Archives for January 2015

What Are These Central Banks Doing? Weekly Update – January 26, 2015

Image courtesy of FreeDigitalPhotos.net/suphakit73

Image courtesy of
FreeDigitalPhotos.net/suphakit73

Markets ended the week in the black for the first time in 2015 on the back of major moves by multiple central banks. For the week, the S&P 500 gained 1.60%, the Dow grew 0.92%, and the Nasdaq added 2.66%.1

Central banks ruled market headlines last week with the European Central Bank, Bank of Canada, People’s Bank of China, and Bank of Japan all making key announcements. The ECB led the pack by announcing its first round of quantitative easing, promising EUR 60 billion in monthly asset purchases. The move is designed to boost the Eurozone economy and fight deflationary pressures, though some experts are dubious about the potential for success.2 In an effort to stem outflows of cash from the Chinese economy, the Chinese central bank used short-term monetary tools to inject more liquidity into the financial system ahead of the Lunar New Year Holiday.3 The Bank of Canada joined the party by announcing a surprise interest rate cut to spur growth in the face of falling oil prices.4

Markets reacted positively to the news that central banks are making an effort to boost the global economy, helping the major indexes post gains for the first time this year. However, the news last week wasn’t all good.

The Eurozone faces another major challenge in Greece; voters went to the polls Sunday and elected the radical left Syriza party, which wants to end austerity measures and refuse European debt inspections. Though it’s unclear if the party has enough parliament seats to form a government, the election result highlights Greek voters’ frustration with austerity and increases the risk of a so-called “Grexit,” a Greek exit from the Eurozone.5

 

The U.S. is also facing new foreign policy challenges. The death of Saudi Arabia’s King Abdullah bin Abdulaziz Al Saud may change America’s relationship with its largest ally in the Middle East and affect global oil markets.6 Yemen, a major Saudi supporter and U.S. ally, also experienced leadership turmoil with the resignation of its president after being besieged by rebel fighters.7 If the political vacuum causes Yemen to splinter along ethnic and religious lines, it could spark civil war, also threatening U.S. policies in the Middle East.

 

Looking ahead, we see a lot of uncertainty this week. Though the U.S. continues to do well, we see markets driven by energy prices, worries about Europe, and concern that new central bank policies may not be enough to stoke economic activity in the rest of the world. Next week’s Federal Reserve Open Market Committee meeting will be key in setting the tone for the year’s monetary policies. Although the Fed has indicated that it may raise rates this year, the increased stimulus measures from its counterparts overseas may make it harder for the Fed to move ahead with rate hikes. Even if global economic policy isn’t part of the Fed’s mandate, the interconnectedness of the world’s economy and the importance of the U.S. dollar in global trade mean our central bankers must take into account global risks when making policy decisions.8 The week ahead is also filled with important earnings reports, which could make or break the Q4 earnings season. Thus far, earnings have been uninspiring, though overall earnings growth is expected to be positive.9

 

When markets turn volatile, it’s important to remain disciplined by sticking to your own financial strategies while staying flexible enough to take advantage of opportunities as they arise. We’re keeping a close eye on market events as they develop and will keep you updated.

ECONOMIC CALENDAR:

Monday: Dallas Fed Mfg. Survey

Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, New Home Sales, Consumer Confidence

Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement

Thursday: Jobless Claims, Pending Home Sales Index

Friday: GDP, Employment Cost Index, Chicago PMI, Consumer Sentiment

 

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HEADLINES:

Jobless claims fall from 7-month high. Weekly claims for new unemployment benefits dropped last week, erasing the previous week’s increase, which pushed weekly claims to the highest level seen since June. Seasonal factors around holiday hiring are likely to blame for the volatility10

U.S. factory activity slows. The manufacturing sector continued to grow in January, but the pace of activity slowed as new orders weakened. Though some seasonal factors may be affecting data, job creation in the sector remains steady, indicating underlying demand may not have dropped.11

