May 29, 2016


On Tuesday came the announcement that new one family homes sold in April had jumped to 619,000, just beating the low point set in 1995.  Yes, you read that right.  The high point of this recovery just passed a 20 year ago low.  The spring season certainly contributed to the jump, but the prospect of higher interest rates may have spurred many buyers to close the deal. Here’s a graph of new home sales for the past two decades:

The housing boom took a decade to build but the total damage of overinvestment is only now being felt in the slow growth that has characterized this recovery.  I’ll turn to the monetary economists at

“During the housing boom, investible resources that could have gone into augmenting human capital, building useful machines and sustainable enterprises, and conducting commercial research and development, were instead diverted to housing construction.  In the crisis it became evident that the housing built was not worth the opportunity cost of the resources allocated to it.” (Source )


Energy Subsidies, or Not?

Many of us don’t like subsidies to giant oil companies like Exxon and Chevron. Why are taxpayers subsidizing these rapers of the environment?  The marketing of this idea is that bad, bad oil companies get good taxpayer money that could be put to better uses. But then we find out that when a poor family gets heating oil for a very reduced amount, the folks in Washington call that a “Consumer Subsidy” to the oil company  (Source).  Why is this not classified as a subsidy for poor families?  Welcome to the ugly politics of Washington where subsidies are  allocated across several departments, and House and Senate committees, so that our elected representatives can feel important and wield influence in order to collect more campaign money.  If the voters are confused, that’s the point.  Politicians use a technique ommon in used car sales: baffle the customer with B.S.

In 2010, Federal (not including states) subsidies totaled $11.6 billion for coal, natural gas and oil. Coal got $3.9 billion for R&D. (Source spreadsheet)  Much of that money was to develop technologies for carbon capture and sequestration, which is what we told politicians in Washington we wanted. (Source)  The energy companies didn’t want the money because they didn’t want to develop the technology. Now we blame the energy companies for spending the money?

Unfortunately, fracking has produced so much natural gas at such a low cost that many energy companies find it more cost efficient to simply shut down power stations that rely on coal.  The largest coal company in the U.S., Peabody Energy, recently declared bankruptcy after 130 years in business (WP article)

Let’s turn to the oil and natural gas portion of this sector since that accounts for 2/3rds of Federal subsidies.  $7.6 billion in subsidies includes:
$3.5 billion, almost half of the total subsidy, is for the LEAP program, which pays for heating fuel for low income families, not a subsidy for the oil companies;
$1 billion for fuel used by farmers, who lobby heavily for their subsidy, and it helps to keep food prices down for consumers across the country;
$1.1 billion for the Federal gov’t to buy oil for the Strategic Petroleum Reserve.  Why is this called a subsidy to the oil companies?
$1 billion for accelerated write-offs on development costs, land, equipment.

Providing consistent, reliable energy in any form is messy.  Every year, wind power kills thousands of eagles, a threatened species, yet there seems to be little outcry because wind power is a favorite of the environmental community and gets a pass.

Many years ago, I was selling tools to the mechanics at San Juan Coal Co. in a remote area of New Mexico and Arizona.  Giant earth movers with tires that were twice as high as a man dug up the coal deposits there.  Reaching up to the blue sky were giant erector set towers hung with huge cables that sizzled and spit with the sound of electricity surging through them.  Stretching toward the western horizon, I asked where the wires went. Southern California, I was told.  California wanted the electricity but not the pollution from creating the energy so they paid to have the electricity produced in this remote area and “shipped” hundreds of miles away.  The process was very wasteful and expensive.  The additional cost though was counted as a subsidy to the energy company because the accounting that is done in government has little to do with the day to day reality of most households and businesses.

Growing Government Debt

March 6, 2016

Earlier this year and again last week I suggested that a broad index of energy companies would probably be a good investment for the long term investor.  This week’s inventory report from the U.S. Energy Information Administration (EIA) showed that crude oil inventories continued to climb but that demand for gasoline is up a strong 7% over last year.

The latest Baker Hughes rig count showed an 11th week of declines in North America.  Oil rigs are now at levels last seen in early 2008 and gas rigs are at a 70 year low.

In response to demand growth and a steadily declining supply, crude oil prices climbed almost 10% and energy ETFs like XLE and VDE climbed almost 8% this past week.


