The Latest in Investment Scams

Have you ever been approached by someone offering a potentially fraudulent investment opportunity? According to a new survey from the Finra Investor Education Foundation, you probably have. Among the 2000 investors aged 40 and over they surveyed, fully 80 percent reported being given the chance to invest in something that smelled very fishy.

The sample pitch that Finra offered had investors getting 2 percent to 3.4 percent per day in a vehicle that lasted a minimum of 180 days, after which investors could pull their money out. That "2 percent a day" may sound modest at first blush, but it's outlandish when you consider that many assets currently pay out around 2 percent a year. When something sounds too good to be true, it almost always is.

It would be nice to report that it's mostly poorer, unsophisticated investors who fall for these kinds of schemes. But according to the Finra survey, it's the highest-earnings households who are most likely to fall victim to an investing scam.

How Would a Shutdown Affect the Markets?

As of next Tuesday, October 1^st, the federal government of the United States will cease to be funded, unless the Congress and the White House can come up with a plan to keep it going. Political considerations aside, a federal government shutdown could have serious repercussions on the markets as well, and investors ought to be prepared for the outcome. 

Or would it be as serious as all that? We’ve lived through government shutdowns before, back in the mid-1990s. S&P Capital IQ has dug up the S&P 500’s performance during those two shutdowns, and the impact doesn’t appear to have been strong. During the first one, from December 13, 1995, to January 10, 1996, the S&P dropped by 3.7 percent. But during the second one, from January 10, 1996, to February 12, 1996, the S&P rose by 10.6 percent. 

So there is no predictable consistent effect on stock prices. It appears as though investors know a shutdown will be a temporary issue, and simply go on about their normal business. 

The Wal-Mart Story

What moves markets? Sometimes, it’s not much more than rumors that may or may not be true. We saw a little bit of that yesterday, when the S&P 500 index was fighting a losing streak that dated back to last week, but was up as the end of the trading day neared.

 

Then Bloomberg News reported it had gotten its hands on an email sent from Wal-Mart to one of its suppliers, reading “We are looking at reducing inventory for Q3 and Q4.” The intimation that sales may be dropping made the market suddenly turn south, and the S&P, instead of posting a modest gain, ended up dropping 2 points.

But the whole story may have been over nothing. Wal-Mart later denied that it was trimming inventory for the latter part of the year. “We have thousands of buyers across thousands of categories,” a spokesman said. “We are increasing orders in some categories and decreasing in others." But even though everything may be hunky-dory at Wal-Mart, the afternoon’s damage had been done.

Movement in Manufacturing

Is America’s manufacturing sector on its way back? A recent survey from the Boston Consulting Group indicates that nearly 40 percent of U.S.-based manufacturing executives say they are either shifting some of their production back to the states from overseas, or are considering doing so. As recently as early 2012, a similar survey showed that more like 20 percent of manufacturing executives had those plans.

The manufacturing sector has a long way to go to get back to where it used to be. Employment in manufacturing reached a peak of 19.6 million in June 1979; it’s at just under 12 million at this point. Because of the overall growth of the economy, the percentage loss has been even greater, from 22 percent of all American jobs at the peak down to 8.8 percent now.

And those are good jobs that have been lost. The retail sector, which has added four times as many jobs as manufacturing since the end of the recession, pays its workers an average of $16.67 an hour, compared to $24.47 for manufacturing jobs.

The New Dow Debuts

Yesterday marked the first day of the new Dow Jones Industrial Average, with Nike, Goldman Sachs and Visa replacing Bank of America, Hewlett-Packard, and the old stalwart Alcoa, which had been part of the Dow since 1959. The changeover is intended to be as undisruptive as possible, with the new components being weighted to keep the Dow at precisely the level it had been with the old components.

The first day of the new Dow was not so positive: The index lost nearly 50 points. All three of the new Dow stocks were down, with Goldman Sachs and Visa being the biggest percentage losers among the 30 companies. On the other hand, only 11 Dow stocks advanced on the day.

