New Directions

December 28th, 2014

Emergency Plan

Let’s say you have $60 invested in the stock market.  You have $30 invested in bonds and $10 sitting in your savings account, for a total of $100.  This is essentially a 60/40 stock/bond mix. You do not rely on your investments for current income.

Some crisis unfolds, sending shock waves through global markets.  Within a month, the stock market loses 30%.  Bonds have gone up 10% as investors flee to safety.  Financial soothsayers are predicting further stock losses, perhaps as much as 50%.  Others are saying that the market has bottomed.

Your stock portfolio has lost $18 (30% of the $60).  Your bond portfolio has gained 10% or $3.  Your portfolio is now valued at $42 stocks, $33 bonds, $10 savings, a 50/50 mix of stocks/bonds.

Now, let’s add some historical context. From 1968 to 1982, a period of fourteen years, there was no change in the SP500.  From 1982 to 2000, the SP500 rose 1400%.  Then from 2000 to early 2013, almost thirteen years, there was no change in the SP500.  Yes, it’s only been a year and a half since the market regained those levels of 2000.

So, what would you do?  Do you:

A)  Invest the $10 in savings to bring you back closer to your original allocation mix of 60/40 stocks/bonds.

B) Stick to allocation goals.  Keep the $10 tucked away in savings for emergencies, sell some bonds and buy stocks to get closer to your allocation goals.

C) Change your allocation mix.  Cut your losses by selling the stocks you own and buying the better performing bonds.

D) Shrug and make no changes.  Turn on the game and order a pizza. The stock market will rebound in due time and automatically rebalance your portfolio on its own.

E)  Freeze, not knowing what to do.  Yes, not knowing what you would do is a game plan, a choice.  Perhaps its not the best plan but it is often one chosen as the default.

Now, run that same scenario, changing only one thing. You rely on your investments and savings for half of your current income.  Now what do you do?

Was the past year and a half the beginning of an eighteen year run up in prices similar to the 1982 – 2000 period?  Could the SP500 index, currently trading near 2100, be valued at 21000 (1500 * 1400%) in 2032?  Maybe.  Could 2014 be the last year in the previous flat cycle so that the market drops 25% to the 1500 level of 2000 and 2007?  Maybe.

The third estimate of 3rd quarter GDP growth was a strong 5% on an annualized basis, more than offsetting the weak 1st quarter of this year. On a more sobering note, it is only in the past six months that per person GDP has firmly surpassed 2007 levels.
GDP is a measure of tradeable goods and services in an economy.  There is much important human activity that is not measured in GDP so it is far from perfect.  If you want perfect, go to the universe next door. Per person GDP growth below 1% causes concern among traders, money managers, economists and policy makers.  This year per capita growth is a healthy 2% – not robust but respectable.  
Contributing to GDP growth in the third quarter was a 4% yearly increase in federal government spending, more than double the rate of inflation.
Monday’s meeting of the OPEC members left little doubt that Saudi Arabia is content to let the price of oil fall as low as natural supply and demand might take it.  They said they would not consider production cuts until oil went as low as $20 a barrel, about a third of what oil is currently trading at, and a fifth of its price in 2013.  This rhetoric was aimed directly at two non-OPEC members, the U.S. and Russia, warning both countries that the Saudis intend to keep their leadership position in the international oil market.
Missouri was the first state to report an average price per gallon of gas that was lower than $3.  Others are sure to follow.  A few weeks ago an EIA administrator testified before Congress, revealing a number of dramatic shifts in U.S. oil production, consumption and import.  Once the largest importer of petroleum products, the U.S. is now the world’s largest exporter.  Despite falling oil prices, the EIA expects production to increase 10% in 2015.  

Merry Christmas

December 21, 2014

In preparation for today’s solstice, the market partied on in a week long saturnalia.  The week started off on a positive note.  Industrial production increased 1.3% in November, gaining more than 5% over November of 2013.

Capacity utilization of factories broke above 80%, a sign of strong production.  Production takes energy.  I’ll come to the energy part in a bit.

