time away from the job.

Friday, August 17, 2012

What Happened to Facebook?

After the biggest and most-covered IPO in American history last May, Facebook has had a difficult time with its stock ever since. The latest drop happened yesterday, when the stock fell more than 6 percent after early investors became eligible to sell some of their stock. Exactly why that happened can serve as a constructive lesson about today's IPO landscape.

Companies that go public typically ask their early investors to refrain from selling shares until a certain period  of time has passed - in this case, it has now been three months since the IPO. The thinking is that if the market gets flooded with shares, it can lower the price, which is exactly what happened here. With a sudden addition of 271 million Facebook shares to the market, there weren't enough buyers for the stock, which results in a drop in price.

This is just the first wave of early-investor selling, though; there is another group of shares that can potentially go on the market in November, and more will be appearing through next May. It's important to realize, though, that this isn't necessarily Facebook "insiders" who are selling shares, people who might have insight into the inner workings of the company. Much of the shares sold yesterday belonged to Goldman Sachs and other institutional owners.

Thursday, August 16, 2012

The Downgrade, a Year Later

When Standard & Poor's issued its famous downgrade of the creditworthiness of the United States government, a year ago, many pundits felt that it was more a case of grandstanding on S&P's part than a real concern that the U.S. was becoming more likely to default on its debts. If the performance of U.S. Treasury bonds are any indication, investors around the world have ignored S&P's downgrade and have continued to consider America's bonds one of the safest investments around.

The yield on the benchmark ten-year U.S. Treasury Note has more or less fallen steadily since S&P's announcement. From around 2.2 percent at the time of the downgrade, the yield has dropped to around 1.6 percent now. Remember, the yield falls as demand increases.

And it looks like that rate may stay low for some time to come. Wells Fargo yesterday issued a revised forecast for the remainder of the year, signaling that its year-end target for the ten-year Treasury is now 2.0 percent, down from its initial forecast of 2.5 percent. No matter what other economic problems our nation has, our debt continues to be one of the safest and most popular investments around.

Wednesday, August 15, 2012

More Mixed Signals in Retail

The top-of-the-line good news that came out yesterday was that retail sales were strong in June, stronger than we've seen in quite some time. After dropping for three consecutive months, retail and food-service sales rose by 0.8 percent last month. It exceeded all the economists' forecasts, and was the biggest monthly gain in retail sales since February.

But, as we have so often seen in this economy, there was other news as well that undermined the overall message. Inventories at American businesses climbed by only 0.1 percent in June; apparently business owners aren't confident that the rise in retail sales is going to continue over the long haul.

At the same time, confidence among small-business owners has been slipping. The National Federation of Independent Business reported that its monthly survey of business owners dropped by 0.2 points in July, after falling by 3 points in June. Still, that measure remains at 91.2 - that's slightly above its average reading of 90 during the economic recovery.

Tuesday, August 14, 2012

Playing the Election Campaign

The presidential election is coming up less than three months from now, and while the effects of this on our society will be many, there will also be an effect on investing. RBC Capital Markets has looked at the way various sectors have performed in the runup to a presidential election, and found that two sectors tend to underperform in that period: material producers and technology.

Since 1980, in the three months prior to a presidential election, those two sectors have lagged the overall S&P 500 60 percent of the time, by an average of 4 percentage points. Last time around, in 2008, technology stocks lost 23.9 percent of their value over that time frame, and material producers lost 29.8 percent. The whole market was crashing at that point - the S&P lost 19.5 percent - but the losses for those sectors still outpaced the whole.

There are no sectors on the other side of the ledger, ones that tend to outperform the larger market during election campaigns. According to RBC, most of the other sectors only beat the index about 50 percent of the time.

Monday, August 13, 2012

Trouble in Municipal Bonds?

The municipal bond market has been a strong haven for investors all year long - which makes it more surprising that so many cities appear to be running into financial troubles. Moody's Investor Service just announced that it had downgraded 290 municipal issuers during the second quarter of this year, which is the most downgrades it has had in any one quarter since 2000.

Moody's downgraded 4.4 municipal issuers for every one it upgraded. Most of those affected were city governments and school districts. All told, it was the 14th consecutive quarter in which Moody's announced more downgrades than upgrades.

It's not just small places that have had financial issues, either. Stockton, California, declared bankruptcy on June 28, and Detroit is seeking to avoid a state takeover of its finances. California and Michigan were the states with the most municipalities that had been downgraded. 

Friday, August 10, 2012

The Paradox of Dividends

There is kind of a funny paradox going in the world of stock dividends these days. The number of stocks in the Standard & Poor’s 500 that offer dividends is at its highest level in more than a decade – 402 out of the 500 are now paying dividends – and dividend payouts are expected to reach a new record of $275 billion in 2012.The old record was set back in 2008, when dividends totaled $248 billion.

At the same time, though, companies are not being incredibly generous with their money. Dividends are reaching record levels in large part because profits are reaching record levels. The overall payout ratio for the S&P 500 – the percentage of profits that get back to shareholders as dividends – is now at a record low of 29 percent, according to research conducted by the Web site the Motley Fool. 

All told, the aggregate dividend yield for the S&P 500 is sitting at 2.1 percent, which is the same as the overall ten-year average. So even though more companies are issuing dividends, and profits are at lofty levels, the overall percentage of money getting back to shareholders is largely unchanged. 

Thursday, August 9, 2012

Feeling the Drought's Pinch

The drought that has afflicted so much of the United States this summer could have far-ranging effects on our economy. There's some concern that the severe weather has been holding back hiring and increasing unemployment, but probably the most dramatic effect could come on consumer prices. The U.S. Department of Agriculture has released a study showing that food prices could rise an average of 0.5 percent next year, above the rate of inflation.

