Weekly Commentary February 23rd, 2015

The Markets

It was all Greek to investors.

Last Thursday, things weren’t looking so good for Greece. Barron’s explained:

“…Germany scotched Greece’s request for a six-month extension to its existing aid package. Athens had sought more time to renegotiate the Draconian austerity package imposed on the land of Pericles, to keep from going bust and, perhaps, being kicked out of the euro zone.”

Just a day later, though, Eurozone leaders found grounds for compromise and Greece became the beneficiary of a four-month extension to its current aid package. The deal was contingent on Greece coming up with a list of economic reforms by this Monday for European leaders to approve.

The Irish Times reported Greek Prime Minister Tsipras gave the conditional agreement an interesting spin, telling Greek citizens, “Yesterday’s agreement with the Eurogroup... cancels the commitments of the previous government for cuts to wages and pensions, for firings in the public sector, for VAT rises on food, medicine.” After all, that’s what he promised during his campaign.

World markets were unconditionally thrilled with the news. In the United States, the Dow Jones Industrial Average and Standard & Poor’s 500 Index both closed at record highs. Markets across Europe and Asia finished the week higher. The only stock markets reported in Barron’s International Perspective that didn’t finish the week higher were in Taiwan and Canada.

Closer to home, The Federal Reserve’s Open Market Committee minutes indicated to some rate hikes may not begin in June, as had been expected. However, Reuters pointed out employment data has been very strong since the January 28 meeting and could affect the Fed’s decision about when to tighten.

And, now, for something completely different. You learned about negative numbers in school. Now, you get to learn about negative interest rates. Currently, the European Central Bank (ECB) pays -0.2 percent on money banks have deposited. By way of comparison, the U.S. Federal Reserve’s Fed funds rate is 0.12 percent.

The idea of negative interest rates – essentially, paying a company or institution to hold and use your money – is confounding. Why wouldn’t you opt for cash instead? Richard Anderson and Yang Liu of the St. Louis Fed explained:

“Negative interest rates fascinate both professional economists and the public. Conventional wisdom is that interest rates earned on investments are never less than zero because investors could alternatively hold currency. Yet currency is not costless to hold: It is subject to theft and physical destruction, is expensive to safeguard in large amounts, is difficult to use for large and remote transactions, and, in large quantities, may be monitored by governments. Currency does not provide even a logical zero floor for market interest rates.”

According to The Economist, banks in the United States and Europe have very significant amounts of cash tucked away with their central banks, thanks to quantitative easing. By paying a negative rate of return, the central banks are encouraging member banks to reduce reserves by lending. The idea is to stimulate economic growth. The catch is borrowers may be in short supply when economic prospects for new businesses are murky.

One unexpected consequence of negative interest rates is some financial firms’ computer systems have had to be reprogrammed because they weren’t set up for negative rates.

 

Weekly Focus – Think About It

 

“Do you want to know who you are? Don't ask. Act! Action will delineate and define you.”

--Thomas Jefferson, Third U.S. President

 

Weekly Commentary February 17th, 2015

The Markets

Animal spirits were improving last week, according to Barron’s.

The idea of animal spirits was introduced to the dismal science (a.k.a. economics) in the late1930s, courtesy of John Maynard Keynes. In The General Theory of Employment, Interest and Money (a dreary title that surely could have benefitted from an injection of animal spirits), he wrote:

“…a large portion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

In modern times, Keynes’ idea blossomed into the field of behavioral economics, the study of human psychology on economic decision-making. One of the animal spirits that influences decision-making is confidence (another is overconfidence) which can drive stock markets higher.

Last week, easing measures by the European Central Bank (ECB), a cease-fire agreement in Ukraine, optimism about negotiations over Greek debt, and better than expected earnings for many companies, helped improve investment sentiment in Europe for the fourth straight month, according to Reuters. Many European markets moved higher.

In the United States, strong fourth quarter earnings, improving oil prices, and good news from Europe helped push markets higher as well. Reuters reported the CBOE Volatility Index (VIX), Wall Street’s fear gauge, hit its lowest level for the year on Friday.

more greek drama. You know things are getting contentious in the Eurozone when the newly-elected Greek Prime Minister, Alexis Tsipras suggests Germany may owe Greece war reparations.

Talk of reparations is a distraction from the real issue which, according to Financial Times, is the possibility that Greece will need a third bailout when the current one expires. Yet, the new prime minister has promised to end austerity measures. Members of his government have described those measures, which were implemented before Eurozone leaders would agree to the first Greek bailout, as “fiscal waterboarding.”

You may recall the euro crisis. Back in 2009, the European Union (EU) insisted France, Spain, Ireland, and Greece reduce their budget deficits (the difference between what a government spends and what it receives in taxes). The Eurozone set a limit for debt (the accumulated value of deficits) at 60 percent of gross domestic product (GDP) which is the value of goods and services produced by a country.

In December 2009, Greek debt was $442 billion or about 113 percent of GDP, according to the BBC. After the discovery of irregularities in Greek accounting and a flurry of concern Greece would have to leave the euro, the country implemented an austerity program to reduce the deficit which included severe cuts to public spending. The program was well received by the EU, and EU leaders agreed to a major bailout for Greece which included writing off about 50 percent of the country’s debt.