The Housing Market Index remained strong at 57, indicating that builders remain confident.  Tuesday’s report of Housing Starts was a bit of a head scratcher.  After a strong October, single family starts fell almost 6%.  Multi-family starts fell almost 10% in October, then rebounded almost 7% in November.  Combined housing starts fell 7% from November 2013.

The market continued to react to the change in oil prices.  For the big picture, let’s go back a few years and compare the SP500 (SPY) to an oil commodity index (USO).  For the past five years, USO has traded in a range of $30 to $40, a cyclical pattern typical of a commodity.  In October, the oil index broke below the lower point of that trading range.

On Tuesday, oil seemed to have found a bottom in the high $50 range.  USO found a floor at $21, about a third below its five year trading range.  Beaten down for the past three weeks, energy stocks began to show some life (see note below).

Encouraging economic news helped lift investor sentiment on Tuesday morning. Some bearish investors who had shorted the market went long to close out their short positions. Growth in China was slowing down, Japan was in recession, much of Europe was at stall speed if not recession and the continued strength of the U.S. dollar was making emerging markets more frail.  While the rest of the world was going to hell in a hand basket, the U.S. economy was getting stronger.  Thee Open Market Committee at the Federal Reserve, FOMC, began its two day meeting and traders began to worry that the committee might react to the strengthening U.S. economy with the hint at an interest rate increase in the spring of 2015.  This helped sent the market down about 2% by Tuesday’s close.

Wednesday’s report on the Consumer Price Index (CPI) was heartening.  Falling gas prices were responsible for a .3% fall in the index in November, lowering inflation pressures on the Fed’s decision making about the timing of interest rate hikes.  The core CPI, which excludes the more volatile energy and food prices, had risen 1.7% over the past year, slightly below the Fed’s 2% target inflation rate.  Traders piled back into the market on Wednesday ahead of the Fed announcement Wednesday afternoon.  Back and forth, up and down, is the typical behavior when investors are uncertain about the short term direction of both interest rates and economic growth.

The Fed’s announcement that they would almost certainly leave interest rates alone till mid-2015 gave a further 1% boost upwards on Wednesday afternoon.  Twelve hours later, the German market opened  up at 3 A.M. New York time.  Early Thursday morning, the price of SP500 futures began to climb, indicating that European investors were reacting to the Fed’s decision by putting their money in the U.S. stock market.  Those of you living in the mountain and pacific time zones of the U.S. might have caught the news on Bloomberg TV before going to bed.  Maybe you got your buy orders in before brushing your teeth and putting your nightgown on. Very difficult for an individual to compete in a global market on a 24 hour time frame.  On Thursday, the market rose up as high as 5% above Wednesday’s close, before falling back to a 2.5% gain.

Still, a word of caution.  Both long term Treasuries, TLT, and the SP500, SPY, have been rising since October 2013.

As long as inflation remains low and the Fed continues its zero interest rate policy (ZIRP), long term Treasuries and stocks will remain attractive.   Something has to break eventually.  ZIRP  helps recovery from the aftermath of the last crisis but helps create the next crisis.  Abnormally low interest rates over an extended period are bad for the long term stability of both the markets and the economy.

Sale – Energy Stocks – Limited Time Only

(Note: this was sent out to a reader this past Tuesday.  Energy stocks popped up 4 – 5% the following day, a bit more of rebound than I expected. The week’s gain was almost 9% and the ETF closed above its 200 week average.)

As oil continues its downward slide, the prices of energy stocks sink.  XLE, a widely traded ETF that tracks energy stocks,  has dropped below the 200 week (four years!) average.  (A Vanguard ETF equivalent is VDE).  Historically, this has been a good buying opportunity. In the market meltdown of October 2008, this ETF crashed through the 200 week average.  A year later, the stock was up 38% and paid an additional 2% dividend to boot.  Let’s go further back in time to highlight the uncertainty in any strategy. The 2000 – 2003 downturn in the market was particularly notable because it took almost three years for the market to hit bottom before rising up again.  The 2007 – 2009 decline was more severe but took only 18 months. In June 2002, XLE sank below its 200 week average.  A year later, the stock had neither gained nor lost value. While this is not a sure fire strategy – nothing is – an investor  is more likely to enjoy some gains by buying at these lows.