Single-family housing starts to reach multi-year high. Groundbreaking on new single-family homes reached the highest level in 6-1/2 years in December. Though housing activity has lagged in the last year, the new construction trend could indicate greater demand for housing as the economy improves.12

Mortgage applications surge. The volume of mortgage applications increased dramatically last week, pushing total volume 41% higher than the same period last week, in another hopeful sign for the housing sector. Economists cite low mortgage rates and a reduction in Federal Housing Administration mortgage insurance premiums as factors.13

Friday’s “Relief Rally” Weekly Update – January 20, 2015

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of
FreeDigitalPhotos.net/Stuart Miles

Stocks experienced another rollercoaster week, pummeled by a dismal global growth forecast and missed earnings reports. However, markets ended a four-day losing streak on Friday with a “relief rally” as energy prices rebounded slightly.1 For the week, the S&P 500 lost 1.26%, the Dow fell 1.27%, and the Nasdaq dropped 1.48%.2

The World Bank underscored investors’ concerns about the global economy by slashing its global growth forecast for 2015 and 2016. Citing disappointing growth in Europe and concerns about some emerging markets, the development organization cut its predicted global economic growth rate to 3.0% from 3.4% in June.3 Though U.S. growth remains strong, slowing demand overseas may hurt U.S. firms.

December holiday sales reports arrived, and the news wasn’t very jolly, showing that overall retail sales dropped 0.9%. Cheaper gas, earlier shopping, and significant discounts all contributed to the drop, and retailers have chosen to call the season a win. The National Retail Federation says that overall holiday spending rose 4.0%, making it the best season since 2011. Investors were less enthusiastic about the data, which could indicate weakness in consumer spending.4

Earnings season shifted into high gear last week, bringing total S&P 500 company reports to 37. So far, the news isn’t great. Financial companies are the first large group to report in, and although there are some individual success stories, the Major Banks sector (which includes companies like JP Morgan, Wells Fargo, and Citigroup) dragging, with earnings down 13.7% since the same time last year. However, outside the Finance sector, the picture is brighter, with total earnings up 17.4% so far on higher revenues.5 Though it’s still early in the season, S&P Capital IQ predicts that overall earnings for the S&P 500 increased 6.5% in the fourth quarter.6 Though the U.S. demand picture appears to be strengthening, external factors like oil prices and the dollar’s strength relative to other currencies is likely to significantly affect company performance this year.

Does January’s rocky start bode ill for the rest of 2015? Probably not. Right now, Wall Street is preoccupied with the murkiness of recent data. Macro issues like oil prices, the dollar’s strength, central bank moves, and global growth forecasts are overriding individual company data, which makes it hard to pick winners and losers. Fundamental trends within the U.S. economy haven’t changed: U.S. firms are hiring, Americans are more confident about their prospects, and many sectors of the economy are showing improvement. Markets are closed on Monday, but the week ahead is filled with more earnings reports as well as Tuesday’s State of the Union address by President Obama.

ECONOMIC CALENDAR:

Tuesday: Housing Market Index

Wednesday: Housing Starts

Thursday: Jobless Claims, PMI Manufacturing Index Flash, EIA Petroleum Status Report

Friday: Existing Home Sales

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NY Post Twitter feed hacked, traders respond.
Investors were shocked when the New York post tweeted Friday that the Federal Reserve was holding an emergency meeting to set interest rates. Though the paper quickly regained control of the Twitter account and deleted offending tweets, some traders may have responded to the news. Lessons? Don’t believe everything you read.7HEADLINES:

Swiss franc soars after 1.20 euro peg dropped. The central bank of Switzerland abandoned a 3-year-old currency agreement by dropping the floor on the Swiss franc Thursday, allowing it to float freely against the euro. Traders responded by rushing for the euro exits, buying Swiss francs and pushing the currency 30% higher against the euro.8

U.S. import prices post record drop in December. The cost of U.S. imports fell by the largest amount since 2008 as petroleum costs continued to plunge. Import prices fell by 2.5% in December, dropping 5.5% for all of 2014. Weak import inflation may help stave off Fed rate hikes.9

