Tag: earnings results

What I’m Watching This Week – 20 July 2014

Published on by dredheadz

The Markets

In a week that saw mostly mixed economic data and generally positive earnings reports, markets posted mixed results as well. While tech and international stocks posted slight gains, the Dow Jones Industrial Average lost a little less than 1% after Friday’s 123-point drop. Small caps continued their slump, and the S&P 500 finished the week flat despite hitting new records mid-week.

Market/Index 2013 Close Prior Week As of 7/25 Weekly Change YTD Change
DJIA 16576.66 17100.18 16960.57 -.82% 2.32%
Nasdaq 4176.59 4432.15 4449.56 .39% 6.54%
S&P 500 1848.36 1978.22 1978.34 .01% 7.03%
Russell 2000 1163.64 1151.61 1144.72 -.60% -1.63%
Global Dow 2484.10 2622.25 2630.48 .31% 5.89%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.50% 2.48% -2 bps -56 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • Consumer prices rose 0.3% in June. According to the Bureau of Labor Statistics, the increase was driven largely by higher gas prices, which rose 3.3% and accounted for two-thirds of the increase. By comparison, last month’s rise in inflation was more broad-based. Energy prices were mixed in June: electricity prices rose, while natural gas and fuel oil prices fell. Food prices rose modestly, while the index for all items except food and energy rose by a slight 0.1%. For the 12 months ended in June, inflation rose 2.1%.
  • Existing-home sales climbed 2.6% in June, reported the National Association of Realtors® (NAR). At a seasonally adjusted annual rate of more than 5 million, sales are at their highest rate since October 2013. Inventories rose 2.2% to 2.3 million homes, indicating a 5.5-month supply at the current rate of sales. Lawrence Yun, NAR chief economist, said, “Inventories are at their highest level in over a year and price gains have slowed to much more welcoming levels in many parts of the country. This bodes well for rising home sales in the upcoming months as consumers are provided with more choices.”
  • On the other hand, sales of new single-family homes plummeted by more than 8% in June from May, according to a report issued jointly by the U.S. Census Bureau and the Department of Housing and Urban Development. The seasonally adjusted rate of 406,000 homes was 11.5% lower than the June 2013 estimated figure.
  • The Securities and Exchange Commission (SEC) announced amendments to the rules that govern money market mutual funds. According to a press release issued by the SEC, the amendments are intended to guard against a run on such funds in times of crisis, “while preserving the benefits of the funds.” The rules require a floating net asset value for prime money market funds serving an institutional client base. Prime money market funds serving individual investors will continue to strive for a stable $1 share price, although there can be no guarantees that such a price will be maintained. The new regulations also allow non-governmental money market funds to charge fees or impose other restrictions on investors attempting to withdraw funds during trying times. “This strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America’s investor,” said Mary Jo White, SEC chairperson.
  • In a move that surprised many observers, the Bank of Russia raised its key interest rate for the third time in five months. The central bank lifted the rate by 0.5% to 8% in a move intended to curb inflation, respond to continued geopolitical unrest, and perhaps stymie additional flight of capital resulting from any further economic sanctions.
  • Unemployment insurance weekly claims (i.e., weekly jobless claims), were 284,000 for the week ending July 19. That was a decrease of 19,000 from the previous week and, more notable, the lowest level for initial claims since February 2006.

Eye on the Week Ahead

Next week, market watchers will keep an eye on manufacturing data, home prices, comments from the Fed, and the government’s initial estimates for second-quarter growth figures.

What I’m Watching This Week – 21 July 2014

Published on by dredheadz

The Markets

U.S. stocks dropped sharply Thursday in response to the downing of a Malaysia Airlines commercial jet over Ukraine and the Israeli ground invasion of Gaza. However, most indexes bounced back Friday to end another week in positive territory. The exception was the Russell 2000 Index, which continued its decline perhaps aided by Fed Chairman Janet Yellen’s comments earlier in the week indicating that valuations in some small-cap sectors appear “substantially stretched.” Treasury yields dropped last week, while gold ended the week about 2% lower.