Constant Weighted Purchasing Index (CWPI)

At the beginning of each month I update an index that is based on the Purchasing Managers Index (PMI) using a methodology initially developed by financial economist Roland Pelaez in 2003 as a possible forcasting indicator for recessions.  I modified that to include the dominant non-manufacturing part of the economy, and called this combined index the CWPI, which I have included in my blog for three years.

The PMI is a monthly survey of Purchasing Managers throughout the country that gauges expansion or contraction in several aspects of their business.  The two most important components in the model are employment and new orders.

For the first time since last October, the manufacturing component of the index rose but is still contracting slightly.  Export manufacturers have had to overcome a strong dollar in the past 1-1/2 years, which makes American made products more expensive overseas.  The services sector is still expanding and the composite reading is still strong, indicating that there is little risk of recession in the near term.

Although Friday’s employment report showed strong job gains of 240,000, growth in the employment component of the services sectors is slowing.

Mr. Pelaez has recently published  a peer reviewed recession forecasting tool that I have not reviewed yet but I do look forward to reading his insights. Recessions come infrequently, about once a decade, but a long term investor who can switch out of stocks and into Treasuries to avoid these recessions could theoretically triple their wealth.

A word of caution.  There are several inherent problems with trading models based on infrequent economic events like recessions: 1) backtesting can help one develop a model or trading rule that does little more than fit the historical data;  2) backtesting uses revised economic and financial data.  Unfortunately, we don’t get to make decisions with historically revised data.

A great example of this:  at the June 2008 meeting of the Fed, three months before the financial crisis imploded, the majority of economists at the meeting felt that the economy had skirted a recession.  As more data for the first and second quarters of 2008 showed a definite decline in GDP, the NBER actually marked the start of the recession six months before that meeting, in December 2007.  You want perfect?  Next universe that-a-way.


Debt Doubts

In December 2009, I mentioned  a comment by Raymond Baer, the chairman of Swiss private bank Julius Baer, who warned: “The world is creating the final big bubble. In five years’ time, we will pay the true price of this crisis.”

That time has come and gone but these things don’t run on a calendar.  As the book “The Big Short” noted, a person has to be right and timely.  Some who bet on the implosion of the housing bubble ran out of money before the bubble burst.

Taking advantage of extremely low interest rates, companies continue to borrow.  Levels of corporate debt are nearly a third of GDP.

Instead of bringing some of its cash profits back into the U.S. and triggering a tax expense, Apple has borrowed money to fund operations and investment.  Banks and investors would rather loan money to Apple than some medium sized business.  How good is that for the long term health of the economy?

To understand the makings of a debt bubble, let’s compare rates of return on investment and debt. Let’s say that a 50/50 balanced portfolio can earn 5.5% per year; 7.5% for stocks, 3.5% for bonds.  If a mortgage can be had for 4%, then it makes sense to NOT pay down the mortgage.  A car lease or loan at a 2% interest rate?  Keep rolling the loan or lease.  A company like Johnson and Johnson can borrow money for 25 years at the same 4%.  Why would they pay down debt?

Debt continues to grow because there is no financial incentive to pay it down.  Some families may pay down debt out of conservative prudence but there is no economic sense in doing so as long as money can be borrowed at a rate that is below what one can earn with the money.

As an example, let’s say that a family is considering paying off the remaining $100K on their mortgage.  They can get a new mortgage for 3.5% – 4%.  If they can earn 5% on that money, why bother paying off the mortgage?  Persistently low interest rates cause families and businesses to make short term decisions that make sense – until they don’t.  Some families will pay off debt as a matter of prudence but the low interest rate environment encourages families and businesses to NOT pay off debt.

In 2009, Raymond Baer was referring to the amount of corporate debt that was being rolled over at the time in order to avoid taking a loss on the loan.  Central banks have helped subsidize that rising corporate debt with low interest rates.  Banks reciprocate by buying government debt.

Global government debt has DOUBLED from $28 trillion in 2007 to almost $56 trillion in 2015 (Global debt clock).  China’s government debt-to-GDP ratio has more than doubled from 21% in 2007 to an estimated 54% in 2008 (S. China Post)

In the U.S. and Europe, government banking agencies reciprocate by requiring banks to hold little if any reserve collateral for the Federal or central government debt the banks purchase.  It’s a great financial buddy system – until it’s not.  We have never lived in a world where central banks can create so much money with an entry in a ledger.  As long as no one runs for the exits, everything is OK.

