Author: dredheadz

The Markets

Equities recovered from January’s losses in fine style. The Nasdaq continued to lead the pack year-to-date, but by the end of the month the S&P 500 had set a fresh all-time closing high. The small caps of the Russell 2000 also had a strong month, leaving the Dow industrials the only one of these four domestic indices down for the year despite its February gains. Unlike its domestic counterpart, the Global Dow barely managed to squeak into positive territory for 2014.

The second month of cuts in the Fed’s bond purchases seemed to have little impact on the benchmark 10-year Treasury yield. Meanwhile, gold saw a rebound from its recent losses, gaining almost $100 an ounce and hitting its highest level so far this year before settling back a bit to end at roughly $1,320.

The Month in Review

• The U.S. economy grew a bit more slowly in Q4 2013 than previously thought (2.4%). According to the Bureau of Economic Analysis, that put growth for all of 2013 at 1.9%.
• The 113,000 new jobs added to the U.S. economy nudged the unemployment rate down 0.1% to 6.5%. Meanwhile, the Bureau of Labor Statistics said the labor force participation rate rose slightly to 63%, and the number of long-term unemployed fell by 232,000 during the month.
• Congress agreed to avoid renewed conflict over an increase in the debt ceiling by passing legislation that resolves the issue until March 2015.
• Tokyo-based Mt. Gox, at one time the largest Bitcoin exchange, filed for bankruptcy after days of suspense after its website went dark. The company said hackers may have made off with roughly 750,000 bitcoins owned by customers and 100,000 of its own–the equivalent of nearly half a billion dollars’ worth of the virtual currency. Meanwhile, Federal Reserve Chair Janet Yellen told a congressional committee that the Fed has no authority to regulate Bitcoin but suggested that Congress could look into doing so.
• Manufacturing showed signs of slowing in the United States, where durable goods orders were down for the third of the last four months thanks to a decline in transportation-related orders and the Institute for Supply Management’s gauge fell more than 5%. Meanwhile, Markit/HSBC’s survey of Chinese purchasing managers showed contraction there, though seasonal distortion may have played a role.
• Housing suffered from frigid weather throughout much of the country. Housing starts, building permits, and sales of existing homes all saw declines, though new-home sales were up slightly for the month and construction spending also rose.
• Inflation remained well within the Fed’s comfort level. The biggest monthly increase in the cost of electricity since March 2010 pushed up consumer prices by 0.1% for the month, putting the annual rate for the last 12 months at 1.6%. Meanwhile, the Bureau of Labor Statistics said the wholesale inflation rate was up 0.2% in January, but the annual rate was only 1.2% over the last year.

Eye on the Month Ahead

The Fed will meet again in March and may have to decide whether weaker economic reports in the last month or so were a function of bad weather or signs of something more significant. Also, the situation in Ukraine could affect the psychology of the markets.

The Markets

After making several attempts at setting a new all-time record high, the S&P 500 finally managed it at the end of the week. Buoyed by the possibility of a slowdown in Fed tapering, domestic equities more than erased the previous week’s losses; it was the first week so far this year that the S&P has ended in positive territory year-to-date.

Last Week’s Headlines

• The U.S. economy grew a bit more slowly in Q4 2013 than previously thought (2.4%). According to the Bureau of Economic Analysis, that put growth for all of 2013 at 1.9%.
• Home prices saw a slight (0.1%) decline in December, according to the S&P/Case-Shiller 20-City Composite Index–its second straight drop–but were 13.4% higher than the previous December.
• Despite the frigid winter weather in much of the country, the Commerce Department said sales of new homes were almost 10% higher than in December and more than 2% higher than the previous January.
• Orders for durable goods fell 1% in January, according to the Commerce Department. Though it was the third month of the last four to see a decline, it wasn’t nearly as bad as December’s 5.3% drop, and most of the decline was due to the often volatile transportation sector. Excluding the 5.6% transportation loss, new orders were up 1.1%.
• Tokyo-based Mt. Gox, at one time the largest Bitcoin exchange, filed for bankruptcy following days of suspense after its website went dark. The company said hackers may have made off with roughly 750,000 bitcoins owned by customers and 100,000 of its own–the equivalent of nearly half a billion dollars’ worth of the virtual currency. Meanwhile, Federal Reserve Chair Janet Yellen told a congressional committee that the Fed has no authority to regulate Bitcoin but suggested that Congress could look into doing so.
• Yellen also told Congress that the Fed is keeping a close eye on signs of weakness in economic data over the last month and is prepared to slow its tapering efforts if necessary. The Fed wants to assess the extent to which the weakness was the result of a slowing economy or simply lousy weather.