There will be other, more subtle changes on the way. For one thing, Bank of America had been the Dow company with the strongest projected earnings growth over the coming year. So all of a sudden, the Dow’s collective earnings projection has dropped significantly.

Mortgage Movement

There were some very positive signs for the housing industry last week, starting with the fact that permits to build single-family homes reached their highest level since May 2008. With mortgage rates still at historic lows, mortgage lending has been booming as well. A new report from the Federal Reserve shows that mortgage origination reached a five-year high in 2012.

Part of that is the fact that we were starting from a very low base. There were 7.1 million mortgages originated in 2011, the lowest that figure had been in 16 years. The number jumped an impressive 38 percent in 2012, though, reaching a total of 9.8 million mortgages.

One thing driving that is refinancing existing mortgages. There were 6.6 million refinanced loans taken out in 2012, which was up 54 percent from 2011. That means about two-thirds of all mortgages in this country in 2012 were actually re-fis.

Reaching Four Digits

A long time ago, in the dot-com days, Priceline was one of the hottest stocks on the market. But when the bubble burst, Priceline lost 97 percent of its value in about a year and a half. After a decade or so of retrenching, it's back setting records: Priceline's share price has now  reached four digits, closing yesterday at $1000.62.

Priceline is the first stock on the S&P 500 Index to trade above $1,000, but there are other stocks at that level, including:

• Berkshire Hathaway, Warren Buffett's company, at $175,825
• Farmers & Merchants Bank of Long Beach, at $5,290
• Seaboard Corp., which is oddly enough a Kansas-based meat processor, at $2,805

Next to crash the party: Google, which is trading at $898.

Waiting for the Taper

There was some good news from the Federal Reserve yesterday afternoon, depending on how you look at it. Fed chair Ben Bernanke announced that they would not be tapering off their monthly bond purchases, which now consist of $85 billion worth of bonds bought every month. The purchases are generally seen as bolstering the markets as well as the larger economy.

On the other hand, the reason Bernanke gave for continuing the purchases was that the economy was still not strong enough to withstand their loss. He has given 7 percent unemployment as a gauge for when this economy is solid enough to stand on its own; we're currently at 7.3 percent.

But everyone realizes that the Fed will begin tapering off those asset purchases at some point, and reasonably soon. The question is, what effect will the loss of all those assets have on the market as a whole? We've explained the entire situation in a bit more depth in a new article on the main part of the Echelon Wealth Strategies Web site. Give it a read, and if you have any questions about it, feel free to give me a call.

Return of the IPO

The initial public offering for Twitter has gotten a lot of notice recently, as the highest-profile IPO since Facebook's flawed outing last May. But it's really at the forefront of a whole wave of IPOs, including such well-known names as Chrysler and Hilton. We've already seen 132 companies go public in 2013, after just 128 in all of 2012.

In part, that's because investors have begun to believe in the worth of newly public companies. Renaissance Capital, a firm that tracks IPOs, reports that the average return on those 132 new stocks has been 34 percent. That's a far cry from the IPO-mania of the late 1990s, but it also seems like a far more sustainable figure.

Even the much-maligned Facebook IPO has turned out all right. Although the stock lost half its value in the first few months of trading, it's now rebounded to the low 40s, well above the opening price of $38 a share.

Five Years After the Crash

As we noted last week, this weekend marked the fifth anniversary of the Lehman Brothers bankruptcy. Although the recession had technically started the previous November, that September was when the depths of the financial crisis really hit home. According to Gallup, Americans' economic confidence was already low before the crash, registering at -39 before the Lehman bankruptcy. But a month later, it had plummeted to -65. Today, that reading is still in negative territory, at -16, but it's well above where we were at the Lehman collapse.

Gallup's Standard of Living Index shows a similar trajectory. Standing at 25 before September 2008, it dropped to 12 immediately after the Lehman bankruptcy, but has since risen to 38, or much higher than it was five years ago.

But by some measures, we're still worse off than we were five years ago. In Septmeber of 2008, Americans reported spending an average of $113 on their daily consumer spending. The Lehman shock dropped that figure down to $85. Five years afterward, following a long and difficult recession, the figure has barely budged, at $86 per day.