Under the Dodd-Frank rules, the Federal Reserve does not rate state and municipal debt with the same safety it accords U.S. Treasury debt.  This forces banks to hold more collateral against the debt, making it less attractive.  The Dodd-Frank test is whether banks can survive for thirty days during a financial crisis.  Since municipal and state bonds don’t trade very frequently, their lack of liquidity makes them more susceptible to downward price pressures in a crisis.  The Fed wants banks to offset that risk.  Cities and states complain that this forces them to pay higher interest rates on their debt and gives them less access to the bond market.  What do governments do when they don’t like the judgment of finance professionals?  Get their legislators to pass laws to override that prudence.  Several bills in both the Senate and House have been proposed.  This is how the world goes to hell.  One step at a time. (WSJ article on municipal debt)


Bonds Bust ZLB

Howz dat for a headline?!  ZLB means “Zero Lower Bound”, or 0%. Last Monday, the central bank of Japan sold almost $20 billion of 10-year government bonds that paid a negative interest rate.  Buyers are paying the Japanese government a fee to loan the government money.  Bizarro world!  While I don’t know the details, the buyers are probably Japanese banks who “take one for the team” – lose money – to implement a plan that the central bank hopes will combat the threat of deflation.

Ugly January

January 17, 2016

The ever-strengthening dollar and growing inventories of crude led to a plunge in the price of a barrel of West Texas Intermediate (WTI) which fell below $30.  I remember hearing some analyst on Bloomberg about a year ago saying that oil prices could go as low as the $20 range.  HaHaHaHa!  A popular basket of oil stocks, XLE, is about half of it’s July 2014 price, falling 25% in the past two months and almost 10% in the two weeks. Here’s a tidbit from the latest Fact Set earnings brief: “On September 30, the estimated earnings decline for the Energy sector for Q1 2016 was -17.7%. Today, it stands at -56.1%.”  Ouch!

Volume in energy stocks this week was more than double the three month average.  It smells like capitulation, that point when a lot of investors have left the theater.  Investors who do believe that the theater is on fire, as it was in 2008, should probably stay away.

What the heck is going on?  This Business Insider article from June 2015 (yes, six months ago) explains and forecasts the money outflows from China and emerging markets.  Pay particular attention to #4. This Bloomberg article from this week confirms the capital flight from China as investors anticipate a further devaluing of the yuan.

4th quarter earnings reports will begin in earnest in the following week.  If there are disappointments, that will magnify the already negative sentiment.


Death Cross

No, it’s not the title of a Fellini movie.  The merits of technical analysis can be more controversial than a Republican Presidential debate, but here goes.   The 50 day average of the SP500 crossed above the 200 day average, a Golden Cross, at Christmas, then crossed back below the longer average this week, a Death Cross.  A Golden Cross is a positive sign of investor sentiment.  The Death Cross is self-explanatory.  A crossing above, then below, happens infrequently – very infrequently.  The last two times were in 1960 and 1969 and the following months were negative.  After January 1960, the market stayed relatively flat for a year.  In June 1969, it marked the beginning of an 18 month downturn.  There was an almost Golden Cross followed by a Death Cross in May 2002.  A similar 18 month downturn followed.

Longer term investors might use a 6 month short term average and an 18 month longer average, selling when the 6 month crosses below the 18 month, buying back in when the one month (or 6 month average in the case of more volatile sector ETFs) crosses back above the longer average. Like any trading system, one takes the risk of losing a small amount sometimes but avoids losing big.

Trading signals are infrequent using monthly average prices.  Note that the sharp downturn of the 1998 Asian financial crisis did not trigger a sell signal.  The six month average of the SP500 as a broad composite of investor sentiment is above the 18 month average but several sectors have been sells for several months: Emerging markets (June and July 2015), Energy stocks (January 2015), and European stocks (August 2015).  Industrials (XLI) have taken a beating this month and will probably give a sell signal at the end of the month.

John Bogle, founder of Vanguard, recommends that long term investors look at their statement once a year and rebalance to meet their target allocation, one that is suitable for their age, needs and tolerance for risk.  In that case, don’t look at your January statement.  As I wrote a few weeks ago, it could look ugly.



