Friday, May 30, 2014

Just Another Blip in GDP?

The bad economic news yesterday came when the Bureau of Economic Analysis released its second estimate of our first quarter GDP. Rather than its initial estimate of an increase of 0.1 percent, the BEA now thinks the economy shrank by 1.0 percent in the first quarter. That makes it the first down quarter for the economy since the first quarter of 2011, when the economy shrank by 1.3 percent.

That quarter proved to be a short-lived blip. It was the first quarter in which the economy had contracted since we emerged from the recession in the middle of 2009, and it was followed by 11 consecutive quarters of expansion.

Will this year's first-quarter figure be more of the same? It's impossible to see three years into the future, but in the near term, economists are still optimistic. The consensus is for GDP growth to rebound to about 4 percent in the current quarter, and to hold at about 3 percent for the rest of the year.

Thursday, May 29, 2014

Inflation and Stock Prices

Inflation has a complicated relationship with the stock market. When prices go up, that often means that stocks are one of the things that get more expensive. But a new study from S&P Capital IQ indicates that stock prices don't really suffer until inflation gets much higher than it's running now.

The research showed that since 1948, when inflation is running at between zero and 2 percent, the S&P 500 has increased by a monthly average of 1.1 percent. When inflation is at 2 percent to 4 percent, stocks slow a little, with an average monthly increase of 0.7 percent. With inflation at 4 percent to 6 percent, though, the S&P 500 drops an average of 0.7 percent per month. At a little higher inflation - 6 percent to 8 percent - the effect starts to mitigate. The S&P 500 still fell, but only by 3 percent.

The current consumer price index shows about 2 percent inflation, so we're not really in the danger zone yet. Any higher, though, and it could start to have an effect on stock prices.

Wednesday, May 28, 2014

The Mice That Roared

We've noted before that small-cap stocks have been struggling some this year. The benchmark Russell 2000 small-cap index is down more than 2 percent on the year.

But small caps are also where you find some of the most outrageous gainers in the market. Here are the Top Ten earners so far in 2014:

  1. Intercept Pharmaceuticals, up 251.66 percent
  2. Pernix Therapeutics, up 182.94 percent
  3. Intermune, up 169.72 percent
  4. Furiex Pharamceuticals, up 147.70 percent
  5. Maxwell Technologies, up 132.43 percent
  6. Retrophin, up 100.11 percent
  7. Pioneer Energy Services, up 93.01 percent
  8. TriQuint Semiconductor, up 92.45 percent
  9. RF Micro Devices, up 87.60 percent
  10. Horizon Pharmaceuticals, up 85.96 percent

Tuesday, May 27, 2014

The Falling Cost of Mutual Funds

The strong performance of the stock market over the past few years has resulted in a side bonus for individual investors. Not only have their assets been appreciating, but because fund companies have been doing so well, mutual fund fees have been dropping, too.

Ten years ago, the average fund's expense ratio was about 1 percent, meaning investors had to pay out $100 in expenses for every $10,000 in assets they had invested. That's now down to 0.74 percent, according to the Investment Company Institute.

In addition to expense fees, many mutual funds also charge what's known as a load, or an upfront charge to invest in that fund. Not surprisingly, those have been dropping, too. According to the ICI, the average load is down 75 percent since 1990.

Monday, May 26, 2014

Thoughts for Memorial Day

"A hero is someone who has given his or her life to something bigger than oneself." ~ Joseph Campbell

"The greatest glory of a free-born people is to transmit that freedom to their children." ~ William Havard

"Sometimes when you sacrifice something precious, you're not really losing it. You're just passing it on to someone else.”  ~ Mitch Albom

Friday, May 23, 2014

What the Hedge Funds Are Buying

Hedge funds still have kind of a mystique in this country, as they are often perceived to be run by brilliant investors who are able to make calls that stodgy mutual funds cannot replicate.That reputation persists despite the fact that hedge funds are flat on the year so far, while the S&P 500 has returned roughly 2 percent.