The Market's Danger Zone?

We enter the last week of summer today. Are we also entering the danger zone for the stock market? An econometrician named Salil Mehta has analyzed the entire history of the Dow Jones Industrial Average, and found that the very worst days tend to happen in the autumn months.

Looking at the worst 1 percent of all trading days, Mehta found that the month with the highest number was October with 45. November was next with 43, then September with 33 and December with 30. Aside from those four months, the average number of disaster days for the other eight months of the year is just 17.9.

Within those dangerous months, the worst day would appear to be Monday. Nearly 30 percent of those bottom 1 percent trading days happen on a Monday. Mehta says all these figures are statistically significant.

The Dropping Price of Imports

Are we headed for a bout of deflation? The Labor Department reported yesterday that the price we paid for imports (excluding petroleum) over the past 12 months dropped by 0.9 percent. As recently as July of 2011, that same figure showed more than 5 percent inflation.

The biggest factor in that price drop has been Japan. Imports from Japan have dropped in price by 2.6 percent over the past year, as their political leaders have focused on devaluing the yen. Japanese import prices were steady as recently as six months ago, and showed about 3 percent inflation as of July 2011.

Will those lower import prices be reflected in lower prices overall? It might, but prices don't really have all that much room to drop further. The current annual inflation rate as measured by the Consumer Price Index is 1.9 percent.

Five Years Ago...

It was exactly five years ago that our nation's financial sector was in the process of melting down, a collapse that crystallized around the bankruptcy of the venerable investment bank Lehman Brothers. That triggered the panic on Wall Street, the sale and closing of several other old-line financial institutions, and was in large part responsible for the depth of the recession.

Lehman Brothers was one of the heaviest investors in subprime mortgages, which means they had bought up a great number of loans that were never likely to be repaid. Not only that, but they borrowed huge sums of money to buy those securities - by 2007 they had a ratio of 31 to 1 in terms of their equity versus the amount of their own money they had put down. So when those mortgages went bad, they went really bad for Lehman Brothers.

On September 9, 2008, five years ago this past Monday, when a deal for Lehman to be bought by a Korean bank fell through, its stock lost half of its value. For the remainder of that week, it searched for someone to buy up its assets, but no white knight was forthcoming. On September 15 - five years ago this coming Sunday - Lehman filed for bankruptcy, with debts of more than $600 billion. And the American financial landscape would never be the same.

The New Dow

The Dow Jones Industrial Average is going to look a little bit different from now on: The venerable index has shedded three of its most sluggish performers in favor of three more dynamic, contemporary-feeling stocks. Gone are Alcoa, Hewlett-Packard, and Bank of America. Coming in are Nike, Visa and Goldman Sachs. The change takes effect on September 20.

This could have a strong impact on the Dow's performance. The Dow is weighted by stock price, not market cap, which means that Visa and Goldman Sachs - both trading above $165 a share- will become the second- and third-most impactful stocks on the index. The three stocks removed were the three Dow components with the lowest share prices.

Hefty share prices are the reason important stocks like Apple and Google are not part of the Dow. Trading at more than $500 a share, each of them would throw the index completely out of whack.

Are the Baby Boomers Slowing America's GDP?

There has been much discussion lately about how the U.S. economy has been growing at subpar rates - the 2.5 percent for the second quarter is about as good as it gets lately. But many economists think that 3 percent ought to be the historic norm for the American economy.

A new paper out from a firm called Research Affiliates is disputing that notion. They propose that the America's postwar growth was fueled by demographics, primarily the development of the Baby Boom generation. "The implications are clear: Real GDP growth of 3 percent was the 'old abnormal'; it is not, and never was, "normal," the authors write.

Now that the Baby Boomers are aging, they're making much less of a contribution to the economy. "The average contribution to GDP growth becomes negative between 55 and 60," the authors argue. That means what we're seeing now may be totally normal. The entire paper can be found here.