Market/Index 2013 Close Prior Week As of 7/18 Weekly Change YTD Change
DJIA 16576.66 16943.81 17100.18 .92% 3.16%
Nasdaq 4176.59 4415.49 4432.15 .38% 6.12%
S&P 500 1848.36 1967.57 1978.22 .54% 7.03%
Russell 2000 1163.64 1159.93 1151.61 -.72% -1.03%
Global Dow 2484.10 2599.40 2622.25 .88% 5.56%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.53% 2.50% -.03 bps -.54 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • Stocks tumbled Thursday in response to two major geopolitical events, the downing of Malaysia Airlines Flight 17 over Ukraine and Israel’s ground invasion of the Gaza Strip. Treasuries yields dropped and gold futures rose as investors sought safer havens.
  • Retail and food sales rose 0.2% in June and were 4.3% higher than a year earlier. However, the Commerce Department does not adjust the numbers for price increases such as those seen in food costs in the last several months; not counting autos, which were down 0.3%, other retail sales were up 0.4% for the month.
  • The Federal Reserve’s “beige book” report said most districts expect a continuation of generally steady growth seen at the end of last year. All districts reported year-over-year gains in manufacturing, and most also said retail sales had increased since the last report.
  • Wholesale prices rose 0.4% in June, putting the wholesale inflation rate for the last 12 months at 1.9%. The Bureau of Labor Statistics said almost all of the monthly increase was the result of a 2.1% jump in energy costs resulting mostly from higher gas prices.
  • Housing starts dropped by 9.3% in June from the previous month, according to a joint release issued by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. The decrease stemmed from a nearly 30% drop in the South, where unusually wet weather hampered construction efforts. Other regions reported increases, including the Northeast, which was up 14.1%, and the Midwest, which rose 28.1%. Year-over-year, the index is up 7.5%.
  • Manufacturing data was generally positive. The Federal Reserve said U.S. manufacturing output was up for the fifth straight month, while a 0.2% gain in industrial production meant production was up an annualized 5.5% during Q2 2014. Also, the Federal Reserve’s Empire State manufacturing survey rose for the third straight month, hitting its highest level in more than four years (25.6). The Philadelphia Fed Survey reported similar results. The index rose to 23.9 this month, its highest point since March 2011.
  • The Conference Board Leading Economic Index rose 0.3% in June. Ataman Ozyildirim, a Conference Board economist, noted that increases over the last six months indicate an improving economy, which might even accelerate a bit in the second half. “Housing permits, the weakest indicator during this period, reflects some risk to this improving outlook. But favorable financial conditions, generally positive trends in the labor markets and the outlook for new orders in manufacturing have offset the housing market weaknesses over the past six months,” he said.
  • The Justice Department announced that Citigroup had agreed to provide $200 million worth of financing for new affordable rental housing as part of a $7 billion settlement for misrepresenting mortgage-backed securities it packaged and sold leading up to the 2008 financial crisis. The agreement also includes a $4 billion civil penalty that the Department of Justice said represents the largest settlement under a federal law enacted as a result of actions by thrifts and savings and loan institutions in the 1980s.

Eye on the Week Ahead

This week, investors will likely keep a close eye on continuing geopolitical developments, as well as domestic reports on consumer inflation, existing and new home sales, and durable goods.

What I’m Watching This Week – 14 July 2014

Published on by dredheadz

The Markets

After Alcoa’s strong report unofficially kicked off the Q2 earnings season, domestic equities rebounded from two down days. However, investors decided to take advantage of equities’ recent record levels and take some profits after revelations about a banking problem in Portugal revived concerns about Europe’s financial sector. Meanwhile, the spot price of oil, which had spiked to $107 two weeks ago, ended the week just over $100 a barrel.

Market/Index 2013 Close Prior Week As of 7/11 Weekly Change YTD Change
DJIA 16576.66 17068.26 16943.81 -.73% 2.21%
Nasdaq 4176.59 4485.93 4415.49 -1.57% 5.72%
S&P 500 1848.36 1985.44 1967.57 -0.90% 6.45%
Russell 2000 1163.64 1208.15 1159.93 -3.99% -.32%
Global Dow 2484.10 2638.59 2599.40 -1.49% 4.64%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.65% 2.53% -12 bps -51 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The Federal Reserve currently expects its bond purchases to end in October, according to minutes of the most recent Federal Open Market Committee meeting. However, the minutes also reiterated that the end of bond-buying won’t automatically mean higher interest rates, at least not for a “considerable time.” The Fed also will continue to reinvest the proceeds of maturing bonds it already holds until after it acts on rates.
  • Talks aimed at trying to address U.S.-China differences over Chinese currency policies began. The United States contends that those policies have kept the yuan artificially low, giving Chinese companies an unfair pricing advantage. Meanwhile, Chinese exports were up 7.2% in June from a year earlier, according to China’s General Administration of Customs.
  • A major Portuguese lender’s failure to make payments on some of its short-term debt raised concerns once again about the stability of European banks and the possibility of contagion. Banco Espirito Santo has been known to be struggling since December, but investor reaction to the disclosure caused several other European companies to postpone bond offerings.