Emerging Markets Stocks

Also selling below the 200 week average are emerging market (EM) stocks.  These include the BRICs (Brazil, Russia, India, China) as well as other countries like Mexico, Vietnam, Turkey, Indonesia and the Philipines. When a basket of stocks is trading below its four year average, there are usually a number of good reasons. Several money managers note the negatives  for EM.   Also included are a few voices of cautious optimism.  Sometimes the best time to buy is when everyone is pretty sure that this is not the right time to buy.  Another blog author recounts two strategies for emerging markets: a long term ten year horizon and a short term watchful stance.  The long term investor would take advantage of the low price and the prospect for higher growth rates in emerging economies.  The short term investor should be cognizant of the fickleness of capital flows into and out of these countries and be ready to pull the sell trigger if those flows reverse in the coming months.



What are the characteristics of TANF families?  When the traditional welfare program was revised in the 1990s, lawmakers coined a new name, Temporary Assistance to Needy Families, to more accurately describe the program.  The old term carried a lot of negative connotations as well. Two years ago Health and Human Services (HHS) published their analysis of a sample of 300,000 recipients of TANF income in 2010.  Although the recession had officially ended in 2009, the unemployment rate in 2010 was still very high, above 9%.  It is less than 6% today.

There were 4.3 million recipients, three-quarters of them children, about 1.4% of the population. By household, the percentage was also the same 1.4% (1.8 million families out of 132 million households).  In 2013, the number of recipients had dropped to 4.0 million, the number of families to 1.7 million (Congressional Research Service)

In 2010, average non-TANF income was $720 per month, or about $170 a week.  To put this in perspective, this was about the average daily wage at that time The average monthly income from TANF averaged $392. Recipients were split evenly across race or ethnic background: 32% were white, 32% black, and 30% Hispanic. For adult recipients only, 37% were white, 33% black, and 24% Hispanic.

Rather surprising was how concentrated the recipients were. 31% of all TANF recipients in 2010 lived in California.  43.3% of all recipients lived in either New York, California or Ohio.  The three states have 22% of the U.S. population and almost 44% of TANF cases.

HHS data refutes the notion that welfare families are big.  50% of TANF families had only one child.  Less than 8% of TANF families had more than 3 children.  82% of TANF families also receive SNAP benefits averaging $378 per month.

In 2014, Federal and State spending on the TANF program was less than $30 billion, about 1/2% of the $6 trillion dollars in total government spending.  The Federal government spends a greater percentage on foreign aid (1%) than the TANF program. Yet people consistently overestimate the percentage of spending on both programs (Washington Post article).  The average estimate for foreign aid? A whopping 28%.  Cynical politicians take advantage of these public misperceptions.



Aiming to overhaul the health care insurance programs throughout the country, the Affordable Care Act (ACA) was a big bill.  No, it wasn’t 2700 pages as often quoted by those who didn’t like it.  The final, or Reconciled, version of the bill was “only” 900 pages.  The House and Senate versions were also about 900 pages each; hence, the 2700 pages.

At 1600 pages in its final form, the recently passed Omnibus Spending bill makes the ACA look like a pamphlet.  As  specified in the Constitution, all spending bills originate in the House.  Past procedure has been to pass a series of 12 spending bills.  Majority leader John Boehner has found it difficult to get his fractious members to agree on anything in this Congress so all 12 bills were crammed into this behemoth bill just in time to avoid a government shutdown.  Just as with the ACA, most members of the House and Senate did not have adequate time to digest the details of the bill.  The bill is sure to hold many surprises for those who signed it and we, the people, who must live under the farcical law-making of this Congress.  Here is a primer on the budget and spending process.