Eye on the Week Ahead

In addition to Friday’s jobs numbers, investors will be watching the European Central Bank on Thursday to see if any additional monetary easing policies might be announced. On Wednesday, the Chinese government will announce its forecast for economic growth there in 2014. Finally, the tense situation in Ukraine could also factor into the psychology of the markets.

Last Week’s Headlines

January’s dismal weather across much of the country helped cut housing starts by 16% and building permits for future construction by 5.4%, according to the Commerce Department. The worst declines were seen in the Midwest, while starts actually rose in the Northeast.

• Consumer prices rose 0.1% in January, according to the Bureau of Labor Statistics, largely because of home energy demands connected to the brutal winter over much of the country. The BLS said the 1.8% increase in the cost of electricity was the biggest since March 2010, while natural gas and heating oil also were up sharply. Wholesale prices rose 0.2% during the month; that was a slight acceleration from December and put the year-over-year increase at 1.2%.
• Home resales didn’t escape winter’s ill effects. According to the National Association of Realtors®, weather plus higher mortgage rates and the ongoing shortage of homes for sale brought January sales down 5.1% during the month to their lowest level since July 2012. Sales also were 5.1% lower than the previous January.
• China’s manufacturing sector shrank for the second straight month, according to February’s Markit/HSBC Purchasing Managers’ Index, which fell to 48.3 (any number below 50 represents contraction). However, the extended Lunar New Year festival traditionally has slowed manufacturing there at this time of year. U.S. manufacturing reports also showed a decline. The Philly Fed survey fell from 9.4 in January to -6.3, and though the Fed’s Empire State survey remained positive at 4.5, it was down 8 points for the month.
• A report by the Congressional Budget Office assessing the impact of an increase in the minimum wage found that while higher pay for 16.5 million workers would lift anywhere from 300,000 to 900,000 families above the poverty line, it also could also mean some job losses. The CBO estimated that a $9 minimum wage could cut an estimated 200,000 jobs (less than 0.1%), while a $10.10 minimum wage–the level proposed by President Obama–could result in an estimated 500,000 fewer jobs (or 0.3%).
• The International Monetary Fund warned that emerging-market economies need to continue tightening their monetary policies to combat the impact of tighter money in the developed world. It also urged the eurozone to implement new lending programs and lower interest rates to fight inflation that is so low that it raises the risk of turning into deflation.
• Minutes of the Federal Reserve’s monetary policy committee’s most recent meeting suggested that investors could soon begin hearing guidance about when and how the Fed will begin raising its target interest rate.
• The Federal Communications Commission said it will try once again to write rules that prevent broadband Internet providers from blocking or slowing access to certain customers. The FCC’s so-called “net neutrality” regulations were overturned by a federal appellate court ruling last month that would allow broadband companies to charge content providers higher rates for faster service.
• Facebook stunned the tech community by agreeing to pay $19 billion in cash and stock to acquire mobile messaging startup WhatsApp (after having previously turned down one of the company’s founders for a job). The deal was reported to be the largest tech merger since the AOL-Time Warner deal in 2001. WhatsApp in turn stunned its roughly 450 million users by undergoing a three-hour outage just days later.

Eye on the Week Ahead

In light of recent weaker Fed manufacturing reports, the Commerce Department’s report on durable goods orders for January could be closely watched. Final numbers for U.S. economic growth in both Q4 and all of 2013 also will be available.

