Thursday, February 28, 2013

Fear Strikes Out

When the fallout from the Italian elections sent a shudder through the world's stock markets on Monday, one thing that was affected was the VIX, or what is commonly referred to as the fear index. This measure of the market's volatility had been under 15 every day this year until it popped up to 19 on Monday. The 34 percent increase was the largest one-day rise since August 2011, during the debt ceiling debates.

It wasn't so long ago that we had expected volatility like that as a matter of course. The VIX was over 20 as of a year ago. During those debt-ceiling debates, when Standard & Poor's downgraded the nation's creditworthiness, in the late summer of 2011, it was above 40.

But everything is back under control now. The VIX has given back 88 percent of Monday's one-day spike, and dropped safely under 15 again. The shock waves were apparently a one-day phenomenon.

Wednesday, February 27, 2013

Why People Like This Economy

The consumer confidence reading that came out yesterday was surprisingly high, with February showing the first monthly increase in four months. Consumer confidence is now at its highest point since November 2011.

There are other figures just out that point up why consumers might be feeling positive about the economy:

* Sales of new homes jumped up in January by the most in two decades. The number of home sales increased by 15.6 percent for the month, putting the annualized total at the highest it's been since July 2008.

* The Federal Reserve reported that American banks earned $141.3 billion in net income last year, which was their second-biggest year on record, after 2006. The amount of money they set aside to cover bad loans dropped by nearly 25 percent. There's no doubt that the banking sector is now in a very healthy place.

Tuesday, February 26, 2013

America's Retirement Plans

When it comes to being prepared for retirement, about half the country thinks it’s in pretty good shape. According to a new survey from the Employee Benefit Research Institute, 49 percent of those who aren’t yet retired say they are “saving enough for a retirement in which [they] will have a desirable standard of living.” Which half are you in?

Most of the questions saw similar splits. Some 54% said they “have a savings plan with specific goals.”  Another 43% said they “have a spending plan that allows [them] to save enough money to achieve the goals of [their] saving plan.” And 49% said they know their net worth.

Perhaps the most disheartening part of the survey was that there has been no real progress in building up America’s saving habits, despite the economic recovery. There was no improvement in these indicators between February 2012 and February 2013 – the number of people saying they had sufficient emergency savings actually dropped from 66 percent to 65 percent and among the non-retired, and the number saving enough for retirement dropped from 51 percent to 49 percent.

Monday, February 25, 2013

Value Moves Ahead

The fact that investors began pouring money into domestic stock funds in January - after several years of net outflows - was big news for the financial world at the beginning of the year. Now Morningstar, the mutual fund research company, has broken down those figures further, and the results are very interesting. In the large-cap category, investors put $2.389 billion into large-cap value funds in January, but just $343 million into large-cap growth funds. That's about seven times as much money that was put into value funds.

The advantages in other categories are strong too, although not quite as dramatic. Mid-cap value funds took in $631 million in January, as opposed to $377 million for mid-cap growth funds. Small cap value funds took in $383 million, as opposed to $273 million for small-cap growth funds.

Add them together, and that's $3.4 billion that went into value funds, compared with $993 million that went into growth funds. That constitutes a pretty striking trend.

Friday, February 22, 2013

Hedge Funds Love Stocks

There's one group that's pretty excited about the prospects of the current stock market, and it's a fairly significant one: hedge funds. According to research from Goldman Sachs, hedge funds are more exposed to stocks right now that they've been at any point over the past six years.

Goldman says the net long exposure to equities in hedge funds increased to 52 percent in the fourth quarter of 2012. That matched where it was back in the first quarter of 2007, but the figure hasn't been any higher than that in ten years.

Part of it is just playing catch-up. The average hedge fund returned just 8 percent last year, while the Standard & Poor's 500 returned 13 percent. That has continued into the new year, with the average hedge fund up just 3 percent through February 8, while the S&P was up 7 percent.