Eye on the Week Ahead

Q2 earnings reports from some major financial and tech companies, due next week, could influence investor thinking about whether Q1’s discouraging GDP really has given way to renewed growth. Housing and inflation data also are likely to be closely watched.

Should I Divert Unmatched 401(k) Contributions to a Roth IRA?

Published on by dredheadz

By Leslie E. Papke, Professor of Economics at Michigan State University

Note: A participant’s first priority should be to contribute enough to their 401(k) plan to obtain the entire employer match.

In most cases, no. 401(k) contributions and contributions to a Roth IRA benefit from identical favored tax treatment over the life of the investment. (See examples below.) Since the tax benefits of the two saving schemes are identical, an investor should be indifferent between the two types of saving on tax grounds. Plus, the Roth IRA is capped at $5,500 after-tax, while most 401(k) participants can invest much more than that before reaching the current 401(k) cap of $17,500 before-tax. Since the tax treatments are identical, and the limit on the 401(k) contributions is much higher, you should continue to make unmatched contributions to your 401(k) until the maximum is reached. Diverting unmatched 401(k) contributions to a Roth will not give you additional tax saving, but will increase your transaction costs, and possibly management fees as well.

There may be non-tax reasons to prefer a Roth IRA. Say, for example, that you are not happy with the investments available in your 401(k) plan. If your asset choices are restricted in your 401(k), then since the tax treatments are the same, you may prefer to choose your own investments for the $5,500 after-tax that you are allowed to invest in a Roth.

The examples below illustrate that the tax liabilities of comparable 401(k) and Roth IRA contributions are equivalent. In general, the 401(k) contribution is made in pre-tax dollars, and while you pay taxes on the value of the account at withdrawal, you are essentially only paying taxes on the contributions, earnings are effectively tax-free. A Roth contribution is made in after-tax dollars, you pay taxes on the contribution up-front, and its earnings are also tax-free. The key to comparing after-tax returns on a 401(k) investment to a Roth is to be sure that the contributions you are comparing involve the same amount of pre-tax income.

To illustrate with a simple example, suppose I face a 30 percent marginal tax rate and I want to save my next $1,000 of salary in either my 401(k) plan or a Roth. If I invest in the 401(k) plan, since the contribution is not taxed (deducted from your paycheck before taxes), I put the entire $1,000 into the account. Contributions to a Roth are made after-tax, however, so if I receive the $1,000 as salary today, I can contribute only $700 ($1,000-$300 tax) to a Roth.

Ignoring penalties, suppose I want to withdraw from the accounts the following year. My tax rate is still 30 percent and the pre-tax interest rate is five percent. I withdraw $735 ($700 x 1.05) from the Roth and pay no additional taxes. Or, I withdraw $1050 ($1000 x 1.05) from my 401(k), pay my 30 percent tax of $315 ($1050 x .3), and have $735 left. The tax liabilities of the Roth and the 401(k) plan are identical. This is true for an investment of any time horizon.

I make these comparisons assuming that my tax rate today is the same as the tax rate I face when I withdraw the funds. If my tax rate were lower in the future (due to lower retirement income, for example) then the 401(k) plan would have a higher after-tax return than the Roth. But if my tax bracket increases after retirement, then the 401(k) plan would have a lower after-tax return than the Roth IRA.

Changes in my future tax rate will not affect the after-tax return from the Roth, since taxes are paid before the contribution. The Roth would still return $735 in the example above. But, if my tax rate is 20 percent at withdrawal, when I withdraw the $1050 from my 401(k) plan, I pay $210 ($1050 x .2) in taxes and have $840 left. When my tax rate is lower at withdrawal, the 401(k) plan beats the Roth.

But, if my tax rate at withdrawal is 40 percent, when I withdraw the $1050 from the 401(k) plan, I pay $420 in taxes, and have $630 left over. When my tax rate is higher at withdrawal, the Roth after-tax returns are higher than those from my 401(k) plan.