The Markets

Stability ball: A congressional accord on the debt ceiling plus fresh reassurance about Fed policy seemed to outweigh lackluster economic news, helping domestic equities follow through on the previous week’s late rally. The Nasdaq’s week was its best since late October, while the Russell 2000’s gain was the best for any of the four domestic indices listed below so far this year. Meanwhile, the Dow edged above 16,000 once again. 

The Markets

Despite a dizzying 326-point loss for the Dow on Monday after disappointing reports on both U.S. and Chinese manufacturing, domestic equities indices largely managed to rebound on high trading volumes. The S&P 500 finally saw its first positive week following three straight weekly losses. Unfortunately, the small caps of the Russell 2000 didn’t share in the bounce.

Last Week’s Headlines

• The 113,000 new jobs added to the U.S. economy in January barely nudged the unemployment rate down 0.1% to 6.6%. Meanwhile, the labor force participation rate rose slightly to 63%, and the number of long-term unemployed fell by 232,000 during the month.
• U.S. manufacturers saw substantially slower growth in January as the Institute for Supply Management’s gauge fell 5.2% from December’s 56.5%. Though the 51.3% reading represents the eighth straight month of expansion, it’s only 1.4% away from actual contraction, and the ISM survey also showed new orders falling a significant 13.2% to 51.2%. Meanwhile, the 50.5% reading on China’s official manufacturing index was more or less in line with an earlier report of contraction there.
• The ISM’s measure of non-manufacturing activity fared better than the manufacturing sector. January’s 1% increase to 54% represented the 48th straight month of expansion, and new orders for the month increased by half a percent.
• Led by the residential market, construction spending was up 0.1% in December. The Commerce Department said the 2.6% gain for the month in private residential construction resulted in the biggest annualized increase since June 2008. Construction of single-family homes was even better, rising 3.4% for the month and 21.6% from the previous December. By contrast, commercial and government construction were both down.
• A 9.7% drop in transportation-related orders accounted for a large portion of the 1.5% decline in factory orders for U.S. manufacturers in December, according to the Commerce Department. However, the $2.3 trillion worth of U.S. exports in 2013 set a new record for the fourth straight year.
• Labor productivity rose at an annualized rate of 3.2% during Q4 2013, according to the Bureau of Labor Statistics, as output rose 4.9% and the number of hours worked was up 1.7%.
• Bill Gates stepped down as Microsoft’s chairman to take a more active role as a technology advisor to the company, while longtime executive Satya Nadella will become the company’s third CEO.
• Both Standard & Poor’s and Moody’s cut Puerto Rico’s bond rating to junk status, citing concerns about the U.S. territory’s ability to tap capital markets. S&P also reaffirmed Turkey’s BB+ rating but cut its outlook to negative, indicating the likelihood of further downgrades.
• The Congressional Budget Office forecast that the U.S. budget deficit is on track to fall to 3% of gross domestic product this year–close to the average for the last 40 years–and to 2.6% of GDP in 2015. However, after that, it will start rising again because of the aging population, federal subsidies for health insurance, rising health-care costs, and higher interest on federal debt. The 3% projected increase in GDP through Q4 2014 would be the largest rise in almost a decade, though the CBO continued to warn about the size of the federal debt (74% of GDP by the end of 2014). The CBO report also forecast that unemployment will remain above 6% until late 2016. Labor force participation could fall by the equivalent of 2 million jobs in 2017 as a result of the Affordable Care Act, “almost entirely [because of] a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses’ demand for labor.” However, the report said that figure will depend on how many people obtain subsidized health insurance through exchanges.
• The European Central Bank kept its key interest rate at 0.25% for the third straight month despite concerns that without increased monetary stimulus, inflation that has been below 1% in the region for several months could turn into deflation.