In 1998, the Boskin Commission estimated that the Consumer Price Index (CPI) over-estimates the rate of inflation by an average of 1.1%. In 2000, the NBER (the agency that determines recessions) revised their methodology and their estimate of the over-statement to .65%.  In 2006, Robert Gordon, a member of the original committee, re-examined subsequent CPI data and the methods used by the committee.  His analysis re-asserted that the over-statement was at least 1%.

Although this academic debate might seem arcane, the implications are enormous, particularly in an election year.  Presidential contender Bernie Sanders is gaining momentum on Hillary Clinton (HRC) by repeatedly asserting that the inflation-adjusted incomes of working families have declined since 1973.  Although Mr. Sanders makes no proposals to stimulate economic growth, he has many redistribution plans to achieve economic justice.  If inflation has been overstated for the past few decades, then Mr. Sanders’ argument is logically weak but emotionally strong.  More importantly, neither side of the political aisle can even agree on a common set of facts.  The other side is not evil, or stupid, or disingenuous. The disagreement over methodology is legitimate and ongoing.

Risky Biz

December 13, 2015

How low can crude oil prices go?  Older readers may remember the Limbo, a party dance popular in the early 60s.  After breaking through the “limbo stick” of $40 per barrel, gas prices sank even lower when the IEA indicated that the supply glut will continue through 2016 (Story).

A popular energy ETF, XLE, has fallen 11% in nine trading days.  Yes, an entire sector of the economy has lost more than 1% per day this month. Some oil service companies lost more than 3% on Friday alone. The large integrated oil companies like Exxon (XOM) and Chevron (CVX) say they are committed to maintaining their dividends (Exxon now near 4%, Chevron near 5%) but investors are concerned that continuing price pressures will make that ever more difficult. This article provides a good overview of the structure, revenue and profit streams of large integrated oil companies.

So we lie around at night worried about our stock portfolio.  Why would we do that?  Because someone – who? – is going to pay us a little extra to worry about our stocks.  Or, at least, that’s the way it’s supposed to go, isn’t it? The extra return we are supposed to get for our worries is called a risk premium, or the plural – premia.  One measure of that premium is the total return on stocks minus the total return on a safe long term bond like a ten year Treasury bond.

In his book Expected Returns, An Investor’s Guide to Harvesting Market Reward,  Antti Ilmanen reviews the historical returns of several types of assets during the past century. He wrote a free summary of the book in 2012 (Kindle version  OR PDF version).  Mr Ilmanen presents an investing cube (pg. 3) as a visualization of the factors or choices that an investor must consider.   On one face are assets categorized into four types of investment.  On another face are four styles of investment.  On the third face of the cube are four types of risk.

A surprising find was that the risk premia of stocks over bonds was only 2.38% (p. 12) during the past fifty years.  Investors are not being paid much for their worry.  When the author compared the returns on stocks to longer term twenty year Treasury bonds (an ETF like TLT, for example), the risk premium has been negative for the past forty years.

The author emphasizes that “a key theme in this book is the crucial distinction between realized (ex post) average excess returns and expected (ex ante) risk premia.” (p. 15)  Historical averages of risk premia may be exaggerated by high inflation, which hurt the returns on bonds in the 1970s and part of the 1980s, and made returns on stocks that much better by comparison.  In a low inflation environment such as the one we have now the risk premia for owning stocks may be rather muted.

Ilmanen’s analysis of past returns reveals several historical trends that can help an investor’s portfolio.    Value investing tends to produce higher returns over time.  So-called Dividend stocks also generate additional return.

I was surprised at the relative stability of per capita GDP growth over 100 years.  We wring our hands in response to a crisis like the dot-com meltdown or the Great Recession but these horrific events barely show in the average aggregate output of the country over a person’s working years. Here is a table from the PDF summary.

A mutual fund QSPIX was formed last year based partly on the research in the book.  However, the minimum investment is $5,000,000.    The fund is currently 28% in cash.


Social Security Strategies

A resource on the right side of this blog is Maximize My Social Security (MMSS), a personally tailored – and inexpensive – advisory service to guide older people to better informed Social Security choices.  The site does not use your social security number.  If you already have an online account with the Social Security Administration, you can complete the forms at MMSS and get some results in under twenty minutes.

Old people who used to talk about the latest Pink Floyd or Led Zep album when they were younger now talk about Social Security, Medicare and their aches and pains.  Always a popular topic:  hey, what do you think about waiting to file for Social Security?