U.S. foreclosures down 64% from 2010 peak. The number of foreclosed U.S. homes fell again in November, bringing monthly foreclosures down 64% since the peak in September 2010. Though foreclosure activity is falling, analysts believe it won’t reach normal levels for at least two years as distressed loans continue to move through the system.10

How Should I Start Saving for My Kids Education

The other day, I (Tony) got an email from a long lost friend of mine that I hadn’t chatted with in years.  He knows I’m in the industry and he reached out to me with an email question that I thought our blog readers might find of interest.  Turns out, he and his wife had a daughter about a year ago and they were thinking through what type of account would be the best way for them to save for her college education.  Below is my abridged reply.

“It’s great to hear your desire of being a good steward of your family and finances.  Unfortunately, your question isn’t as easy as one might think.  We typically look at a variety of ‘first steps’ that we believe should be in place before beginning to fund a college goal.  First, do you have a Will in place?  A Will should be developed that would name an Executor of your Estate and your desired caretaker of your kids in the unfortunate event of you and your wife’s death.  It would be a travesty to allow the courts to decide who would care for your daughter.  You should have a Will fully executed before beginning to fund your college goal.  These aren’t outrageously expensive, but they aren’t cheap either.  You’ll need to seek and find a qualified attorney to draft a Will for you and your wife.

Next, you should have adequate life insurance in place.  In the unfortunate circumstance of your death, you’ll want to leave your wife and daughter adequate income to survive.  Future college costs can be worked in to the equation of adequate life insurance amount.  Further, if you and your wife should both die at the same time, your chosen care-takers of your daughter will be grateful that money is available to help raise your daughter over the long term.

Third, you should establish and fully fund an Emergency Fund.  We recommend 3-6 months of your living expenses to be set aside in this account to be used for emergencies.  While saving for your daughter’s college is a noble cause, if you lose your job or some catastrophic event causes you to have a large outlay of cash, you’ll want to make sure your family’s needs are met first for the here and now…in which an Emergency Fund could be used.  Once money is in a college savings type account, you will be unable to take the funds back out of it without penalty.

Fourth, it is to your advantage as well to ensure that you and your wife’s retirement is a primary consideration above college contributions.  The main reason is that you may put your own retirement at risk by not funding it fully, only to find out your daughter receives a hefty scholarship or perhaps doesn’t even go to college for various reasons.  I’ve dealt with too many clients who have put their own retirement in jeopardy to send their kids to college and are now living with regret and having to work for longer than they had ever anticipated.

Next, it is to your advantage to make sure you’ve dealt with any consumer debt that is outstanding.  High interest rate student loans, auto loans or credit cards will kill you financially over time.  It is recommended that you extinguish most, if not all, consumer debt (not mortgage) before considering funding a child’s college education.

Last, but not leastJ, if these other financial considerations are in order, you could consider college contributions.  We typically steer clients to CollegeAmerica which is Virginia’s 529 Plan managed by American Funds.  This Plan is only available through advisors.  American Funds has a robust line-up of target date offerings and has had stellar performance.

For those living in Ohio and not working with an advisor, consider Ohio’s 529 Plan.  www.collegeadvantage.com  Choose the Do-It Yourself Direct Plan.  You can sign up everything online and do your contributions via EFT from your bank account.  Choose an age-based option that will vary in risk as the child gets older.  The closer they get to college, the less risk the model will take.  Also, Ohio’s plan allows for a small tax credit that many find helpful in tax planning considerations.

For more information of which I pretty much agree with, visit www.daveramsey.com  He lays out many of the principles I’ve written above in book form.  Also, a lot of times there are live classes in the area in which you can attend.  You can search for those and you and your wife can learn more.”