Thursday, February 21, 2013

Business Loans Are Back

One of the biggest handicaps for our economy following the recession was that the credit markets completely froze up. Having been burned so much by bad lending decisions, banks decided that they weren't going to extend that kind of credit any longer. Credit expands the money supply and grows the economy, so without banks performing their natural function, it created another roadblock for the recovery to get past.

But we finally seem to be getting beyond that. According to the research firm SNL Financial, commercial and industrial loans were up 16 percent in 2012. The number was up by 4.4 percent in the fourth quarter of 2012, and total amount of business loans has now increased for nine quarters in a row.

Part of what's fueling that activity is that banks are flush with cash. With investors still spooked by the 2008-09 market crash, banks have seen an increase in deposits of 29 percent since 2008, to a current total of $9.06 trillion.

Wednesday, February 20, 2013

Cars Are Getting Old

Here's an artifact of the difficult economic times we're living in: The average age of all the light vehicles on the road is up to 11.2 years as of 2012, according to a study done by automotive research firm Polk. Back in 1995, that same number was just 8.4 years. It just crossed over the ten-year mark in 2008.

Part of that can be attributed to cars and trucks that are simply built better these days, and as a result, they have been lasting longer. But it also indicates that as the economy improves, we could see more and more people trading in their clunkers for new vehicles.

We've started to see that already. Motor vehicle dealers report that they have seen their sales jump by 15 percent since 2011.  Business has been good for auto parts supplies as well, who have been furnishing the replacement pieces to keep those older cars on the road.

Tuesday, February 19, 2013

M&A Activity Perks Up

Last week’s news about the takeover of Heinz by Warren Buffett’s investment group and the merger between American Airlines and US Airways pointed up a new wave of transactions among American corporations. A strong stock market does generally lead the way to more merger activity, and that looks to be what’s happening so far.
There was $40 billion worth of deals struck last Thursday alone, with Heinz and the airline merger both being announced on that day. Earlier in the month, Dell went private in a $20 billion deal, and Comcast bought up nearly half of NBC Universal for $18 billion.

Altogether, there has been $160 billion in mergers and acquisitions announced so far in 2013. That’s the most in the first month and a half of any year since 2005. These deals can have an significant effect on stock prices - bankrupt American Airlines' share price nearly doubled the day its merger was announced - so they're well worth watching.

Monday, February 18, 2013

Small Businesses Hunt for Workers

There's kind of an odd disconnect going in our economy right now. Despite the fact that the unemployment rate is struggling to get very far under 8 percent, employers are also saying they're having trouble finding qualified workers. More than half of all small business owners say they're having a "very difficult" or "somewhat difficult" time finding qualified employees, according to a new survey from Gallup.

But that's not anything new. The same survey conducted a year ago showed virtually the same results, that 53 percent of small business owners were struggling to find qualified workers. Before the recession it was even worse: In March 2005, 65 percent of small business owners reported trouble finding good employees.

In addition to the questions it raises about the employment situation, this is also affecting small business' operations. When asked if the inability to find qualified workers was hurting their business, 27 percent of small business owners said yes, up from 21 percent just a year ago.

Friday, February 15, 2013

Sequester Effects

Although we averted the effects of the fiscal cliff at the beginning of the year, the American economy still faces a sequester at the beginning of March – a slew of cuts to government spending designed to bring the deficit down, unless Congress acts otherwise. It’s not clear what the effects of this will be, but there’s a consensus emerging that it will hamper the economy over the course of the year.

But the predicted impact doesn’t appear too terrible. J.P. Morgan has lowered its forecast for GDP growth over the entirety of 2013 to 1.9 percent, down from 2.1 percent. The bank also estimated that unemployment would be at 7.6 percent by the end of the year, down from its current 7.9 percent.

It’s in unemployment that the sequester will probably be felt the most. The budget cuts could conceivably cost the economy 750,000 jobs over the course of 2013 alone, according to Congressional Budget Office director Douglas Elmendorf.

