Monday, March 31, 2014

What to Do With All This Cash?

One of the most positive signs for the economy remains the amount of cash that American corporations have on hand. The companies in the S&P 500 had $1.3 trillion in cash or cash equivalents at the end of 2013. That is not only an all-time record, but it's the sixth straight yearly high. As recently as 2008, the S&P 500 companies had $650 billion in cash - half of what they have now.

What could they do with all that cash? Eventually, one would think it would manifest itself in one of these ways:

  • Businesses could decide to expand, building new physical plants and hiring more workers. In addition to making the business grow, this would also help the American economy grow.
  • Corporations could institute share buybacks. The upshot of this is that there are fewer shares then outstanding in the market, which drives the price of each share up.
  • Stocks could pay increasingly large dividends. Dividend-paying stocks have become more prevalent in recent years; more than 400 of the 500 stocks in the S&P index now pay dividends, which is a record high. 

Friday, March 28, 2014

New Jersey's Bang for the Buck

Depending on how you look at it, New Jersey is either fiercely independent or getting ripped off by the federal government. A new analysis from the site Wallet Hub shows that our state gets back just 88 cents for every dollar it pays to the federal government, which is tenth from the bottom on the list of all 50 states. The absolute lowest state, Delaware, gets back just 50 cents on the dollar.

We're even lower in the number of federal employees per capita, ranking sixth on that scale. Connecticut is at the top of that list, while Hawaii, surprisingly enough, boasts the highest percentage of federal employees (outside of the District of Columbia).

Which state gets the most of its money back from the federal government? That would be South Carolina, which gets a whopping $7.87 for every dollar it sends to Washington.

Thursday, March 27, 2014

The Industry Census

Every five years, the U.S. Census Bureau conducts an economic census, and it has just released the one from 2012 - looking back at five of the most eventful years in America's economic history. The biggest winner over this period has been the oil & gas industry. Since 2007, oil & gas revenues have risen by 34 percent, while employment in the industry is up 24 percent.

That's the good news, but there's plenty of bad news as well. America lost a whopping 2.1 million jobs in manufacturing during the period; the retail industry lost 778,000 jobs and 65,000 stores. The financial sector also took a beating, losing 390,000 jobs, while revenues fell overall by $137.12 billion.

The biggest employer among the industry sectors may come as a bit of a surprise: It's the health care and social assistance industry, which employs 18.6 million people. That figure rose by 11 percent from 2007 to 2012.

Wednesday, March 26, 2014

Raises in the States

Did you get a raise last year? You probably would have if you lived in North Dakota. Fueled buy the natural gas boom there, the average North Dakotan saw his or her income rise by 7.6 percent last year, according to figures released by the Commerce Department yesterday. The national average income increase was a more modest 2.6 percent.

But here in New Jersey, the increase was just 2.2 percent. That ranked only 33rd among the 50 states. The absolute lowest was in West Virginia, where the average income rose by just 1.5 percent.

All told, though, New Jersey still looks pretty good, with a per capita income of $55,993 for 2013. That ranks fourth in the nation, behind only Connecticut, North Dakota and Massachusetts. Last in that category: Mississippi.

Tuesday, March 25, 2014

Why Active Management Is Returning

One very important aspect of the market that savvy investors are watching is the degree to which correlations have been coming down. When the bull market was first getting going, all stocks tended to be affected to a similar degree; a rising tide lifted all boats. Now, though, stocks are less correlated with one another, which means that it takes an expert stock picker to succeed in the market.

That's one reason we're seeing statistics like these: Only 36.7 percent of the benchmarks beat active managers in mid-cap growth funds last year, according to the S&P Indices Versus Active Funds U.S. Scorecard. Only 42.6 percent of the benchmarks beat active managers in large-cap growth funds last year.

We're entering a new era where those passive benchmarks aren't providing the same performance as active stock managers. That's one reason Echelon Wealth Strategies continues to be focused on active management for our clients.