But if you're interested in what the hedge funds are doing, Goldman Sachs has analyzed the assets of 777 hedge funds. They determined that the top ten stocks held by these funds are as follows:

  1. Google
  2. Apple 
  3. General Motors
  4. AIG
  5. Time Warner Cable
  6. American Airlines
  7. Citigroup
  8. Microsoft
  9. Hertz
  10. Micron Technology

Thursday, May 22, 2014

Small-Business Owners Love Their Work

Would you do your career all over again if you had the chance? If you're a small-business owner, you probably would answer yes to that question. A new Gallup survey found that 84 percent of all small-business operators would still want to open their business if they had it to do over again. Surprisingly, this number didn't change much when the recession was at its peak. Gallup has been asking this question of small-business owners since 2003, and the figure has never dropped below 78 percent.

The most important factor by far has been the independence that it provides the owners. The number of respondents citing "be my own boss" as the most satisfying thing about running their own business is 42 percent - more than twice as many as the next highest answer, "job satisfaction/sense of accomplishment."

What's the biggest challenge for these people? While nothing on the negative side stood out as much as independence, the clear top answer was securing accounts and generating revenue, cited by 23 percent of the small-business owners.

Wednesday, May 21, 2014

The Cost of the Housing Crisis

Why did America's first-quarter growth come in at such a disappointing rate? One theory is that after the housing bust, we've started living in much smaller quarters. Single-family home construction is still 64 percent below its 2006 peak, but multi-family housing - mostly apartment buildings -  is back to peak levels.

While 95 percent of simgle-family homes are built to be owned, 90 percent of multi-family units are built to be rented. That not only reduces the amount of money Americans are spending on housing, but it reduces the amount they're spending on household items as well.

Indeed, spending on such items as appliance and window treatments has slowed greatly since the recession. Combined with lowered spending on housing, that has proven to be a drag on overall GDP.

Tuesday, May 20, 2014

Where the Debt Is Coming From

The aggregate amount of Americans' household debt rose in the first quarter by $129 billion. That marked the third straight quarterly increase, and raised our total indebtedness to $11.65 trillion. Ordinarily, this would be a sign of money being injected into the economy, and a positive signal for our economic future.

But a deeper look shows that this might not be the case. Student loan balances are te fastest-growing category of debt, up $31 billion in the first quarter. Mortgage balances were also up, but that was primarily a result of fewer people being in foreclosure.

The category with the most direct impact on the economy, credit card debt, actually dropped in the first quarter. Credit card balances were down $24 billion and are now at their lowest level since 2002. It seems that when it comes to personal debt, Americans are still inclined to play it safe.

Monday, May 19, 2014

The Good News From Earnings Season

The good news for the first-quarter earnings season – which ended last week – was that more companies upgraded their earnings guidance than lowered it. In other words, most companies indicated prior to their earnings reports that their status was likely to be better than originally thought. That’s the first time a majority of reporting companies have done that since the third quarter of 2011.

That's one main reason that earnings, on the whole, surprised on the upside. As of April 1, the Wall Street consensus was that the S&P 500 would report earnings growth of just 0.4 percent. In the end, the 500 companies in the index reported growth of 3.4 percent.

There was one dark spot: the financial sector, which was the only one of the ten industry sectors in the S&P 500 to do worse than expected. Back on April 1, the consensus was that the financial would report a 2.9 percent drop in earnings growth.  By the end of earnings season, the actual number came in at a drop in earnings growth of 7.8 percent.

Friday, May 16, 2014

The Big Picture

Three key pieces of macroeconomic data came out yesterday that could be significant for America’s prospects:

  • The consumer price index increased  by 0.3 percent in April. It’s the biggest monthly jump for inflation in almost a year, and comes on the heels of a 0.2 percent increase in March. 
  • New jobless claims dropped to 297,000 in the week ended May 10. That was the lowest number for that weekly figure since May 2007 – or six months before the recession even officially started.
  • Industrial production in the U.S. dropped unexpectedly in April. Output at factories, mines and utilities fell by 0.6 percent on the month, although March’s figure was revised upward to a 0.9 percent gain. Will that be a headwind going forward?