Pros of waiting:

1.  Where else  can any of us earn a guaranteed 8% on our money each year?  Sign me up!  For each year we wait, our Social Security annual benefit increases by 8%.

2. Inflation adjusted:  On top of the additional 32% we get from SS when we start collecting SS at age 70, we are getting an inflation adjustment on that higher amount.

3.  If we need to borrow money to get by during the 4 years we wait, we may be able to borrow the money using our house as collateral.  Depending on our tax circumstances, the interest we pay on the borrowed money could be deductible, reducing the net cost of borrowing.

4.  If we are a guy, we will probably die before our spouse.  Wives who may have a lower benefit will get their benefit amount bumped up to what we were receiving.

Cons of waiting:

1.  We could die before the “payoff” age, between 79 and 82.  This is the age when the inflation adjusted benefits we receive by delaying our benefit matches the total we would have collected by claiming at an earlier age.  However, we often don’t factor in the advantage of the #4 Pro above in which our spouse collects a higher amount till her death.

2.  Congress could change SS payments and rules.  The institution does not have a good track record for keeping its promises.  The swelling ranks of the Boomer generation contributed far more than recipients of earlier generations took out in benefits. Congresses of the past few decades have spent all the extra money accumulated in the Social Security coffers.  After 2020 the system will come under greater cash flow pressure as the Boomers continue to retire and claim benefits.  If Congress does reduce benefits,  then those of us who waited to file for benefits will probably regret our decision.  By the way, MMSS allows users to estimate the long term impact of such a reduction.

3.  We may have to borrow to make ends meet while we wait to collect benefits.  Banks don’t usually loan money to retirees with no job income, necessitating some asset-backed mortgage. Older people may be averse to assuming any new debt.

4.  Withdrawing money from savings while we wait will reduce our savings for a time, which will lessen the “endowment” base of our lifetime wealth.  While the additional 8% per year from SS should more than offset that loss, we can never be certain.  As an example, let’s imagine a retiree at the beginning of 1995 who decided to draw down savings and wait four years to start collecting SS benefits.  The stock market had gone nowhere during 1994.  She sold some stocks and bought a 4 year CD “ladder” for the amount she would need to tide her over till she started collecting benefits.  During those next four years, the SP500 index rose from 459 to 1229, a 167% gain – more than 25% annually excluding dividends.  Even with the additional money our retiree was making each month in SS benefits because of her decision to delay, it was the worst time to get out of the stock market!


September 6, 2015

I am not going to say a lot about the August employment numbers, reported at 173,000,   since August’s numbers are routinely revised.  The BLS survey was 20,000 less than the ADP survey of private payrolls.  The revised figure will probably be closer to 210,000 jobs gained in August.  We can see the more important trends when we look at the annual job gains averaged over 12 months.

The slowdown in China and other markets and the selloff in markets around the world inevitably prompts talk of recession.  Since WW2 there has been only one recession – the one that followed the 1973 oil embargo –  that occurred when monthly job gains were above 200,000.   There have been 12 recessions since WW2. The work force was very much smaller fifty years ago.  There has been only one exception to this “rule” and when we look at this exception in closer detail we see that it was very much like the prelude to other recessions. Averaged monthly job gains were declining sharply as they do before every recession.  Job gains are NOT declining sharply today.


Resource Countries On Sale

Monday came the news that the Canadian economy was officially in recession.  California, the most populous of fifty U.S. states, has two million more people than all of Canada, whose economic vitality relies on its vast stores of timber, oil, gas and minerals.  Australia, Russia, Norway and New Zealand also ride the roller coaster of commodity prices. (WSJ article )  An ETF that captures a composite of Canadian stocks, EWC, is down almost 30% from its high of August 2014.  The 50 week (not day, but week) average is about to cross below the 200 week average.

These long term downward crossings are often bullish, indicating that prices are near a low point in the multi-year cycle.  An ETF composite of Australian stocks, EWA, is down a bit more than 30% and its 50 week average just crossed below the 200 week average.

A Vanguard ETF composite of energy stocks is near the lows of 2011.

Subprime Mortgages

Conventional wisdom: subprime mortgages started the recent financial crisis in 2008.  A recent National Bureau of Economic Research (NBER) analysis (A short summary ) of home foreclosures overturns that misconception.  The authors found that twice as many prime borrowers lost their homes to foreclosure as subprime borrowers.