Eye on the Week Ahead

Investors will have to determine whether the retail sales to be reported on Thursday were affected by January’s severe weather across much of the country. New Fed Chair Janet Yellen’s testimony before Congress also will be watched.

The Markets

It’s a small, small world: Despite various attempts at propping up local currencies, emerging markets continued to suffer from concerns that 1) assets being moved to stronger currencies could undermine already fragile economies, and 2) a slowdown in Chinese manufacturing could reduce demand for commodities, exports of which are crucial to many emerging-market countries. Fueled by additional Fed tapering, risk aversion also spread to markets in developed countries, hurting large caps that derive a large portion of their revenues overseas. The Dow’s losses gave the index its worst January since 2009. Traditional safe-haven refuges such as U.S. Treasuries continued to benefit from the turmoil.

Last Week’s Headlines

For the second month in a row, the Federal Reserve’s monetary policy committee will cut $10 billion a month from its bond purchases. That will leave the total at $65 billion a month instead of the $85 billion it had been buying as recently as December.

• Some emerging-market countries whose currencies have been hurt in recent months attempted to fight back. Turkey hiked its key interest rate from 7.5% to 12% to try to halt a decline in the country’s lira, while South Africa’s central bank raised its interest rate to 5.5% and India’s repo rate went to 8% from 7.75%. The moves came in the wake of Brazil’s decision to raise its key interest rate by a half-point to 10.5% and Venezuela’s recent attempt to impose currency controls indirectly by limiting the amount of airline tickets that can be exchanged for U.S. dollars.
• The U.S. economy expanded at an annualized rate of 3.2% during the fourth quarter of 2013. Though that was somewhat less than Q3’s annualized 4.1% growth, the Bureau of Economic Analysis said the 3.7% growth during 2013’s second half was stronger than the 1.8% expansion during the first six months. The growth was led by consumer spending, exports, and business spending on capital goods.
• Sales of new homes dropped 7% in December. However, the Department of Commerce said the figure is still 4.5% ahead of the previous December, and sales for all of 2013 were 16.4% higher than in 2012. Meanwhile, home prices in the cities covered by the S&P/Case-Shiller 20-City Composite Index were up 13.7% year-over-year in November. Though the 0.1% drop was the first monthly decline in nine months, it represented the best November since 2005.
• Durable goods orders fell 4.3% in December, according to the Commerce Department; that’s the second decline in the last three months. Aside from the volatile transportation sector, new orders for U.S. manufactured goods fell 1.6%, and business spending on equipment was down 5% for the month.
• The Bureau of Economic Analysis said personal incomes were basically flat in December, though after adjusting for inflation, they were down 0.2% for the month. Meanwhile, holiday spending helped push consumer spending up 0.4%, cutting the personal savings rate to 3.9% from November’s 4.3%. 

Eye on the Week Ahead

In addition to the ongoing focus on emerging markets and earnings reports, Friday’s unemployment numbers will be of interest. And in light of currency concerns around the world, the European Central Bank’s announcement on Thursday could receive extra attention.

The Markets

Increased confidence in a strengthening U.S. economy helped decrease investor confidence in several emerging-market countries, and financial markets around the world felt the strain in January. Investors worried that as the Fed cuts its bond purchases and eventually begins to move away from rock-bottom interest rates, money would be lured away from emerging markets, especially those already facing financial or political instability. That wasn’t the only threat that roiled markets overseas. As several countries attempted to manipulate their currencies to try to attract buyers or fight inflation, a disappointing report on China’s manufacturing sector did little to allay investor concern.

Developed markets weren’t immune to the contagion. Large caps, many of which earn a substantial percentage of their revenues overseas, were hurt the most. After hitting an all-time record on December 31, the Dow had its worst January since 2009, while the S&P 500 went from an all-time high on January 15 to a loss for the month in just two weeks. The Nasdaq, which led the pack in 2013, lost the least, followed by the small caps of the Russell 2000. Not surprising given the rout in emerging markets, the Global Dow also suffered. And as frequently happens during periods of global instability, investors turned to such traditional safe havens as U.S. Treasuries; the yield on the benchmark 10-year note fell as demand pushed prices up.