Thursday, February 14, 2013

Keeping Retail Up

As you probably noticed from looking at your first paycheck in January, the payroll tax went up as a result of the fiscal cliff negotiations between the president and Congress. Most of us saw our real wages decline because of this. And that wasn’t the only negative effect: Some people feared that the loss in purchasing power would serve as a drag on the entire economy.
Fortunately, it hasn’t had a strong impact yet. Retail spending, which would really feel the impact of the lower paychecks, still rose 0.1 percent in January, despite the fact that most American’s real incomes declined slightly.
That figure is still down from the 0.5 percent increase we saw in both November and December, although those numbers were boosted by holiday spending. While we’d like to see it higher than 0.1 percent, at least it’s moving in the right direction.

Wednesday, February 13, 2013

Does This Bull Market Still Have Legs?

We have had a bull market for going on almost four years now, since the Standard & Poor's 500 bottomed out back on March 2009. It's getting to the point that some financial pundits are starting to wonder if the market is overheated, if it's time to pull back on stocks. But according to one key measure, this bull run may still have some legs. 

Consider that the price-to-earnings ratio - the ratio of a share price to that company's underlying earnings per share - of the S&P 500 is now at about 14.4. The long-term average for that figure is 15. If stocks were selling at exorbitant prices, we'd expect that number to be higher than the average.

That's exactly what happened during the dot-com era.  During the bull market that lasted from the 1980s to 2000, the S&P 500's P/E ratio rose from 7.7 to a staggering 28.6. Now that's a sign of an overheated market.

Tuesday, February 12, 2013

Looking Up

You probably remember that the Commerce Department’s estimate of GDP growth for the fourth quarter of 2012 came in at a disappointing negative 0.1 percent. That was just the first estimate, and we’re starting to see why these things get revised over time. The trade deficit for December was reported last week, and it was so unexpectedly small that it will in all likelihood push the next estimate of GDP into positive territory.

For the month of December, the U.S. trade deficit narrowed from $45.5 billion to $38.5 billion, meaning the gap between the amount of our imports and the amount of our exports fell by $7 billion. The biggest factor was that petroleum imports fell to their lowest level in more than a decade.

Exports add money to our economy, of course, while buying imported goods pushes dollars out of the country. When the next revision of fourth quarter GDP is released on February 28, don’t be surprised if it’s good news.

Monday, February 11, 2013

Off to a Good Start

We're off to a pretty good start in the stock market so far in 2013,. The Standard & Poor's 500 Index increased by 5.5 percent in the month of January, which is about half of a good return for an entire year.

But perhaps more importantly, that kind of performance bodes well for the rest of the year. Birinyi Associates looked at the past 50 years, and found only eight other years in which the S&P had risen by 5 percent or more in January. In the ensuing 11 months, not even counting that January increase, the market has added an additional 12.7 percent.

The one time it missed over that period, though, is kind of a cautionary tale. In 1987, the S&P was up 13.2 percent in January. But come October, there was a market crash, and as a result, over the remainder of the year, the S&P was down 9.9 percent. Let's hope we don't see that again.

Friday, February 8, 2013

Why Borrowing Matters

We generally look to consumer confidence surveys to take the pulse of the American economy, but it's probably better to look at what the nation is doing, as opposed to what it's saying. And according to figures released yesterday by the Federal Reserve, Americans are feeling more and more confident about their money.

Consumer borrowing rose in December for the fifth month in a row. The total amount of consumer debt jumped by $14.6 billion for the month, following a $15.9 billion rise in November. Much of that was for new car purchases; non-revolving debt, which is primarily auto loans and college tuition loans, increased by more than $18 billion in December.

This is the reason we measure consumer confidence to begin with, because we need people to spend money to keep our economy humming. If people have enough confidence to take out loans to buy bg-ticket items - well, that's a very positive sign.