Home Appraisals

They’re back!  A review of 200,000 mortgages between 2011 and 2014 showed that 14% of homes had “generous” appraisals, inflating the value of the home by 20% or more.  Loan officers and real estate agents are putting increasing pressure on appraisers to adjust values upwards.


Personal Income

You may have read that household income has been rather stagnant for the past ten years or more.  In the past fifty years household formation has increased 78%, far more than the 50% increase in population.  The nation’s total income is thus divided by more households, skewing the per household figure lower.  During the past thirty years, per person income has actually grown 1.7% above inflation each year.  Inflation adjusted income is now 66% higher than what it was in 1985.

In 2013, the Bureau of Economic Analysis released median income data for the past two decades. Median is the middle; half were higher; half were lower.  This is the actual dollars not adjusted for inflation.  Except for the recession around the time of 9-11 and the great recession of 2008 – 2009, incomes have risen steadily.

The 3.7% yearly growth in median incomes has outpaced inflation by almost 25%.

Why then does household income get more attention?  A superficial review of household data paints a negative picture of the American economy. Negative news in general tugs at our eyeballs, gets our attention.  The majority of the evening news is devoted to negative news for a reason. News providers sell advertising in some form or another.  They are in the business of capturing our attention, not providing a balanced summary of the news.  In addition, a story of stagnating incomes helps promote the agenda of some political groups.


Merry Christmas and Happy Chanukah!

Oil, oil, retail, and oil

December 14, 2014

The market seemed to wake up Monday morning on the wrong side of the bed.  The Federal Reserve updated their Labor Market Conditions Index, scoring the month of November with a tepid 2.9, a sobering counter punch to the previous Friday’s report of 321,000 job gains in November.  Too many part time workers, too many long term unemployed, a rate of unemployment that was too high among minorities, those in their twenties and those without a college education.

ISM’s monthly reports showed continued strength in both manufacturing and the services sector. The composite CWPI eased just a bit from the historic highs of the past two months.

The key components of the manufacturing index, new orders and employment, remained strong or robust.  The prices component showed a steep dive from expansion to contraction, 53.5 to 44.5.  George wondered if the falling price of oil had anything to do with this change.  New orders in the services sector grew even stronger while employment eased just a bit and was also continuing a strong expansion.

On his way to Home Depot on Tuesday morning, George filled up his SUV for just under $50.  When had that happened last he wondered.  2009, maybe?  George remembered the lead up to the 2012 elections. “Gas was $1.50 when Obama came into office,” he would hear on a conservative talk show, “and now it’s more than double that. Obama is hurting working families.”  As though Obama, or any President for that matter, had much to do with the price of gas.  Most talk show hosts counted on the fact that their audience was, well not stupid, as Jonathan Gruber had quipped when talking about Obamacare at a conference, but poorly informed.

The market had opened up that morning in a particularly foul mood after China tightened lending criteria so that Chinese investors could no longer use low-grade corporate debt as collateral for loans.  Overnight the Shanghai market lost more than 5% (WSJ ).

The EIA projected that U.S. oil production would rise in 2015 even as oil prices went lower.  Lower prices might curb new drilling but once the wells were drilled, the cost of production was fairly low.  The drop in gas prices put some extra money in most people’s pockets.  The EIA estimated that a gallon of gas would average about $2.60 in 2015, almost a $1 lower than the $3.51 average in 2013.

The continuing fall in oil prices contributed to another drop in the market on Wednesday, erasing the gains of the past month.  To sell or not to sell, that is the question, George thought as the volatility in the market continued to climb, rising more than 50% in the past week.  But he hemmed and hawed, then decided to replace the fence post in the back yard as the antidote to his indecision.