The Month in Review

• The U.S. economy expanded at an annualized rate of 3.2% during the fourth quarter of 2013. Though that was somewhat less than Q3’s annualized 4.1% growth, the Bureau of Economic Analysis said the 3.7% growth during 2013’s second half was stronger than the 1.8% expansion during the first six months. The growth was led by consumer spending, exports, and business spending on capital goods.
• Only 74,000 new jobs were added to U.S. payrolls in December; it was the lowest number since January 2011, according to the Bureau of Labor Statistics. However, the unemployment rate fell from 7% to 6.7%–its lowest level since October 2008–largely because of people dropping out of the workforce.
• A Markit/HSBC survey of purchasing managers that indicated contraction in China’s manufacturing sector–a key customer for the commodity exports on which many emerging economies rely–helped aggravate concerns about several foreign currencies. Argentina devalued the country’s peso in an attempt to jump-start exports, while Venezuela indirectly imposed currency controls by attempting to curb a black market trade in airline tickets. Meanwhile, after South Africa’s rand dropped and Turkey’s currency hit a record low, central banks in both countries raised their key interest rates to try to keep investors from moving their money elsewhere. Those actions followed the decision of India’s central bank to raise its benchmark rate from 7.75% to 8% after a year-long decline in the rupee, and Brazil’s increase in its key rate to 10.5%.
• As Ben Bernanke turned over the Federal Reserve chairmanship to Janet Yellen, the Fed began reducing the bond purchases that have helped support the economy for the last several years. The $85 billion of Treasury and mortgage-backed securities being bought each month fell to $75 billion in January, and will go to $65 billion in February.
• Housing starts fell 10% in December, and sales of new homes were down 7% for the month. However, the Department of Commerce said the new-home sales figure is still 4.5% ahead of the previous December, and sales for all of 2013 were 16.4% higher than in 2012. Home resales were better, with a 1% rebound in December after 3 straight months of declines, and the National Association of Realtors® said 2013 resales were the highest since 2006. Meanwhile, even though home prices in the cities covered by the S&P/Case-Shiller 20-City Composite Index fell 0.1% in November, it was still the best November since 2005, and prices were up 13.7% year-over-year.
• Inflation remained well within the Fed’s comfort level. A 0.3% increase in consumer prices and a 0.4% rise in wholesale prices in December left the annual inflation rates for 2013 at 1.5% and 1.2% respectively, according to the Bureau of Labor Statistics. Meanwhile, the Commerce Department said slower auto sales didn’t prevent overall retail sales from rising 0.2% in December, because non-auto retail spending rose 0.7%.
• Record exports helped cut the U.S. trade deficit to $34.3 billion in November, its lowest level since September 2009, according to the Bureau of Economic Analysis. After a surge in November, orders placed with U.S. factories fell 4.3% in December–the second decline in the last three months. Also, the Fed’s measure of industrial production saw its fifth straight month of gains; the 0.3% monthly gain put it 3.7% ahead of the previous December.

Eye on the Month Ahead

January’s turmoil left many wondering whether it represented the start of a long-overdue correction in the nearly five-year post-2008 bull market in equities or a long-overdue pause that could fuel a push to fresh heights. February could help answer that question. The Fed won’t meet again until March, so markets will get a chance to digest the current round of tightening and emerging markets’ ongoing attempts to cope with its implications for their futures.

What I’m Watching This Week – 27 Jan 2014

The Markets

The Markets

Domestic indices were mixed last week. The NASDAQ and Russell 2000 ended with slight gains, the Dow was basically flat, and the S&P 500 wound up with a slight loss after briefly returning to the level at which it started the year. The benchmark 10-year Treasury yield also saw a little dip.