Thursday, May 15, 2014

Investors Losing Their Optimism

After the huge year put up by the markets in 2013, investors came into this year full of further enthusiasm. A survey of investors conducted by the American Association of Individual Investors just before the beginning of this year found that 55.1 percent of them expected stocks to rise over the next six months.

Stocks have risen in the ensuing period - the S&P 500 is up by about 2.5 percent over that time frame - but not by enough to reassure investors. The number of optimistic investors has dropped to 28.3 percent in the most recent version of that survey. For the sake of reference, the average figure in this survey since 1987 has been that 38.9 percent of investors tend to feel bullish at any one time.

It's also worth noting that many professional investors treat this as a contrarian indicator.  Individual investors tend to get the market's moves wrong more than they get it right, so investor pessimism is often considered a positive sign.

Wednesday, May 14, 2014

Small Business' Long Climb Back

The nation's small business operators are showing some signs of life: The Small Business Optimism Index, a monthly survey conducted by the National Federation of Independent Business, reached a post-recession high in April. Where 100 is considered the average, the index crossed above 95 for the first time since 2007.
On the other hand, the longer-term reading of this index shows just how devastating the recession was to small businesses. The current reading of 95.1 is still below the long-term average, of course, and the reading had only dipped below 95 for one single month between 1994 and 2007.

But at least things are moving in the right direction. The small business owners reported optimism on seven of the index’s ten markers, with the strongest being “expect economy to improve” and “earnings trends.”

Tuesday, May 13, 2014

Summer Doldrums

The end of the school year is coming up rapidly, and for those of us with kids in high school, many of them will be out looking for a summer job. But there will be fewer of them than in years past. According to data from the Bureau of Labor Statistics, only about 40 percent of all people aged 16 to 19 had a summer job last year.

That's a huge change from summers past. A generation ago, in 1978, roughly 72 percent of all teens held down a summer job. As recently as the late 1990s, the percentage was about 60 percent.

It's a combination of a couple of things. With a still-sluggish economy, the teen unemployment rate remains above 20 percent. But many more of them simply aren't interested in working. Of the more than 11 million teens who didn't work last summer, only 8.3 percent said they wished they had a job.

Monday, May 12, 2014

A Silver Lining for Small Caps?

The biggest drag on the overall stock market this year continues to be the small-cap sector. While the S&P 500 is up a modest 1.6 percent on the year, the tech-heavy Nasdaq index is down by 2.5 percent. The Russell 2000 small-cap index has performed even worse, losing 4.9 percent on the year.

And those losses have accelerated in recent weeks. Nearly all of the Russell 2000's underperformance this year has taken place in the last month. It has lost 4.6 percent of its value since April 9.

If there's an upside to this, it's that lower stock valuations may lead to an increase in mergers and acquisitions, which tend to be very good for investors. In the first quarter of this year, there were 54 M&A deals worth more than $1 billion, which is up from 37 in the year-earlier period.

Friday, May 9, 2014

Making It on Your Own

The recession gave rise to a lot of people going out on their own and forming sole proprietorships after having lost their jobs working for someone else. And many of these micro-businesses are doing quite well. According to the Census Bureau, more than 30,000 one-person companies earned more than $1 million in 2012.

Some 1900 of these business earned between $2.5 million and $5 million. Another 386 topped the $5 million mark. The number of businesses in that earnings range has risen by roughly 10 percent in the space of one year.

Of course, there are also a lot of these businesses that never make anywhere near that much. The biggest income category for one-person firms is the $10,000-to-$25,000 range; there are 5.7 million sole proprietorships who fall into that category.

Thursday, May 8, 2014

The 401(k) Piggy Bank

During the frenzy of the housing bubble, in the middle part of the previous decade, many homeowners turned to home-equity loans in order to get some quick cash. Rapidly rising home prices made that very easy to do, but with the collapse of the housing market in 2008, it soon became out of fashion. Since they peaked in 2007, the nation's total amount of home-equity loans has dropped by 38 percent, according to the Federal Reserve.

