Author Archives: The Weekly Commentary

The Economy

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Last week POSITIVE developments outweighed the NEGATIVE and the economy appears to be slowly improving.  

Below is a succinct list of last week’s events:

Positives:

1) LTRO2 gives 530b more euros to European banks giving them cheap money, more time, chance to prefund ’12 maturities and play carry trade
2) Italian, Spanish bond yields fall again
3) Euro zone economic confidence up 1 pt, a touch better than expected
4) German consumer confidence rises to 1 yr high
5) US Initial Jobless Claims at 351k, lowest since Mar ’08
6) Vehicle sales reach 15mm for 1st time since Feb ’08
7) Consumer confidence jumps to best in a yr
8) Pending Home Sales rise another 2% to most since Apr ’10
9) Purchase apps gain 8.2% off last week’s lowest level since Oct
10) China’s state weighted mfr’g PMI rises to 5 month high at 51

Negatives:

1) LTRO2 take more than in Dec, banks still need help, dependency on ECB grows, what will happen in 2015 when 1T euros need to be returned to the ECB?
2) Portuguese bond yields rise, are they next problem child?
3) Euro zone unemployment rate rises to 10.7%, highest since 1997
4) Feb German jobs report a touch weaker than expected
5) Euro zone inflation remains sticky with Feb CPI up 2.7% y/o/y and Jan PPI up 3.7%
6) Jan US Durable Goods well below expectations, hangover from gov’t tax benefit?
7) CS home price index falls to lowest since Feb ’03
8) ISM mfr’g surprisingly weak with new orders, backlogs, production and employment all down while prices paid rise to highest since June
9) According to AAA, gasoline prices rise another .07 on the week and now up .30 over past month.  

Source:  The Big Picture

The Markets This Week

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The stock market spun its wheels last week, with prices ending little changed for many big issues. Small-caps, however, dropped 3%, one of a few technical market divergences that investors should watch.

U.S. Federal Reserve Chairman Ben Bernanke’s congressional testimony Tuesday dispensed with investor hopes for more monetary stimulus in the near term. Gold got the message and plummeted 5% Wednesday before recovering a bit to $1,712.60 per ounce by Friday.

The Dow Jones Industrial Average flirted with the 13,000 level, closing above it on Thursday, the first time that’s happened since May 2008. But the Dow couldn’t hold on to that round number and ended Friday at 12977.57, five points off the previous week’s close. The Nasdaq Composite gained 0.42% to 2976.19. The one sour note came from the small-cap Russell 2000 index, which fell 3% to 802.42. 

The drop in small-caps in the past 30 days or so, as well as a decline in the past month in the Dow Jones Transportation Average, are divergences from the broad market that investors shouldn’t ignore. There is a complacency and lethargy to the market that suggests a quick and humbling 3% to 5% pullback could be in the offing, one trader says.

The economic news out last week was slightly less positive than investors have been accustomed to. Consumer-confidence figures rose sharply, but some manufacturing indicators fell. Despite a recent 20% rise in gasoline prices, a “remarkable” data point came from car sales, which reached their highest levels in February in nearly four years, says David Kelly, chief market strategist for JPMorgan Asset Management. The rise was equivalent to an annual sales rate of 14.7 million cars.

“It reflects both pent-up demand [from the past couple of years] and a rising tide of consumer confidence,” he says. Given the importance of companies such as General Motors (ticker: GM) and Ford Motor (F) to the U.S., rising car sales are good for the whole economy. A year of 15 million units in car sales is just about the 20-year average for the U.S.

The price of energy is probably the greatest near-term risk that market faces, says James McDonald, chief investment strategist at Northern Trust. Only if economic indicators continue to be strong will investors be comfortable with higher oil prices, he says.

Investors’ worries have shifted from topic to topic in the past 12 months, just as a baton passes hands in a race. The European sovereign-debt situation was enemy No. 1 last spring. The worry next turned to whether U.S. economic growth would turn flaccid. Now it has morphed into concerns about rising oil prices, what with crude above $100 per barrel. 

One thing the market won’t like is a potential military strike by Israel against Iran. Look for this talk to heat up in the spring (Source:  Barrons Online).

The Numbers

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Last week, U.S. Stocks and Bonds increased but Foreign Stocks decreased. During the last 12 months, BONDS outperformed STOCKS.

Returns
through 3-2-2012

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds-
BarCap  Aggregate Index

     
.2

   
   .9

  
8.6

  
7.4

  
6.3

   
5.7

US
Stocks-Standard & Poor’s 500

     
.3

    
9.3

  
6.9

  27.7

  
1.9

   4.0

Foreign
Stocks- MS EAFE Developed Countries

   
-.8

  
10.6

-10.0

  18.0

 -5.5

   
3.4


Source: Morningstar Workstation. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three, five and ten year returns are annualized excluding dividends.

Real-Life Situations

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Question:
I own a business, a sole proprietor, so I file my income tax return with a Schedule C.  My children, ages 15 and 17, help me around the office to do chores I assign to them.  Should I pay them?