Hixon Zuercher January 2015 Monthly Video Update

Perspectives On a Volatile Week Weekly Update – January 12, 2015

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of
FreeDigitalPhotos.net/Stuart Miles

Stocks ended the first full week of 2015 in the red, pulled in different directions by a mixed December jobs report, fresh oil declines, and renewed terrorist fears in the West. For the week, the S&P 500 lost 0.65%, the Dow fell 0.54%, and the Nasdaq slid 0.48%.1

The December employment report was released on Friday and it has both good news and not-so-good news. Preliminary data shows that the economy added 252,000 jobs last month, bringing the total new jobs for 2014 to 2.95 million. The headline unemployment rate dropped to 5.6%.2

While the jobs growth is good news for continued economic growth in 2015, investors are worried about a lack of wage growth, which could put a damper on consumer spending. This prolonged absence of wage growth is perplexing. As the number of available jobs rises and the pool of unemployed Americans shrink, Econ 101 teaches us that employers should be forced to raise wages to attract and keep qualified employees. However, this doesn’t seem to be happening. Inflation-adjusted hourly pay actually fell 0.2% between November and December and ended 2014 just 1.7% higher.3

Why is wage growth so slow? One theory developed by economists at the Federal Reserve Bank of San Francisco posits that “downward wage rigidity,” the reluctance of employers to reduce wages in the recession, has created a backlog of pay cuts that’s causing many employers to hold back on raises. Until the labor market tightens much more, stagnant wages are likely to remain.4

So, in the overall calculus of the economy, more new jobs = good, but frozen wages = not so good.

Oil prices continued to plunge last week. Benchmark Brent crude dropped below $49 a barrel, but closed above $50 on news that the number of U.S. drilling rigs had dropped significantly.5 The fallout from cheap oil for some North American oil producers, many of which rely heavily on debt to fund projects, is already being felt; Shell announced layoffs of up to 10% of the workforce of an Alberta tar sands project.6 A small Texas oil producer filed for bankruptcy protection last week after being turned down for financing by a lender.7 Given how reliant on credit many oil and gas producers are, more bankruptcies may follow in the weeks and months ahead. If small producers are squeezed out of the market, it could allow oil prices to climb back up to the levels preferred by OPEC nations.

On Wednesday, Charlie Hebdo, a satirical weekly newspaper in Paris, was attacked by three gunmen who killed 12 employees.8 Gunmen later attacked a kosher grocery, killing four others.9 Our thoughts are with the victims’ families and the Paris community as they grapple with the aftermath of these horrific attacks.

The week ahead is heavy with economic data, including reports on retail sales for December and business inventory spending. A significant number of earnings reports are also due to be released, giving investors something other than macro-economic headlines to consider.

ECONOMIC CALENDAR:

 

Tuesday: JOLTS, Treasury Budget

Wednesday: Retail Sales, Import and Export Prices, Business Inventories, EIA Petroleum Status Report, Beige Book

Thursday: Jobless Claims, PPI-FD, Empire State Mfg. Survey, Philadelphia Fed Survey

Friday: Consumer Price Index, Industrial Production, Consumer Sentiment, Treasury International Capital

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HEADLINES:

Automakers end 2014 with gains. Falling oil prices contributed to solid sales numbers for U.S. automakers, helping each company close out December with better results than December 2013. Trucks seem to be back in vogue as consumers take advantage of lower gas prices to buy less fuel-efficient vehicles.10

U.S. trade imbalance falls to 11-month low. The bill for U.S. imports fell in November as lower oil prices reduced transportation costs. The report caused economists to revise their estimates of fourth-quarter GDP growth to as much as 3.5%.11

Federal Reserve FOMC minutes highlight differences in opinion. The official minutes of the Federal Reserve Open Market Committee meeting in December showed that though the Fed doesn’t plan to raise interest rates until at least mid-April 2015, some committee members feel the central bank shouldn’t commit itself to any particular timeline.12

Retailers shutting stores due to demographic and competitive pressure. Retailers like RadioShack, J.C. Penney, Macy’s, and Wet Seal are laying off workers and closing stores. The companies cite increased competition from online retailers, demographic shifts away from suburbs, and changing consumer preferences as reasons for the closures.13