Thursday, February 7, 2013

The Unlikely Jump at the Pump

Gasoline prices tend to go down over the winter, as Americans drive less in the colder months of the year. That's why the recent rise in gas prices has been so surprising: The cost of a gallon has risen by 18 cents nationwide in the past week. That's the biggest weekly gain we've seen in two years.

Here in New Jersey, we're right at those national averages. Whereas the national average for a gallon of gas is $3.51, a gallon of gas costs an average of $3.52 in New Jersey right now. A week ago, that same average was $3.39 a gallon.

Why is this happening? For one thing, oil prices are now as high as they have ever been. Although the price fluctuates quite a bit, for 2012, the average cost of oil was $112 a barrel, the highest annual average ever. Prices have stayed at those levels through the early part of 2013.

Wednesday, February 6, 2013

The Great Rotation

For years now, domestic stock funds have been hemorrhaging money as investors have sought the safer haven of bond funds. But now that seems to be turning around, in what some financial pundits are calling "The Great Rotation." After equity funds lost more than $350 billion in net outflows for 2012, they took in $29.9 billion in the first three weeks of January. By comparison, bond funds took in $28.1 billion over that same period, which shows that investors may finally be developing some confidence in this market.

Overall inflows into mutual funds of all types have reached a new high as well. Long-term funds took in $64.8 billion in the first three weeks of January; unless those numbers seriously reverse themselves, we will break the monthly record set back in May 2009, when net inflows into funds reached $52.6 billion.

Will any of this matter to investors? It could very well have a practical effect on the market. If there is more money being invested in the stock market, it stands to reason that that could help drive up stock prices.

Tuesday, February 5, 2013

The State of New Jersey

What do you make of New Jersey's economic well-being? It has been a rough time recently, especially given the effects of Sandy, but most residents still have a fair amount of confidence in the state. According to a Gallup poll released this week, New Jersey's self-reported economic confidence score, -21, is that same as that given to the nation as a whole.

Obviously, a positive number would be better than a negative, but none of the fifty states reported a positive figure for economic confidence, although the District of Columbia did. The worst reporting from among the 50 states belongs  to West Virginia, which reported a -42, or twice as bad as New Jersey.

Maybe the best news for the Garden State is that the number shows a long-term trend of moving in the right direction. Back in 2008, our economic confidence reading was at a dismal -53, but it has improved in three out of the four years since then.

Monday, February 4, 2013

Super Bowl Fallout

Did you bet on the Super Bowl? If so, I hope you put some money down on the Ravens - or even better, on there being a power outage in the middle of the game. The odds on that must have been pretty long.

If you did make a friendly bet, you're not alone. According to the Wall Street Journal, 40 percent of all Americans have bet on the big game at one point or another. The most common bet was between $1 and $25 - 60 percent of those who had placed a bet said they had lost that amount.

Sixteen percent of those who had placed a bet claimed to have won $100, while just 7 percent said they had lost a $100 bet.  Maybe the Journal should have also asked how many people had ever lied about the amount of money they'd won betting on the Super Bowl.

Friday, February 1, 2013

The Jobs Report Looks Backward

In contrast to the disappointing GDP figure released earlier in the week, the January unemployment figures released this morning by the Bureau of Labor Statistics show the economy to be continuing along as it has been for months now. We added 157,000 new jobs in January, and the unemployment rate remained unchanged at 7.9 percent.

Perhaps more significant is that the numbers for the previous two months were revised upward significantly. December's new job output, previously reported at 155,000, is now thought to have been 196,000, and the November jobs figure has been revised from 161,000 to 247,000.

Those two monthly revisions were enough to make a significant change to the overall new jobs rate of 2012. Initially, just after the year ended, the BLS reported that the economy had added 153,000 new jobs per month over the course of the year. But today's revisions mean that the number is now being reported as 181,000 new jobs per month.