Monday, March 24, 2014

Churning in Hedge Funds

It has been a strange time for hedge funds these past few years. With the stock market offering strong returns, most investors don't feel the need for the higher fees and higher risk of a hedge fund. Indeed, a total of 904 hedge funds closed up shop and liquidated their funds in 2013, which was the highest such figure since 2009.

Of course, new hedge funds are springing up all the time, but even there the figures are dropping. A total of 1,060 new hedge funds opened last year, but that was the smallest such number since 2010.

In the face of all that churning, the successful hedge funds are still going strong. In fact, the entire hedge fund industry controlled $2.63 billion at the end of last year. That was up 17 percent from the prior year. The strong hedge funds, it seems, are still getting stronger.

Friday, March 21, 2014

Springtime for Stocks

Today is the first full day of spring, and while many of us are looking forward to emerging from what has been a long and trying winter, investors are asking themselves: How do stocks do in the springtime? Fortunately, the people at Bespoke Investment Group like to answer these very questions.

And the answer in this case is: Very well. Not as well as they do in the fall, which is historically the best season for stocks, but pretty well nevertheless. Over the last 20 springs, the S&P 500 has returned an average of 2.54 percent during the season – not as strong as fall’s 3.76 percent, but better than winter’s 2.06 percent.

Most of all, though, investors want to make some money before the summer doldrums come in. Over the past 20 years, the S&P 500 has gone virtually nowhere during the summer, returning an average of 0.05 percent. That’s one more reason to be glad it’s spring.

Thursday, March 20, 2014

The Latest From the Fed

The Federal Reserve, in some respects, didn’t change any of its policies in the meeting that ended yesterday. As expected, it shaved another $10 billion off its asset-purchasing plans, bringing the monthly total of its bond buying down to $55 billion starting in April.
One slight change, though, was that the Fed no longer says that it will consider raising interest rates once the unemployment rate reaches 6.5 percent, as Ben Bernanke claimed more than a year ago. Unemployment is now at 6.7 percent, and could officially drop to 6.5 percent as early as the first week of April, when the next set of figures is released.
The Fed has clearly decided that that is too soon, that this economy isn’t strong enough yet to raise interest rates. Indeed, according to today’s Fed announcement, most Fed officials don’t foresee an interest-rate hike until 2015.

Wednesday, March 19, 2014

Confidence in Retirement

American workers are getting more confident about their retirement, according to the newly released annual Retirement Confidence Survey. More than half of all those surveyed – 55 percent – report that they feel confident about their ability to retire comfortably.

But that confidence isn’t very strong. Only 18 percent of those surveyed said they were “very confident” about retirement. Even that number is higher than it’s been in recent years – it was at 13 percent in 2013. Before the bottom fell out of the market, as many as 27 percent of American said they were very confident about their retirement in 2007.

Not surprisingly, the most confident group was the wealthiest. But among all income cohorts, by far the most confident group was those who had a solid, well-established retirement plan in place.

Tuesday, March 18, 2014

Profits on the Up

One of the factors that has fueled the long bull market in stocks has been the increasing growth in corporate profits. The earnings reports for the S&P 500 are virtually all in for the fourth quarter of 2013, and the numbers are record-setting: Corporate profit margins reached a whopping 9.8 percent for the quarter, according to FactSet.

Records for profit margins date back to 1994, and over that time span, the current figure would be a new record. Given the way corporate profit margins have been in recent decades, it is also likely an all-time high. The average profit margin since records have been kept is 7.5 percent.

Could that number go even higher? FactSet has analyzed revenue and income forecasts for the coming year, and their estimate is that profit margins could top the 10 percent milestone sometime this summer.

Monday, March 17, 2014

The Shift Away from Foreign Funds

The American stock market has been on a historic run for the past five years. Meanwhile, foreign stocks have hit a very bumpy time, especially in emerging markets. But one of the strange things about recent investing trends is how slow investors have been to react to these things. Recent figures show, though, that that has started changing.