A comparison between a 401(k) contribution and a Roth IRA contribution may also be framed in terms of a $1,000 after-tax contribution to a Roth. Suppose I want to compare an investment of $1,000 in a Roth to the equivalent investment in my 401(k) plan. The right question to ask is: How much pre-tax income would I need to make the $1,000 Roth contribution? That is the amount I could invest in my 401(k) instead. Since Roth contributions are made after-tax, I need $1,430 in income ($1,000=$1,430 x (1-.3)) to contribute $1,000 to a Roth. The after-tax $1,000 contribution to the Roth grows to $1050 next year with no additional liability. If, instead, I save the $1,430 in the 401(k) plan, it grows to $1,500 ($1,430 x 1.05) in one year, leaving $1,050 ($1,500 x (1-.3)) after-tax.

No matter how you argue it, from the point of view of tax liability, the 401(k) plan without matching and the Roth IRA are equivalent forms of saving. Of course, if you can afford to save more after you have maximized your 401(k) contributions, you might invest an additional $4,000 after-tax in a Roth IRA. Some investors may also be eligible for a conventional IRA. The conventional IRA is capped at $ 5,500 before- tax, so if you’re going to invest up to $5,500 before taxes, the two IRAs are equivalent (assuming that you are eligible for both). If you can afford the larger investment of $5,500 after-tax, then you should invest in the Roth IRA.

What I’m Watching This Week – 7 July 2014

Published on by dredheadz

The Markets

After generally positive economic data once again suggested that the economy really did begin to rebound this spring, the Dow industrials surpassed 17,000 for the first time, while the S&P 500 hit three new all-time records during the week. And as investors embraced stocks, worries about the potential impact of a strong economy on potential Fed rate increases also sent the benchmark 10-year Treasury yield up and the price down.

Market/Index 2013 Close Prior Week As of 7/4 Weekly Change YTD Change
DJIA 16576.66 16851.84 17068.26 1.28% 2.97%
Nasdaq 4176.59 4397.93 4485.93 2.00% 7.41%
S&P 500 1848.36 1960.97 1985.44 1.25% 7.42%
Russell 2000 1163.64 1189.49 1208.15 1.57% 3.83%
Global Dow 2484.10 2603.77 2638.59 1.34% 6.22%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.54% 2.65% 11 bps -39 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

    • The unemployment rate fell to 6.1% in June; that’s 1.4% lower than a year earlier and the lowest level in almost six years. The economy added 288,000 new jobs during the month, higher than the 272,000 monthly average since March. The data, coupled with upward revisions to payroll figures for April and May, suggested possible acceleration in job growth. The Bureau of Labor Statistics said the widespread job gains were led by professional/business services, retail, restaurants/bars, and health care.
    • A 2% increase in new orders placed with U.S. manufacturers put orders at their highest level since late 2013. Even though the Institute for Supply Management’s index showed that manufacturing growth didn’t accelerate in June, it still remained at a healthy 55.3% reading (any number above 50 represents expansion). The ISM’s measure of the services sector also showed slightly slower growth than the previous month, though the reading remained at a robust 56.3%.
    • After three straight monthly increases, new orders for U.S. manufactured goods slipped 0.5% in May, though most of the decline was in the volatile transportation sector. The Commerce Department also said inventories were at their highest level on record and have increased 18 of the last 19 months.
    • Commercial construction spending rose 1.1% in May, but the Commerce Department said that was largely offset by a 1.4% drop in the value of new home projects. The 0.1% overall increase in construction spending was weaker than April’s 0.8% gain, but the annual rate was 6.6% higher than a year ago.
    • As expected, the European Central Bank left two key interest rates unchanged, hoping that measures taken last month will be enough to help stimulate the economy.
    • Higher auto-related exports and less spending on imported oil and consumer goods helped cut the U.S. trade deficit by 5.5% in May to $44.4 billion, according to the Bureau of Economic Analysis.
    • The U.S. Supreme Court ruled that closely held, for-profit companies can choose to opt out of a provision of the Affordable Care Act that requires that employees’ insurance include coverage for birth control. The court also ruled that workers who aren’t full-fledged public employees cannot be required to pay fees to a union even if they benefit from its collective bargaining efforts.
    • Two separate assessments suggested that China’s sluggish manufacturing sector may be rebounding. The reading on the Chinese government’s purchasing managers’ index nudged up slightly to 51 in May. Meanwhile, HSBC/Markit’s Manufacturing PMI was basically flat but stayed in expansion territory, apparently responding to small steps taken by the government to stimulate economic growth.