In 2007, the Social Security Administration estimated that prices would be 20% higher in 2015. Then came the severe recession of 2008-09 and persistently low inflation.  Prices this year are only 15% higher than those in 2007.  Social Security payments will total almost $900 billion this fiscal year (FRED series), more than 20% of Federal spending, and are indexed to inflation.  Low inflation “saves” the Federal government about $40 billion each year when compared with earlier projections.  Sounds good?  Life is a trade-off.  The 60 million (SSA) people who receive social security spend most of it.  That savings of $40 billion is money not spent.  In addition, low interest rates have reduced income for many retirees, who depend on safer investments for an income stream.  These safer accounts, which include savings, CDs, short and mid-term bond funds, have paid historically low interest rates since the Federal Reserve lowered its target interest rate to near-zero (ZIRP) in 2008.

The China Syndrome

August 23, 2015

Some of you may have spent the summer vacation on a small island in the Pacific where there was no access to the news.  So a quickie catch up.  The new Mission Impossible movie Rogue Nation is edge of the seat great fun and its still on the big screen.  And, yeh, almost two weeks ago the central bank of China devalued the Yuan a bit over 3%. Yes, that was a bit unusual.  An unexpected 8% drop in July’s exports spooked economists in the Chinese government.

That brought some additional pressure on oil stocks but the larger market eked out a .7% gain at the close of the week on August 14th.  But – cue up the going down the dark stairs into the basement music – the 50 day average of the Dow Jones crossed below the 200 day average during that week.

Yep, the death cross of doom.  Of course, the Dow Jones is only 30 stocks, weighed down by the plunging fortunes of oil giants like Chevron and Exxon.  The 50 day average of the broader SP500 index was still above the 200 day average so there was cause for concern, but not panic.

For the first two days of this past week, the market was essentially flat.  USO, a commodity ETF that tracks West Texas Intermediate crude oil (WTI) rose more than 1% on Tuesday.  Then came the news that crude oil inventories were continuing their relentless advance upwards. On the good side, lower oil prices are leading to higher demand but sometimes investors focus on the bad news.  WTI oil dropped 4.4% on Wednesday.  Whispers of disappointing manufacturing production out of China added fuel to the fire. On Thursday, the broader market fell 2%, joining the continuing downturn in energy stocks and emerging markets.  A PMI (Purchasing Managers Index) survey of Chinese manufacturers confirmed a slight contraction in the Chinese economic machine. That spooked investors, leading to a 3% drop in the broader market on Friday.

By the time the smoke cleared at the end of the week’s battle, the broader index had lost 5.6% for the week.  Energy and emerging market indexes were down 8%.  Weekly volume in the popular SP500 ETF SPY was the highest this year, an indication that this concern may be more than a temporary blip.

The 50 day average of the SP500 is still above the 200 day average.  No feared death cross yet.

After four years without a 10% correction, the SP500 crossed below that mark this week, falling 10% from the recent high in late May.  Time to sell? Did you get out of the market last October when the broader market fell more than 6% in a month?  Remember that one? The market was going to fall by 50%, according to some market gurus.  Friday’s close is 5% above that October low.

Some long term traders use a 50 week average as a guideline.  As long as it is rising, why worry?  Until this week, the 50 week average had been substantially rising since September 2009.  Why do I use the word “substantially?”  There were a few weeks in late 2011 and early 2012 when the average dipped a few cents.  This week’s decline was like those little dips – a mere 5  cents in SPY, the popular ETF that tracks the SP500.

The world’s economy has come to depend on the growth of two stalwarts – the U.S. and China. For the past eight years, the Eurozone has fumbled and floundered through a cobweb of of political and economic problems. When the U.S. economy cratered in 2008 – 2009, the economic burden shifted to China, whose expansionist growth truly saved the world from a Great Depression.  Although the U.S. economy is showing strong growth, can it offset the economic weakness in China?  The stock market is holding an election, a vote of confidence on that very question.

New Year, No Fear

January 4th, 2015

As the calendar flips from December to January, some favorite activities are predictions for the coming year and reviews of the past year.  Here are a few predictions I’ve heard in the past few weeks:

“We think oil will continue to drift downwards as global demand slackens.”

“We think long term Treasuries will continue to show strong gains in the coming year.”

“Output remains strong, and the labor market continues to strengthen.  We expect further gains in the stock market this year.”

“We expect gold to find a bottom in the $900 to $1000 range and we will be initiating a long position at that time.”