In an economy dominated by consumer spending, the monthly retail sales report and the employment report are probably the two most influential gauges of the strength of the economy.  Thursday’s report on retail sales was a huge positive, showing a rise of .7%.  On an annualized basis, that was an increase of more than 8%.  People were evidently spending the money they were saving at the pump.  The market opened higher and climbed up above Wednesday’s opening price.  Great stuff, George thought, then watched as the positive mood vanished and the market started sinking.  He must have made some sound because Mabel called out asking him if he was OK.  George realized that the early morning run up in prices was traders covering their short bets.  The underlying sentiment was still negative.  A strong employment report last Friday and now a strong retail sales report was having little effect on the mood of the market.  George decided to get out of the way of the darkening mood and sold the equity index he’d bought in mid-October.

The market continued to follow oil prices down on Friday.  George was pleased to find that the long term Treasuries that he had bought last week were up a few percent.  Glancing back at the beginning of the year, he saw that long term Treasuries (TLT) were up an unbelievable 20% so far this year.  Back in January many had projected higher interest rates toward the end of 2014, making long term Treasuries less attractive.  The equity market was up 10% for the year despite the recent change in mood.  Two types of investment that often moved opposite each other had moved in the same direction.  George smiled as he remembered something his  childhood baseball coach would say, “If it ain’t one thing, it’s the other, and sometimes it’s both.”  Which was just another way of saying not to put all your eggs in one basket.


December 7, 2014

On Monday, George intended to put the $50K from the CD into the bond market. He couldn’t decide between a long term bond index like Vanguard’s BLV or TLT, the ETF that tracked 10 year Treasury bonds. Both the bond and stock markets opened lower in the morning which confused him and he did nothing. Gallup released their monthly survey of consumer spending for November, showing a respectable gain of more than 4% over last November.

Tuesday’s report of auto sales in November was strong.  Total vehicle sales topped 17 million on an annualized basis. Auto manufacturers reported particularly strong sales over the Thanksgiving holiday.  SUVs were big sellers and that was a double plus for auto companies because those vehicles had larger profit margins.  The American car buyer has long had a short memory.  Six months of falling gas prices prompted many to abandon their economical cars and wrap themselves in a big bubba vehicle.

Construction spending was up 1.1% from the previous month and 3.3% above last October.  The economies of Europe may have slipped into neutral or recession but the U.S. economy was chugging along.  The upbeat reports gave the stock market a minor boost but there was little selling of Treasuries, indicating a growing split in sentiment among investors.  George decided to put his and Mabel’s CD money into TLT.

On Wednesday, the Centers for Medicare and Medicaid Services released their annual report on health care costs.  Spending had increased only 3.6% in 2013, the lowest increase since 1960, and the fifth year in a row that spending had grown less than 4%.  Out of pocket expenses had risen from $293 billion in 2007 to $339 billion in 2013, a 16% increase over six years.  Before the recession, George could remember years when spending rose almost that much in a single year.  CMS reported that consumers’ out-of-pocket spending was only 3.2% of charges, less than the 5.9% of charges in 2007.

CMS published a historical table that caused George to raise both eyebrows.  In 1960, Americans spent $125 ($967 in 2012 dollars) per person on health care. In 2012, that figure had grown eight-fold to $7533 per person.  Administrative and public health programs added another 15% to those costs.  In 2013, the total cost per person was over $9500 for a whopping national total of $2.9 trillion spent on health care, almost 18% of GDP.

While families were shelling out more for health care, companies were grabbing a larger share of the economic pie.  As a percent of GDP corporate profits had been trending upward since 1990.

The private payroll processor ADP reported private job gains of 208,000, slightly below expectations but still above the 200,000 mark considered a healthy job market. Later that day came the announcement that a Staten Island grand jury decided that there would be no indictment in the death of Eric Garner.  Caught on video, five or six officers had surrounded the man to arrest him for selling bootleg loose cigarettes.  One of the officers put a choke hold on the unarmed Garner, restricting his breathing till he died of asphyxiation.

Later that day, four Denver bicycle cops were escorting a parade of students protesting the grand jury decision in Ferguson.  Acting as a buffer between the students and traffic on the busy street east of the Capitol, the officers were struck by a Mercedes as it ran through an intersection.  The Mercedes dragged one of the officers about thirty yards and that officer was taken to the hospital in critical condition.  On the evening news, George and Mabel learned that the driver of the Mercedes might have been having a seizure when he hit the officers.