Eye on the Week Ahead

In a week that’s light on fresh economic reports, investors may begin to focus on the Q2 earnings season, which has its unofficial start on Tuesday when Alcoa reports. Minutes of the most recent Federal Open Market Committee meeting could shed new light on the debate over whether the Fed should be concerned yet about inflation.

 

 

 

Monthly Market Review – June 2014

Published on by dredheadz

The Markets

After a rocky start, the quarter eventually made up for domestic equities’ earlier losses. As winter weather finally lost its chokehold on the U.S. economy, investors also grew increasingly comfortable with the Federal Reserve’s slow-and-steady approach to unwinding quantitative easing. As a result, they were willing to take on risk again, handing the Dow and S&P their 11th and 22nd all-time record closes of the year. As tech and biotech stocks rebounded from their early-spring slump, they helped push the Nasdaq back to a level it hadn’t seen since March 2000. By June, the small caps of the Russell 2000, which suffered the most in April, had managed to climb back into positive territory for the year, and the Global Dow’s year-to-date performance was more than triple that of its U.S. counterpart.

Bond investors continued to confound Fed-wary pundits, sending the benchmark 10-year Treasury yield down as demand pushed up prices. With Iraq joining Ukraine as a source of geopolitical anxiety, concern about oil supplies helped send the spot price above $107 a barrel. And despite some volatility that took the price of gold down to roughly $1,240 an ounce, a June rally allowed it to end the quarter at roughly $1,320.

Market/Index 2013 Close As of 6/30 Month Change Quarter Change YTD Change
DJIA 16576.66 16826.60 .65% 2.24% 1.51%
NASDAQ 4176.59 4408.18 3.90% 4.98% 5.54%
S&P 500 1848.36 1960.23 1.91% 4.69% 6.05%
Russell 2000 1163.64 1192.96 5.15% 1.70% 2.52%
Global Dow 2484.10 2605.62 1.61% 4.11% 4.89%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.53% 5 bps -20 bps -51 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Quarterly Economic Perspective

  • The end of winter weather brought greater relief than usual this spring, especially after gross domestic product was shown to have contracted strongly in Q1. The Bureau of Economic Analysis’s final -2.9% GDP estimate was the worst reading since early 2009 and a far cry from the 2.6% growth of the previous quarter. The BEA said most of the decline was caused by cuts in exports, business investments/inventory, and state and local government spending, while consumers spent more on higher heating costs. The slump caused the Federal Reserve to cut its economic growth forecast for all of 2014 to 2.1%-2.3%. Meanwhile, corporate profits were down 9.1% during the quarter–the largest drop since the end of 2008, according to the BEA.

  • The U.S. economy finally regained all of the jobs lost since the recession officially began in late 2007, and total employment was higher than when it previously peaked in January 2008. Also, the unemployment rate inched downward to 6.3%–its lowest level since September 2008.
  • By the end of the quarter, the housing market had begun to rebound from its winter slowdown as more homes came onto the market. According to the Commerce Department, sales of new single-family homes leaped 18.6% in May, and the National Association of Realtors® said that the 4.9% increase in home resales was the biggest monthly gain in nearly three years. Also, April was a strong month for both housing starts and building permits, though they had tapered off by the end of the quarter.
  • U.S. manufacturing also showed signs of strength. Industrial production rose for three months out of four, according to the Federal Reserve. And after three straight months of increases, durable goods orders slumped in May, but the Commerce Department said non-defense orders were up 0.1%. And once winter weather abated, retail sales also showed gains.
  • By quarter’s end, consumer inflation had risen at the fastest monthly pace (0.4%) in more than a year. The Bureau of Labor Statistics said the increases were driven by higher prices for housing, food, electricity, and gas. However, Fed Chair Janet Yellen called recent upticks “noisy” data and said the 2.1% inflation rate for the last 12 months isn’t a concern. The past year’s 2% increase in wholesale prices is substantially higher than the 1% of last May, but also within the Fed’s comfort zone. However, one of the Fed’s favorite inflation gauges–personal consumption expenditures–saw its biggest 12-month gain since October 2012, raising questions about possible future inflation.
  • The Federal Reserve’s monetary policy committee continued to unwind its economic support by cutting $10 billion worth of bond purchases each month. The committee now predicts that additional improvement in the economy and job market in coming months will allow it to increase the current near-zero target rate to 1.2% by the end of 2015 and 2.4% in 2016. Longer-term, however, it sees that rate leveling out around 3.75%.
  • To stimulate lending, the European Central Bank’s key interest rate was cut to -.01%; it’s now essentially charging banks to hold their funds rather than paying interest on deposits. The ECB also said it’s prepared to take additional steps later if necessary. The action is designed to stimulate lending, stave off the threat of deflation, and help jump-start the European economy, which grew 0.3% or less during Q1.
  • The Chinese economy showed signs of slowing. According to the country’s National Bureau of Statistics, the annual growth rate dropped below the official 7.5% target to 7.4%, the HSBC Purchasing Managers’ Index of Chinese manufacturing showed a slight contraction, and housing sales prices fell in half of 70 major cities.