What has replaced the home-equity loans as a source of ready cash? Unfortunately, it's the 401(k). In 2011 - the most recent year for which we have figures - the IRS collected $5.7 billion in penalties for early withdrawals from 401(k)s. Since the penalty is 10 percent, that means we took out a collective $57 billion from our 401(k)s.

A total of 5.7 million tax returns paid penalties for early 401(k) withdrawals in 2011. Adjusted for inflation, such withdrawals have increased by 37 percent since 2003. That's a shame given how many people haven't saved enough for retirement in the first place.

Wednesday, May 7, 2014

The 54-Day Rule

Are you planning to fly somewhere for your summer vacation this year? If so, it's probably time to buy your airline tickets. The Web site has analyzed more than a billion possible combinations of flights and lead times, and determined that the optimal point at which to book your flight is 54 days in advance.

It may be surprising that there was an upper limit on how far in advance you need to book, but CheapAir looked a lot further than those 54 days. They tested everything up to 320 days, but nothing worked better than 54. Earlier than that, the airlines usually don't bother to offer fare sales.

Some people believe that by waiting till the last minute, the airlines will offer cheap fares for unsold seats, but CheapAir found that that's a myth. The absolute worst time to buy a seat, the research showed, was always within 14 days of your flight.

Tuesday, May 6, 2014

Stirrings of Inflation

Are we starting to see the stirrings of higher inflation? Commodity prices for many consumer goods are on the rise, according to the latest ISM Non Manufacturing Report. According to its latest monthly survey, the price of beef, bacon, coffee, dairy products, paper and plastic are all on the rise.

The survey asks respondents about 22 different categories of commodity, and whether those prices are rising or falling. April's survey found that 18 items were rising in price while only four were falling. That's the highest percentage of rising commodities this survey has found in two years.

Gasoline prices have also been rising - but not by as much as normal. The usual pattern is for gas prices to rise from January through May and stay elevated over the summer. The cost of a gallon of gas has increased by 10.6 percent so far this year, but that's less than half the usual increase of 21.6 percent for the first five months of the year.

Monday, May 5, 2014

Retirement Investors Move to Stocks

Investors are showing a renewed confidence in the stock market by turning over more and more of their retirement assets to equities, according to a report in the Wall Street Journal last week. Stocks made up 67 percent of the contributions into retirement portfolios in March. That's the highest that figure has been since March 2008, shortly after the recession had officially begun.

The difference has been pretty remarkable. As of March, the average 401(k) was made of 66 percent stocks. In February 2009, that same number was just 48 percent.

A separate study shows how much investors have moved away from so-called safe havens. The percentage of assets allocated to bond funds and money market funds in IRAs is just 25 percent now, the lowest that number has been since 2007.

Friday, May 2, 2014

April's Good News

After the disappointing GDP number earlier in the week, we've got a stunner on the other side of the ledger this morning with the release of April's unemployment report. According to the Labor Department, the economy added 288,000 new jobs in April, which is the most in any single month since January 2012.

The headline unemployment rate took a huge dive, from 6.7 percent down to 6.3 percent. That puts unemployment at its lowest point since September 2008 - the month that the financial crisis reached a flashpoint, with the Lehman Brothers bankruptcy.

The industry report was very broad-based, with big gains in professional and business services (75,000 new jobs) and retail (35,000 new jobs). No segments reported significant losses. And February and March's job numbers were both revised upward as well. All in all, it's the most positive jobs report we've seen in a while.

Thursday, May 1, 2014

Mortgages Hit a Wall

The mortgage market may be slowing down, although not as a result of any sort of trouble in the housing market. Primarily because of rising interest rates, as of the first quarter of 2014, mortgage lending has declined to its lowest level in 14 years. The average 30-year fixed mortgage rate has climbed from 3.6 percent last May to its current rate of 4.5 percent.

The drop in mortgage issuance has happened fairly quickly. Mortgage loans from January to March were down 23 percent from the fourth quarter, and down a whopping 58 percent from the year earlier.

This isn't really an indictment of the housing market per se. Loans for home purchases have been virtually flat from the year-earlier period. But what has happened is that mortgage refinances, which were so hot when interest rates were at historic lows, have basically dried up.