Late Thursday morning, George was focused on several economic reports.  Since 2010, the polling firm Gallup had conducted a simple employment survey, called P2P, that counted the number of people who had worked for money in the past week or had looked for work in the past week.  Gallup reported the lowest unemployment rate, 6.2%, since the poll began.  New jobless claims were one again just under 300,000, indicating that the previous week’s 314,000 might have been an anomaly.  The 4 week average of new claims was still below 300,000.

Friday morning the reporters dusted off their sports dictionaries as they searched for words to describe the monthly labor report from the BLS.  Blockbuster.  Gangbusters. Blowout numbers. Spectacular.  Amazing.  George poured another cup of coffee. Yes, 321,000 new jobs sounded great!!! Too great. George got out his magnifying glass, put on his Sherlock cap and went hunting.  First of all, ADP had reported 208,000 private job gains.  The BLS report included new government jobs which the ADP did not include.  So back out the 7000 new government jobs to get private job gains of 314,000 according to the BLS.  Paging Dr. George, number surgeon.  He took out his skeptical scalpel. Take the average of the two estimates, which was 314 +  208 = 522, divided by 2 = 261.  Add back in the 7000 government jobs and probably the more accurate figure was close to 270,000 – 280,000.  September’s job gains had been revised up 20,000 by both ADP and the BLS. The BLS also revised the job gains of October,  getting closer to the averaging method that George used. Sacre bleu!  Averaging really works!  George was a big believer in averages.

Anyway, the employment report was strong, just not as fantastic as it first appeared. Average monthly job gains for the past year had been about 230 – 240,000.  George picked up his magnifying glass.  Hmmm, he said.  Retail job gains were 50,000, far above the 22,000 average of the past year.  At least 20,000 of those job gains were temporary seasonal gains.  Let’s be generous and start with 280,000 jobs. 280 – 20 = 260.  Now job gains were approaching the average of the past year.

Still, the yearly growth in employment was climbing toward 2%, slowly but surely getting stronger.

Professional and business service jobs had been a leading sector for the past few years and were especially strong this month at 86,000, way above the average gains of 50 – 55,000.  George raised a skeptical eyebrow.  A closer look showed that the strong gains were particularly strong in bookkeeping and accounting.  Take out 20,000 temporary tax jobs, George thought, and now his count was down to 240,000.  Boy, this was quickly becoming an average employment report.

Yearly gains in hourly earnings for the average worker were just under 2.2%, just barely ahead of inflation. For all workers, the gains were 2.1%.

George put away his magnifying glass and put on his rosy glasses.  The average hourly work week had increased .1 hour over the past month, a good sign.  However, that was also the yearly gain.  Not so good.  George cleaned his rosy glasses.  The gains had been fairly broad and the core work force aged 25 – 54 had increased to nearly 96 million.

The construction and manufacturing sectors reported strong gains.  Although the headline unemployment rate remained the same at 5.8%, this rate was more than 1% below last year’s rate, a sign of a relatively healthy labor market.

A wider measure of unemployment, the U-6 rate, had declined .1% but was still above the rates in the mid-2000s.  George needed a better pair of rosy glasses.

George checked to see if the Federal Reserve had updated their Labor Market Conditions Index but that would probably come next week.  The market had risen a few tenths of a percent since the high of two weeks ago.  According to a Fact Set report, earnings growth for the fourth quarter had been revised down from 8.3% to only 3.4%.  After rising up almost 14% since the mid-October trough, the SP500 had stalled despite a number of positive reports.  Treasury bonds had lost a few percent in price since mid-October but had stayed relatively strong, indicating some skepticism toward any further stock gains.  The stock market seemed to be treading water ahead of the December 11th deadline for Congress to pass a spending bill.  Despite promises that there would be no government shutdown this time, investors might be a bit less confident in the dependability of promises from the Republican leadership.