Watching the Treasury Yield

The benchmark ten-year U.S. Treasury bond crossed an important milestone last week, when its yield climbed above 3 percent for the first time since July 2011. The rate had been higher than 3 percent for decades before falling under that level, bottoming out at 1.4 percent in July 2012. As recently as May 1, it was at 1.6 percent.

This could be seen as another sign that our economy is returning to some semblance of normal. In addition to being the flagship safe-haven vehicle for investors around the world, the Treasury yield is used as a benchmark for things like corporate loans and mortgage rates.

But the milestone was short-lived. After investors were unimpressed by Friday morning's jobs report, the Treasury yield crept back down below 3 percent, finishing the day at 2.94 percent.

August's Employment Report

The August unemployment report, out this morning from the Bureau of Labor Statistics, was very much in line with what we've seen recently: The economy added 169,000 jobs for the month, as compared with an average of 184,000 per month over the previous year. And as has been happening recently, the headline unemployment figure ticked down slightly, from 7.4 percent to 7.3 percent.

One key, and troubling, difference is that earlier months saw their jobs numbers revised downward. More often recently, we've been finding out that previous months were better than first reported. But June's figure was revised down from 188,000 to 172,000, and July's was revised down from 162,000 to 104,000 - a loss of 58,000 jobs in that month alone.

The sector of the economy generating the most jobs continues to be retail, reflecting the fact that Americans' personal spending habits appear to be growing. Retail created 44,000 jobs in August, and has now added 393,000 jobs over the past 12 months.

Cutting America's Oil Dependence

Cutting our dependence on foreign oil has been a key American goal for decades now, and new data suggests we've truly made a dent. The Energy Information Administration, a division of the Department of Energy, estimated that we imported a little less than 10 million barrels of oil a day in June of this year. That's down from more than 12 million barrels per day as recently as January 2011.

We've imported less than 10 million barrels a day in four of the past six months now, after having been above that 10 million figure every month since February of 1998. We're also exporting a lot more of the oil found here at home - that figure is up 50 percent over the past three years.

A big part of the reason for all this is that Americans have begun using less oil. From the early 1980s to the recession, the trend was toward more and more oil usage in this country, but it's finally started moving downward: After averaging more than 20 million barrels a day every year from 2003 to 2007, we're now down to around 18.5 million barrels a day.

Gallup Looks at the Consumer

It's an open question as to whether Americans are feeling more confident about this economy, but at any rate, they do appear to be spending more money. According to the results of a Gallup poll, Americans reported spending $95 per day in August, the highest that figure has been in five years.

The new figure hasn't been topped since September 2008, the month the financial sector collapsed, when Americans reported spending $99 per day. The number bottomed out in the summer of 2010, at $63 per day.

Still, Gallup also reports that Americans' economic confidence is not especially strong. After peaking at -3 in June - almost into positive territory - Gallup's poll on that measure has sagged back down to -14. On the other hand, that's up from where it started the year, at -21.

GDP Turns Upward

Some good economic news that passed somewhat under the radar last week: The gross domestic product for the second quarter was revised upward pretty sharply, from an initial reading of 1.7 percent up to 2.5 percent. That's more than double the growth we saw in the first quarter of 2013.

The biggest reason for the revision was that exports, which had initially been estimated to have been growing at 5.4 percent, are now thought to have grown at 8.6 percent. That kind of upward revision has been expected ever since the Commerce Department announced that June had been our best month for exports since September 2012.

Still, this is good news, not great news. The long-term average growth for the U.S. is 3 percent, so the revised number is still a bit below that. We haven't seen growth stronger than 3 percent since the first quarter of 2012.

Thoughts for Labor Day

“The dictionary is the only place that success comes before work. Work is the key to success, and hard work can help you accomplish anything.” ~ Vince Lombardi

“A hundred times every day I remind myself that my inner and outer life depend on the labors of other men, living and dead, and that I must exert myself in order to give in the same measure as I have received and am still receiving." ~ Albert Einstein 

“By working faithfully eight hours a day, you may eventually get to be a boss and work twelve hours a day.” ~ Robert Frost