Friday, September 28, 2012

Revisionist History

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

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

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

Thursday, September 27, 2012

QE3 and Inflation

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

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

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

Wednesday, September 26, 2012

Consumer Confidence Inches Upward

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

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

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

Tuesday, September 25, 2012

Slow and Steady Wins the Race

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

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

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

Monday, September 24, 2012

Taking the Long View

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

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

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

Friday, September 21, 2012

Small Cap Troubles?

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

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

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

Thursday, September 20, 2012

What's Going to Turn Stock Funds Around?

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

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

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

Wednesday, September 19, 2012

Renewed Confidence in the Housing Market

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

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

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

Tuesday, September 18, 2012

Manufacturing Stumbles

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

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

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

Monday, September 17, 2012

The Rise of the Smartphone

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

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

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

Friday, September 14, 2012

QE3 Is Here

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

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

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

Thursday, September 13, 2012

The Shrinking Middle Class

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

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

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

Wednesday, September 12, 2012

The Market Finds Separation

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

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

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

Tuesday, September 11, 2012

The Strategy of the Buyback

Apple has scheduled a massive stock buyback for later this month, with the expectation that the company will repurchase about $10 billion worth of its own shares. This is supposed to be an encouraging sign for stockholders. It's not just that Apple is confident enough in its future that it wants to own more of its own stock, but by removing those shares from the marketplace, the purchase should help buoy the price.
But it doesn’t always work that way. Like many individual investors, companies are all too often willing to buy their own stock when prices are high, and sell it when prices are low. In the recent past, stock buybacks by the S&P 500 peaked at $172 billion in the third quarter of 2007 – when the market was at its peak – and reached a trough at $24 billion in the second quarter of 2009, just after the market had hit bottom.
Consider the plight of Best Buy, which has bought back 98 million of its own shares since April 2010, according to the Wall Street Journal’s CFO Report. It paid about $30 a share for that stock, but it’s now trading just under $20, which means the buyback program has cost Best Buy around $1.2 billion.

Monday, September 10, 2012

Teenagers in the Work Force

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

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

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

Friday, September 7, 2012

Jobs Report Falls Short

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

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

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

Thursday, September 6, 2012

Too Many ETFs?

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

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

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

Wednesday, September 5, 2012

The Vital Information

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

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

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

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

Monday, September 3, 2012

Trends in Household Debt

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

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

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

Thoughts for Labor Day

“My grandfather once told me that there were two kinds of people: those who do the work and those who take the credit. He told me to try to be in the first group; there was much less competition.”~ Indira Gandhi

“A mule will labor ten years willingly and patiently for you, for the privilege of kicking you once.” ~ William Faulkner

“I believe in the dignity of labor, whether with head or hand; that the world owes no man a living but that it owes every man an opportunity to make a living.” ~ John D. Rockefeller