Last Week’s Headlines

• Slower auto sales didn’t prevent overall retail sales from rising 0.2% in December, according to the Commerce Department. Excluding the 1.8% decline in auto sales, retail sales were up 0.7%.
• Driven by increases in the cost of housing and energy, consumer prices rose 0.3% in December, putting the inflation rate for the last 12 months at 1.5%. The Bureau of Labor Statistics said wholesale inflation also was up in December; the 0.4% monthly increase put the annual rate at 1.2%. However, both remain well below the level that would raise concerns at the Federal Reserve Board.
• There was good news about manufacturing from the Federal Reserve. The Empire State index showed accelerating growth and hit its highest reading in more than a year (12.5), while the Philly Fed index went from 6.4 to 9.4 and has now shown growth for eight straight months. The Fed’s measure of industrial production also was positive. December’s 0.3% increase–the fifth straight month of gains–put industrial production 3.7% ahead of the previous December and 0.9% higher than its pre-recession high of December 2007.
• Housing starts froze in December, according to the Commerce Department. However, the nearly 10% decline for the month still left them 1.6% ahead of December 2012, and the 923,400 housing starts for all of 2013 represented the highest annual total since 2007. Building permits–an indicator of future activity–also fell by 3% during the month but were 4.6% higher than a year earlier.
• A federal appeals court voted to give providers of broadband internet services greater ability to charge content providers higher rates for faster service to their customers. The ruling overturned the FCC’s so-called “net neutrality” regulations, but left open the possibility that the FCC could regulate service in other ways–for example, by classifying broadband as a telecommunications service, which would put it in the same category as telephones.
• The Federal Reserve’s “beige book” reported continued moderate economic expansion in most districts.

Eye on the Week Ahead

With little fresh economic data available, investors may concentrate on the ongoing stream of earnings reports. The World Economic Forum at Davos also could produce some headlines.

Have an amazing week!

The Markets

Believers in the so-called January indicator–the concept that the first five trading days suggest the stock market’s overall direction for the rest of the year–were likely discouraged last week. The S&P gave up roughly half a percentage point during 2014’s first five trading days. The other three domestic indices also slipped during those five days, with losses ranging from the Nasdaq’s quarter of a percentage point to the Dow’s nearly seven-tenths of a percent. A rebound at week’s end gave three of the four domestic indices a gain for the week. However, the small-cap Russell 2000 was the only one to see a slight gain for both the week and the year so far. Meanwhile, the yield on the benchmark 10-year Treasury fell as the new year saw a new interest in bonds.

Last Week’s Headlines

Only 74,000 new jobs were added to U.S. payrolls in December; that’s the lowest number since January 2011, according to the Bureau of Labor Statistics. However, the unemployment rate fell from 7% to 6.7%, largely because of people dropping out of the workforce.

Minutes of the meeting at which the Federal Reserve’s monetary policy committee decided to begin scaling back its bond purchases emphasized once again that tapering will be done gradually and will depend on economic data. Members also forecast stronger economic growth in coming years and a gradually declining unemployment rate.

The Senate made it official that Janet Yellen will oversee the Fed’s tapering efforts. Members confirmed her appointment as the first woman to chair the Federal Reserve Board. She will take over when Ben Bernanke steps down January 31.

Record exports helped cut the U.S. trade deficit to $34.3 billion in November. According to the Bureau of Economic Analysis, that was the lowest level since September 2009.

Orders placed with U.S. factories in November surged 1.8% for the month, putting them at their highest level since the Commerce Department began tracking the figures in 1992. Inventories, which have risen 11 of the last 12 months, were partly responsible, but new orders for durable goods, particularly transportation equipment, also have risen 3 of the last 4 months and were up 3.4% in November.

Growth in U.S. service industries slowed slightly in December as the Institute for Supply Management’s gauge fell almost 1% to 53% during the month. The ISM survey also showed new orders falling to 49.4% in December, which represents actual contraction.

Eye on the Week Ahead

The Q4 2013 earnings season will get into high gear as several major financial and tech companies release reports. Data on retail sales for the holiday season will shed light on the state of consumers’ wallets.

Have a wonderfully profitable week!