Answer:
Yes.  There are some very important income tax benefits to do so it is better to put them on the payroll and pay wages to them rather than an allowance.  Your net profit from this business is taxed at the highest tax rate of any income; thus, any deductions like wage payments to children will save substantial income taxes.  And, you can even set up an IRA or SIMPLE IRA account to benefit them later.    Note that the IRS requires the children to perform meaningful work and that you pay them the going rate for such work.

Feel free to contact me if you or someone you know has this type of situation.  Financial Planning advice presented here is general in nature, and individual circumstances make applying these general rules tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.

Personal Notes

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Today (Monday) my wife Jo Anne and I are visiting Madison Square Garden, NYC for the Westminster Kennel Club Dog Show watching some excellent examples of man’s best friend.  You might be surprised to learn the dog show itself has a long pedigree – stretching way back to May 1877.  Dogs are judged against their breed standards, to see how close each dog matches the standard, which is a written description of the ideal specimen of that breed. Standards may include references relating form to function in the performance of the job that the dog was bred for, and may also include items that seem somewhat arbitrary such as color, eye shape, tail carriage and more. While many breeds no longer need to perform their original jobs and are bred mostly for companionship, they should still have the innate ability and physical makeup to perform those jobs, and this is what the judge looks for.  Our companion at home, Bella, is a personality-rich Bichon Frise.  


Economic Reports Last Week

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Last week the number of NEGATIVE developments exceeded POSITIVE developments and the stock market maintained a watchful eye on European concerns. 

Positives:

1) Initial Jobless Claims fall to 358k, 12k less than expected and the 4 week average drops to 366k, the least since May ’08
2) Job Openings in monthly BLS data rise to match the highest since Sept ’08
3) MBA said avg 30 yr mortgage rate falls to new low of 4.05% and refi’s jump 9.4%
4) German Factory Orders in Dec rise a bit more than expected
5) China’s PPI moderates to a gain of just .7% y/o/y, the slowest rate since Nov ’09
6) Indonesia unexpectedly cuts rates to 5.75% while RBA and SK sit pat

Negatives:

1) Greece on brink, AGAIN, unemployment rate in Nov hits 20.9% from 18.2% in Oct
2) German exports in Dec, the main driver of their economy, falls 4.3% m/o/m vs an expected decline of just 1%, German IP falls 3% vs est of flat from Nov
3) Euros being re-deposited with the ECB overnight remain around 500b, matching the amount borrowed under the LTRO
4) BoE votes for more QE, brings asset purchase program up to 325b pounds. 
5) US inflation expectations in TIPS continue to drift higher
6) Feb UoM confidence moderates 2.5 pts after Jan jump of 5
7) Avg gallon of gasoline at the pump rises to most since Sept.

The Markets This Week

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Stock prices eased last week, snapping a five-week winning streak for most of the major indexes. Most of the damage came Friday as traders took profits on news late Thursday of a huge foreclosure-abuse settlement between five big banks and attorneys general from the federal and state governments. 

It wasn’t a great week, but investors still appear to be gaining confidence in a more “normal-acting” market, or one at least where not all stocks rise and fall together, last year’s bugaboo. Trading activity remains unspectacular. 

The Dow Jones Industrial Average dropped 61 points, or 0.5% on the week, to close at 12,801.23. The Nasdaq Composite finished the best of the three main indexes, losing 0.1% last week, to close at 2903.88. 

The market is moving from “macro to micro,” says Brian Belski, the bullish chief investment strategist at Oppenheimer.  A precipitous drop in stock price correlations this year suggests a market in which shares move more on company fundamentals than on global macroeconomic news, he avers. After last year’s persistently high correlations, over 0.9 at times, a reversion to the mean will assure that low correlations will continue, he predicts.

Continued good earnings reports and U.S. macroeconomic data are helping keep the market buoyant, adds Peter Kenny, director of institutional sales at Knight Capital Americas. Leadership by the large-cap tech and financial stocks—instead of the small caps, as was the case in 2009-2010—gives “legitimate support” and confidence to the market’s positive tone, he adds. 

Granted, we are only six weeks into the market’s about-face, but the bears have to pay some attention to this change in market tone.

Sentiment can be fickle, but last year’s worries—the European financial crisis and the U.S. economy—no longer appear to be scary enough to usher in more than a routine pullback in the short term. The Greek boogeyman isn’t going away, but the market doesn’t seem so easily spooked. It’s up to the bears to prove it otherwise. 

Increased selling by insiders and abnormally bullish readings from the American Association of Individual Investors’ weekly survey argue for a short-term pullback soon. Potentially worrisome weekend headlines out of Europe—by now customary—could weigh on markets next week (Source:  Barrons Online).

The Numbers

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Last week, U.S. Stocks and Foreign Stocks decreased.  And, Bonds increased. During the last 12 months, BONDS outperformed STOCKS.   

Returns
through 2-10-2012

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds-
BarCap  Aggregate Index

     
.2

   
   .6

  
9.8

  
7.2

  
6.6

   
5.7

US
Stocks-Standard & Poor’s 500

   
-.3

    
7.0

  
3.7

  20.1

    
.8

   
4.1

Foreign
Stocks- MS EAFE Developed Countries

   
-.3

    
8.0

-11.6

  10.5

 -6.4

   
3.6


Source: Morningstar Workstation. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three, five and ten year returns are annualized excluding dividends.