How much is that in real terms? The Wall Street Journal looked at food consumption numbers published by the Labor Department and found that the average American family will likely spend an additional $32.76 on food next year as a direct result of the drought. That's just $2.73 a month.

All told, food prices are expected to rise by 3 to 4 percent next year, counting the drought effects. While that would be above recent rates of inflation, it's important to remember that food costs aren't a huge amount for the average American household budget. Food makes up only about 14 percent of Americans' daily living expenses.

Wednesday, August 8, 2012

A Blah Earnings Season

With second quarter earnings season nearly complete - around 80 percent of the S&P 500 has reported earnings thus far -  there haven't been too many surprises. About 68 percent of all reporting companies have exceeded expectations, which is above the long-term average of around 60 percent. Just 22 percent have had negative earnings surprises, and 10 percent were neutral.

But American corporations seem to have made a concerted effort to downplay expectations, and it's paid off. Overall, the average company has increased its earnings by just 5.7 percent this quarter.  That's not a very impressive figure.

Sales figures have been especially unimpressive. For the S&P 500 as a whole, year-to-year sales were reported down 0.4 percent. The sector showing the strongest sales growth has been information technology, which is up 7.7 percent from the year earlier. The weakest sector has been energy, where sales are down a whopping 14.2 percent.

Tuesday, August 7, 2012

Credit Standards Ease for Cars, Credit Cards

A new report from the Federal Reserve shows that banks have begun easing their standards on various types of loans, which should be a boon to the economy. Even though interest rates of all kinds have been low for a long time now, that doesn't do much good if banks are still reluctant to make loans. But over the past three months, “Domestic banks, on balance, continued to report having eased their lending standards across most loan types," the Fed said yesterday.

For consumer borrowing, the biggest easing has occurred for car loans and credit card debt. Standards for other consumer loans is reported as largely unchanged. Commercial and industrial loans are also surging: The total of $1.45 trillion for the week ended July 25 marks a three-year high for that figure. The total of commercial lending has now increased for eight straight quarters.

Interestingly enough, only about one fourth of the banks attribute the easing of lending standards to the sluggish economy. The remainder said they were forced to increase their loan portfolios because of increased competition from other lending sources.

Monday, August 6, 2012

Volume Around the World

One of the results of the worldwide economic downturn has been not just that stock returns have been middling, but trading volumes have been down around the world. With the European crisis scaring off so many investors, the total value of shares traded on worldwide exchanges in the first half of 2012 was down 14 percent from the year earlier.

The biggest drop in traded share value was here in the Americas, where overall volume dropped by 20 percent over the year earlier. The total number of trades fell by 25 percent. Traded share value in Europe dropped by 15 percent, and the number of trades dropped by 9 percent.

The one area showing growth in volume is the Middle East and Africa, and it's surprisingly robust growth.  Total trading value in those regions is up 52 percent over last year, and the number of trades is up by a stunning 35 percent.

Friday, August 3, 2012

July's Jobs Report

After three straight months of disappointing employment figures, the economy finally looked a bit brighter in July, adding 163,000 new jobs, according to figures released this morning by the Labor Department. The private sector accounted for all of the growth, with 172,000 new jobs reported for private employers, while the public sector shrank by 9,000 jobs.

Still, the unemployment rate ticked upward, to 8.3 percent. The Bureau of Labor Statistics compiles the new jobs figure from its survey of businesses, while the overall unemployment rate is compiled from a survey of households. Generally, the two track together closely, but there are occasional times when they diverge. One reason they may have diverged in July was that the number of people seeking work, according to the household survey, grew by 45,000.

July's relatively strong numbers boost the overall average monthly job growth to 151,000 for 2012. For all of 2011, the growth rate was about the same, at 153,000 jobs added per month. So we may be looking at 150,000 new jobs per month as the "new normal."

Thursday, August 2, 2012

The Fed Does Nothing - For Now

The Federal Reserve Open Market Committee emerged from its latest meeting yesterday and acknowledged that the economy had "decelerated somewhat over the first half of the year." But at the same time, the Fed chose to forgo further steps to stimulate the economy, although Fed chair Ben Bernanke indicated that more moves may be in the offing.

For now, the Fed will leave in place Operation Twist, the strategy of selling short-term debt and buying long-term debt, with the purpose of keeping interest rates low. That's certainly been a success, with 30-year mortgage rates at record lows. The Fed also indicated that it will keep its Fed Funds rate at near-zero levels through the end of 2014.

Still, many Fed watchers expect further stimulative measures when the group meets again on September 12. About half of the economists surveyed by Bloomberg News thought the Fed would announce more asset purchases at that time.

Wednesday, August 1, 2012

Dueling Indicators

There was a whole set of economic indicators released to the public yesterday by various government agencies, and the financial press lined up in different corners, deciding whether the news was good or bad. On the positive side, the Financial Times ran a story headlined "Economic Data Pierce US Gloom": The good news was that the home price index rose 0.9 percent in May, while consumer confidence rose in July, after dropping for four straight months.

At the very same time, the Wall Street Journal was featuring a piece headlined "Cracks Visible in U.S. Consumer Facade." That article points out that personal income growth dropped from 5.1 percent in June 2011 to 3.5 percent in June of this year, and that the Commerce Department issued revisions that lowered the level of American income from 2009 to 2011.

Ordinarily, this wouldn't be too big of a deal; we often see conflicting reports on the state of the economy, and it's not uncommon for indicators to contradict one another. But with the Fed meeting right now to decide what further action it wants to take regarding the economy, which indicators it decides to listen to becomes of paramount importance.