Eye on the Month Ahead

The Fed will be watching the housing market this summer as it considers the timing of future interest rate increases. Also, the second week of July marks the unofficial start of the Q2 corporate earnings season. After the dismal Q1 GDP final reading, those reports may assume even greater significance than usual, as will the Bureau of Economic Analysis’s initial estimate of Q2 economic growth.

What I’m Watching This Week – 30 June 2014

Published on by dredheadz

The Markets

Domestic equities seemed to shrug off a massive downward revision to first-quarter GDP and mostly ended the week flat. Though the Nasdaq’s gain was slight, it was the sixth positive week out of the last seven. Meanwhile, the benchmark 10-year Treasury yield remained low as demand from bond investors continued to support prices.

Market/Index 2013 Close Prior Week As of 6/27 Weekly Change YTD Change
DJIA 16576.66 16947.08 16851.84 -.56% 1.66%
Nasdaq 4176.59 4368.04 4397.93 .68% 5.30%
S&P 500 1848.36 1962.87 1960.97 -.10% 6.09%
Russell 2000 1163.64 1188.42 1189.49 .09% 2.22%
Global Dow 2484.10 2617.86 2603.77 -.54% 4.82%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.63% 2.54% -9 bps -50 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The U.S. economy contracted at a much faster pace in Q1 than anticipated, falling 2.9% (not the 1% recently estimated). The Bureau of Economic Analysis said its unusually steep downward revision of gross domestic product was caused not only by winter weather but also by exports and health-care spending that were both lower than previously thought.
  • The housing market rebounded strongly in May from its winter slump. According to the Commerce Department, sales of new single-family homes leaped 18.6% in May and were almost 17% better than a year earlier. Also, the National Association of Realtors® said the 4.9% increase in resales of existing homes was the biggest monthly gain in nearly three years. However, the NAR also said existing home sales were 5% lower and the number of unsold homes was 6% higher than in May 2013.
  • Data on April home prices also was mixed. Cities in the S&P/Case-Shiller 20-City Composite Index averaged a 1.1% gain in April, for a gain of almost 11% since last April. Boston saw its biggest monthly gain in the index’s 27-year history, and San Francisco had its sixth straight price increase. However, seven cities reported a decline since March, and S&P said year-over-year price gains had begun to slow.
  • U.S. incomes rose faster than personal consumption in May; according to the Bureau of Economic Analysis, incomes were up 0.4%, while spending rose 0.2%. Even after adjusting for inflation, incomes were up 0.2% for the second straight month. The bad news? That 0.2% increase in personal consumption expenditures–a key inflation gauge for the Fed–resulted in the biggest 12-month gain since October 2012; further increases could mean inflationary pressure that might affect interest rates.
  • The European Union formalized a trade agreement with Ukraine, Georgia, and Moldova–the agreement whose rejection by the former Ukrainian president led to subsequent protests and ultimately Russia’s annexation of Crimea. Shortly thereafter, European leaders told Russia it had until Monday evening to persuade rebels in Ukraine to respect a cease-fire or face further EU economic sanctions.
  • Durable goods orders fell 1% in May after three strong months. However, the Commerce Department said most of the decline was caused by a 31% drop in defense spending on equipment. Other than defense, new orders were up 0.6%.