In 2013, while the S&P 500 was increasing by nearly 30 percent, foreign stock funds still took in roughly three times as much as U.S. stock funds, by a margin of $146.2 billion to $48.5 billion. This January, the margin was closer to two to one.

And now that we have figures for February, we can see that the gap has almost disappeared. That month, foreign stock funds took in $10.9 billion in new assets, while domestic ones took in $9.0 billion. It will be interesting to see if American funds have taken the lead by March.

Friday, March 14, 2014

The Decline in ETFs

Here's one shift that's been quietly going on in the stock market in recent years: Exchange-traded funds, which were once the hottest thing in investing, have been losing some of their luster. After peaking at nearly 20 percent of all market trades in 2009, ETFs now constitute about 16.5 percent of all equity volume.

ETF volume tends to increase when the markets are in turmoil. In 2011, when the Eurozone crisis was raging and the S&P 500 was flat on the year, ETF trades ticked upward to 18.2 percent of all volume. That dropped back down to 16.7 percent last year, and has continued to decline this year.

The movement away from ETFs also serves as a signal that stock-picking is coming back into vogue. Correlations among asset classes are coming down, meaning that the type of active management that Echelon Wealth employs is now becoming even more valuable.

Thursday, March 13, 2014

Are We in a Bubble?

After five years of a stock market rising almost continuously, should investors start to be worried that we're in the midst of a bubble? Probably not, according to research from Bespoke Investment Group. This market may be a bit overvalued, but it's a long way from bubble territory.

The most common way to determine if a stock is overpriced is through its price-to-earnings ratio. Bespoke found that nine out of the ten largest companies in the S&P 500 are all now trading at P/E ratios of less than 20. In March 2000, at the height of the dot-com bubble, all ten of those companies traded at ratios over 20 - even though most of the highflying tech stocks were listed on the Nasdaq index.

Those ten biggest S&P companies now have an average P/E of 16.1. Back in March 2000, that same figure was 62.6. These are very different times for the stock market.

Wednesday, March 12, 2014

China's Copper Ripples

The drop in copper prices yesterday was a good demonstration of how much impact the Chinese economy can have on the rest of the world. A new report showed that China's exports had declined last month by 18 percent, amid wider concerns about the slowing of China's growth.

China is the world's largest importer of copper, and the immediate impact was that copper futures fell, declining by 3 percent to reach their lowest level since July 2010. But copper stocks fell as well. Freeport McMoRan Copper & Gold, a Phoenix-based precious metals company, dropped more than 2 percent on the day.

Driven by the commodities slump and concurrent drops in oil prices, the S&P 500 also slid backward from the record high it had set last week. China is only the second-largest economy in the world, still far behind that of the U.S., but its impact is not to be underestimated.

Tuesday, March 11, 2014

Fannie and Freddie on the Rebound

Fannie Mae and Freddie Mac were considered two of the real villains in the housing bubble that helped precipitate both the meltdown in our financial sector and the Great Recession. The role of those quasi-governmental entities was to buy up mortgages in great numbers, thus encouraging lenders to offer riskier and riskier loans.

The two institutions eventually required government aid totaling $187.5 billion to backstop all the bad loans they had acquired, and were officially taken over by the U.S. government in 2008. But now, White House analysts are reporting, Fannie and Freddie could return $179 billion in profits to U.S. taxpayers over the next ten years. The two have already refunded more than $200 billion to the U.S. Treasury.

It's nice that we won't lose any money directly on Fannie and Freddie, but it hardly makes up for the hardship caused by the recession. The total costs of that have been estimated at $6 trillion to $14 trillion.