Predictions are foolish, of course.  They are too certain.  An expectation is a bit more sober, a pronouncement of a probability.  Did anyone hear these expectations at the beginning of 2014?

“Oil prices will decline by 40% this year.”

“We expect long term Treasuries to gain 25% in 2014.”

“We expect the euro to fall to a 4-1/2 year low against the dollar.”

I don’t remember any of those predictions at the beginning of 2014.  So here’s my expectation – er, prediction: in 2015, I will be surprised by some of the events that will unfold.

If that doesn’t satisfy your prediction craving, here are several – let’s call them guesstimates – of SP500 earnings and price predictions in 2015.


Blue Light Specials

As I mentioned a few weeks ago, there are a few stock sectors that are “on sale,” selling below their 200 week, or 4 year average.  Falling gas prices in the last half of 2014 have had a negative impact on energy stocks (XLE, VDE).  Selling below their 200 week averages in December, both ETFs are hovering at their 200 week average.  The 50 week average is above the 200 week average, indicating that this is, so far, a relatively short term trend.

Emerging markets have been in the doldrums for a year and a half.  The 50 week average is just about to cross above the 200 week, signalling that the downturn may have exhausted itself.

The mining sector (XME) is down – way down.  The 50 week average is below the 200 week average and current prices of this ETF are below the 50 week average.  The mining sector can be quite cyclical but could be quite profitable in the next six months.

In the summer of 2011, the oil commodity ETF USO lost a third of its value.  In the melt down of 2008, it lost 75% of its value, falling from $115 down to near $30.  This week USO broke below $20, losing half of its value since July.  Since September 2009, shortly after the official end of the recession, the 50 week average has been trading in a range of $34 to $38, and is currently at the low point of that five year range.  While this may not be appropriate for a casual investor, it might be worth a look for those with some play money.

Other sectors – industrials, materials, finance, health, technology, consumer staples, consumer discretionary, retail and utilities – are above both their 50 and 200 week averages.


Happiness Is An Open Wallet

The Conference Board’s Consumer Confidence gauge rose still further above 90 in December.  At some time in the distant past, in a year called 1985, all the people were happier than they are today.  That long ago time became the benchmark 100 for this index.  The index number is less important than the trend of confidence – whether it is rising, falling or staying the same.

The Case Shiller 20 City Home Price Index for October showed a 4.5% yearly gain.  The double digit gains of last year and the first six months of 2014 were unsustainable.  However, I would be concerned if this continues to fall toward zero, indicating a serious softening of demand, or a lack of affordability or both.


The non-SP500 World

The SP500 index, composed of the 500 largest companies in the U.S., was up 11.4% for 2014. An index of mid, small and micro-cap companies was up a more modest 7.1% (Standard Poors) for the year.  An index of REITs was up 25.6% in 2014 after stalling during much of 2011, 2012 and 2013. I was surprised to learn that during the past twenty years, REITs outperformed the SP500.

Conventional wisdom holds that rising interest rates are bad for REIT stocks.  A study of REIT performance shows that the impact is less than most investors think. In addition, the income growth generated by REITs has outpaced inflation in all but one out the past 15 years. VNQ and RWR are two ETFs in this market space.  VNQ has a 10 year return of about 9%, RWR a bit less.


Social Security

The Social Security program depends on current taxes to pay current beneficiaries.  In per person inflation adjusted dollars, the federal government collects twice the amount of money it did forty years ago.  Per person revenues have almost caught up to the levels of 2006.

The problem is that there are a lot of people starting to retire.  Politicians of both parties have spent the excess social security taxes collected in the past decades.  Last week I asked what you would do if the stock market lost 30% of its value.

This week’s sobering question for those in or near retirement:  what would you do if social security payments were reduced, or means tested?  With the stroke of a pen, Congress could reduce the maximum monthly benefit from $2533 to say $2100.  This would affect a relatively small percentage of voters, those with higher incomes, a favorite target for benefit cuts.  Perhaps you are taking care of an ailing child or parent and need the income.  You might submit a 4 page form listing your pensions, IRAs, the assessed value of your home and any mortgage you had against the house, your mutual funds, stocks and bonds.  Using a complex formula to factor in your age, special circumstances, the cost of living index in your area and the total of your assets, the Social Security Administration would calculate your monthly benefit.  Can’t happen here in the land of the free, home of the brave?

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!