Eye on the Week Ahead

In a holiday-shortened week, trading volumes are likely to continue to be light. Manufacturing data may suggest whether recent improvements can be sustained. The European Central Bank is scheduled to report on Thursday, but last month’s decision to adopt a negative interest rate likely precludes much immediate change in policy. And as always, the jobs report, issued a day early, will be watched.

Foreign Account Tax Compliance Act (FATCA): The Basics

Published on by dredheadz

The Foreign Account Tax Compliance Act generally requires: (1) U.S. persons to report information on their foreign financial accounts to the IRS, (2) foreign financial institutions (FFIs) to report information on their U.S. clients to the IRS, and (3) withholding on payments to FFIs that fail to comply with FATCA. As final implementation on this 2010 legislation begins, withholding on U.S. source income subject to FATCA generally takes effect July 1, 2014.

Individuals

If you are a U.S. citizen or a U.S. resident alien who is required to file a federal income tax return, you must generally file a Form 8938 with your federal income tax return if you have an interest in foreign financial assets and the total value of those assets exceeds certain thresholds.

File Form 8938
If Your Foreign Assets Exceed the Appropriate Threshold You Live in the United States You Live outside the United States
Married Taxpayer Filing Jointly Other Taxpayers Married Taxpayer Filing Jointly Other Taxpayers
On the last day of the year, or $100,000 $50,000 $400,000 $200,000
At any time during the year $150,000 $75,000 $600,000 $300,000

Foreign financial assets generally include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons, and interests in foreign entities.

Foreign financial assets do not include financial accounts maintained by a U.S. payer (including a domestic branch of a foreign bank or insurance company, and a foreign branch or subsidiary of a U.S. financial institution–e.g., U.S. mutual fund accounts, IRAs, 401(k)s, qualified U.S. retirement plans, and brokerage accounts maintained by U.S. financial institutions). There are other exceptions as well.

If you fail to file a required Form 8938, you may be subject to an initial penalty of up to $10,000. Other penalties may also apply. If you have any questions about this requirement, talk to a tax professional.

Foreign financial institutions

In order to avoid withholding on payments made to them, an FFI can register with the IRS and agree to report to the IRS certain information about its U.S. accounts. Registration can be done on the IRS website or using Form 8957. As part of the agreement, the FFI may be required to withhold 30% on certain payments to foreign payees if the payees do not comply with FATCA.

U.S. financial institutions

Starting July 1, 2014, U.S. financial institutions and other U.S. withholding agents must withhold 30% on certain U.S. source payments made to FFIs that do not document their FATCA status. (Payments on certain grandfathered debt obligations outstanding on July 1, 2014, may be exempt from withholding.) They must also report to the IRS information about certain non-financial foreign entities with substantial U.S. owners. Failure to comply may result in liability for the tax that should have been withheld and penalties.

Governments

The United States has collaborated with other countries to develop intergovernmental agreements (IGAs) implementing FATCA. Under such an agreement, the reporting and other compliance burdens on the financial institutions in the jurisdiction may be simplified.

What I’m Watching This Week – 23 June 2014

Published on by dredheadz

The Markets

Reassurance from the Fed seemed to outweigh the situation in Iraq last week as investors showed greater comfort with taking on more risk. The week’s biggest gains were in the small caps of the Russell 2000, which once again returned to positive territory for the year, while the Nasdaq closed the week at a level it hasn’t seen since April 2000. Meanwhile, the Dow and S&P 500 set new record highs yet again–the 11th so far this year for the Dow, the 22nd for the S&P 500.

 