Monday, March 10, 2014

The Bull Market's Big Winners

It was five years ago yesterday that the stock market hit bottom, and started on the bull run that we've been enjoying to this day. In the space of those five years:

  • The Dow Jones industrial average has risen by 151.3 percent
  • The S&P 500 has risen by 177.6 percent
  • The Nasdaq has risen by 241.8 percent
  • The Russell 2000 small-cap index has risen by 250.6 percent
  • Apple has risen by 538.2 percent
  • American Express - the biggest gainer among the Dow stocks - has risen by 782 percent
  • General Growth Partners - the biggest gainer in the S&P 500 - has risen by 7,700 percent 

Friday, March 7, 2014

The February Jobs Report

After the disappointingly low number of jobs added in December and January, the economy was back on track in February, according to the report released by the Bureau of Labor Statistics this morning. We added 175,000 jobs in February, which is not far off from the average of 189,000 jobs per month for the previous 12 months. The headline unemployment rate ticked up to 6.7 percent.

The poor numbers from the last two months got a little better in today's report, with both figures being revised upward. January's moved from 113,000 to 129,000, while December's was revised from 75,000 to 84,000. Both figures remained well below the yearly average, though.

The strongest sector for job creation was professional and business services, which added 79,000 jobs in February. That's up from its already-strong average of 56,000 new jobs per month added in that sector over the past 12 months.

Thursday, March 6, 2014

Weather Report

The Federal Reserve's periodic Beige Book, which assesses economic trends in various parts of the country, is dominated this time around by the one thing everyone has been talking about lately: the weather. The severe winter has been a pain for many of us personally, but it also dominated a lot of financial activity. According to one report, the new Beige Book mentions the word "weather" 119 times.

Not surprisingly, the impact was worst here in the Northeast. Eight out of the Fed's 12 offices reported that economic activity was expanding; two of the ones who didn't were New York and Philadelphia, which also cover, between them, the state of New Jersey. Both those offices blamed the weather for their economic slowdown.

The Philadelphia office also noted that mall traffic was down 40 percent over the Valentine's Day weekend, usually one of the biggest shopping times of the year. Meanwhile the New York office reported that gift card redemptions were very low, which could signal that spending will rebound when the weather does.

Wednesday, March 5, 2014

Dividends Around the World

We've talked before about how dividends have become such an important part of investing, with more than 80 percent of the stocks in the S&P 500 now offering them. But dividend investing is not confined to the U.S.; it's really a worldwide phenomenon. According to Henderson Global Investors, dividends around the world totaled more than $1 trillion in 2013.

Dividends have grown by an average of 9.4 percent worldwide over the past five years. Over that stretch, dividend payments have increased by 50 percent among North American companies - but by a whopping 107 percent among companies in emerging markets.

The leading country for those emerging-market dividends is China. Two Chinese companies - China Construction Bank and China Mobile - are now among the top six dividend payers in the world.

Tuesday, March 4, 2014

Signs of Life

There were two positive signposts for the economy that came out yesterday. First of all, consumer spending increased by 0.4 percent in January, a significant increase over December's figure of 0.1 percent. Households spending on services, apart from goods, increased by 0.8 percent - its biggest monthly rise since 1998. The Commerce Department also reported that incomes rose by 0.3 percent on the month.

Meanwhile, on the other side of the economy, manufacturing also rose sharply in the latest figures. February's manufacturing index, published by the Institute for Supply Management, rose to 53.2 in February, from 51.3 in January; anything over 50 is supposed to signal an expansion.

That's solid growth on both the supply and demand sides of the economy, and an excellent sign for the recovery. We will see another important number on Friday, when the February unemployment figures are released.

Monday, March 3, 2014

The Magic of March

Today is the first trading day of March, and if history is any indication, it might be a good month for investors. Since 1945, the S&P 500 has increased by an average of 1.3 percent during March. Only December at 1.8 percent and April at 1.5 percent have shown better historic results.

March's recent history has been even better than that. It was in March five years ago that the market hit bottom and began the rebound that has lasted to this day. Despite dropping for the first week of that month, the S&P rose an astounding 8.5 percent in March 2009.

From that point, the S&P 500 has risen in four of the past five Marches. The average increase over that time span has been more than 3 percent. Let's hope 2014 brings more of the same.