Market/Index 2013 Close Prior Week As of 6/20 Weekly Change YTD Change
DJIA 16576.66 16775.68 16947.08 1.02% 2.23%
Nasdaq 4176.59 4310.65 4368.04 1.33% 4.58%
S&P 500 1848.36 1936.15 1962.87 1.38% 6.20%
Russell 2000 1163.64 1162.68 1188.42 2.21% 2.13%
Global Dow 2484.10 2587.94 2617.86 1.16% 5.38%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.60% 2.63% 3 bps -41 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The Fed’s long/short strategy: The Federal Reserve’s monetary policy committee predicted that further improvement in the economy and the job market would allow it to raise interest rates slightly faster than previously anticipated. It now sees its current near-zero target rate hitting 1.2% by the end of 2015 and 2.4% in 2016. That’s slightly higher than previous forecasts. However, it also suggested subsequent increases might take rates to only 3.75%–slightly lower than its earlier long-term forecast of 4%. And as expected, Fed bond purchases were once again cut by $10 billion, leaving the monthly total at $35 billion.
  • Despite the projected economic rebound, 2014’s winter-weakened first quarter led the Fed to cut its U.S. growth forecast for the year from the nearly 3% predicted in March to 2.1%-2.3%. The Fed also said the growth rate could bump up above 3% in 2015 but would settle back to a little over 2% in the longer term. Both forecasts are roughly in line with figures from the International Monetary Fund.
  • U.S. manufacturing showed strength in May. Industrial production increased for the third month out of the last four and was up 4.3% from a year ago. The Federal Reserve said May’s 0.6% gain was led by a 1.5% increase in automotive output, and that 79.1% of the nation’s manufacturing capacity was being used. Also, the Fed’s Empire State manufacturing index remained at a multiyear high for the second consecutive month, and the Philly Fed index rose from 15.4 to 17.8–its highest reading since September and the fourth straight positive month.
  • Consumer prices rose in May at the fastest pace in more than a year. The Bureau of Labor Statistics said the 0.4% increase was broad-based, but was driven largely by higher prices for housing, food, electricity, airfares, and gas (food prices jumped more than in any month in almost three years, and groceries were up 0.7% for the month). The increases put the overall consumer inflation rate for the last year at 2.1%. Fed Chair Janet Yellen said that though recent upticks have left inflation a bit on the high side, it’s basically in line with the Fed’s 2% target.
  • Housing starts slumped 6.5% in May, according to the Commerce Department, but were still 9.4% higher than in May 2013. Building permits–an indicator of future activity–also fell, and the 6.4% decline left them nearly 2% lower than a year ago.

 Eye on the Week Ahead

New and existing home sales will suggest whether the summer housing market is picking up, while consumer spending also will be of interest. Depending on the situation in Iraq, oil prices could start to become a bigger factor in investor thinking.

What I’m Watching This Week – 16 June 2014

Published on by dredheadz

The Markets

Equities took a break across the board from their recent upward surge. After fresh all-time record closes early in the week, both the S&P 500 and the Dow Industrials saw profit-taking that also returned the small caps of the Russell 2000 to negative territory for the year. Renewed conflict in Iraq contributed to equities’ swoon, raising concerns about global oil supplies and pushing oil to roughly $107 a barrel.

Market/Index 2013 Close Prior Week As of 6/13 Weekly Change YTD Change
DJIA 16576.66 16924.28 16775.68 -.88% 1.20%
Nasdaq 4176.59 4321.40 4310.65 -.25% 3.21%
S&P 500 1848.36 1949.44 1936.15 -.68% 4.75%
Russell 2000 1163.64 1165.21 1162.68 -.22% -.08%
Global Dow 2484.10 2599.33 2587.94 -.44% 4.18%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.60% 2.60% 0 bps -44 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • U.S. retail sales rose 0.3% in May and were 4.3% higher than a year earlier. The Department of Commerce said the biggest increases were seen at auto and auto parts dealers, building/garden supplies stores, and miscellaneous store retailers such as florists, office suppliers, and used-merchandise stores.
  • Wholesale prices fell 0.2% in May, leaving the wholesale inflation rate for the last 12 months at 2%. According to the Bureau of Labor Statistics, that’s down slightly from the previous month, but substantially higher than the 1% of last May. The decline in prices at the final stage of wholesale distribution was evenly split between goods and services. Inflation is one of the measures being watched by the Federal Reserve as it unwinds its bond-buying efforts.
  • The World Bank cut its estimate of 2014 global economic growth to 2.8% rather than the 3.2% it predicted in January. The Global Economic Prospects report said developing countries have been especially hurt by bad weather in the United States, a slowing housing market in China, political conflicts, and slow progress on structural economic reform; the report sees emerging-market growth at 4.8% this year rather than 5.3%. However, 2015 is expected to be better, with a 3.4% global growth rate and 5.4% growth in the developing economies.

Eye on the Week Ahead

The Fed is expected to once again reduce its monthly bond purchases, and options expiration at the end of the week could mean volatility as traders on the wrong side of equities’ recent surge attempt to manage those positions. U.S. manufacturing data and the state of the oil market also could influence the mood of the markets.