In recent days, the Greek people have been cheering as their new government reverses the reforms implemented by the previous government and talks tough with Greek creditors. The Greek government is seeking additional financial assistance from other Eurozone countries but insists it will not adhere to the reforms previously in place. Eurozone leaders have expressed willingness to extend the current bailout as long as Greek fiscal reforms remain intact. Negotiations have begun to bridge the gap.

Greek market performance shows not everyone is impressed with the new government’s stance. The yield on three-year Greek bonds had risen to 17 percent at the end of January, and bank shares had lost significant value. The Economist reported:

“So back to the markets and the game of chicken being played between Greece and the EU. A Grexit [Greek exit from the euro] might cause problems for the EU in the form of losses for the ECB and others on bad debts… But, as we have seen, Greek financial markets are tanking. So investors clearly feel the EU has a stronger hand to play.”

It seems to be a good time to reflect on an old saying: Beware what you wish for; you just might get it.

 

Weekly Focus – Think About It

“You don't develop courage by being happy in your relationships everyday. You develop it by surviving difficult times and challenging adversity.

-- Epicurus, Greek philosopher

Weekly Commentary February 9th, 2015

The Markets

What’s in an employment report?

Last week, the U.S. Bureau of Labor Statistics’ Employment Situation Summary was full of encouraging data. Employment numbers for last November and December were revised higher which made 2014 the strongest year for job growth since 1999. However, 2015 isn’t off to a shabby start. The economy added just over a quarter of a million jobs in January. In addition, Barron’s reported:

“…Wages for private-sector workers ticked higher in January, rising 0.5 percent from December and 2.2 percent year-over-year. That sort of growth must persist to indicate a trend, but it is a promising sign, and one that could quell chatter about deflation in the U.S. The good news doesn’t end there. Low gas prices could save the average household $750 this year, and household net worth remains near an all-time high. It’s no wonder consumer confidence hit its highest level last month in more than seven years.”

Consumers are happy. Workers are happy. Who’s not happy? The answer may be companies and investors. Barron’s speculated workers’ gains could come at the expense of corporate profits.

Last week, Factset.com reported analysts are expecting to see year-over-year declines in both the overall earnings and revenues of companies in the Standard & Poor’s 500 Index during the first half of 2015. The downward revisions primarily reflect the expected performance of companies in the energy sector. While prospects for the first half of 2015 have dimmed a bit, analysts are expecting profit margins to expand and companies to have record earnings per share, overall, during the second half of 2015.

what is the most common job in the united states? In the late ‘70s and early ‘80s, secretary would have taken top honors in more than one-half of the United States. Machine operators and factory workers were in demand then, too. However, since then, personal computers have made secretarial work less prevalent, and technology and globalization erased many manufacturing positions in the United States.

Since the mid-80s, truck driving has become the most common occupation in most states, according to National Public Radio (NPR). One reason is that, so far, truck driving has been relatively unaffected by globalization and automation. As NPR reported, “A worker in China can't drive a truck in Ohio, and machines can't drive cars (yet).”

If you’re looking for recession-proof jobs (take that with a grain of salt – the Titanic was billed as being unsinkable), CareerProfiles.com reported the following industries are expected to have the greatest job growth during the next decade:

·         Sales and Finance (marketing managers and financial managers)

·         Computer software (systems software engineers)

·         Engineering (chemical, electrical, mechanical, and civil engineers)

·         Computer systems (systems analysts)

·         Finance/Accounting (financial analysts, accountants)

·         Education (certified teachers, teaching assistants and aides)

The U.S. government’s predictions for the fastest growing jobs through 2022 are slightly different. The top occupations on that list include:

·         Industrial-organizational psychologists

·         Personal care aides

·         Home health aides

·         Insulation workers, mechanical

·         Interpreters and translators

Other fields with good prospects include energy and the environment, healthcare, and security.

 

Weekly Focus – Think About It

“The Eskimos had fifty-two names for snow because it was important to them: there ought to be as many for love.”

-- Margaret Atwood, Canadian novelist

Weekly Commentary February 2nd, 2015

The Markets

It’s true. January did not turn out to be the best month for U.S. stock markets. At the end of the month, the Standard & Poor’s 500 Index (S&P 500) was down about 3.1 percent. Before you start listening to pithy observations – the saying ‘as goes January, so goes the year’ has been making the rounds – think back to January 2014. The S&P 500 finished the month down 3.6 percent and still managed to deliver positive performance (up 11.4 percent) for the year.

That said, there is a lot going on around the world and it’s making markets as feisty as a broody hen. Some of the issues include:

·         Low, low oil prices: Oil prices are a boon to consumers at the pump and a detriment to the oil industry which has suffered layoffs and cancelled projects, according to Barron’s.

·         Greek elections: The Syriza party won the Greek election on promises to reduce austerity measures and restructure Greek debt. Forbes reported there is uncertainty about how this will affect the Greek economy and the euro.

·         Currency issues: The Federal Reserve is tightening monetary policy while other central banks are easing. With the value of the euro dropping from $1.45 to about $1.15, U.S. exports are getting more expensive overseas, but it has become a lot cheaper for Americans to travel to most parts of Europe.

·         Deflationary pressures: CNBC.com reported prices in the Eurozone fell 0.6 percent year-to-year in January. That was after a 0.2 percent decline in December. Some folks are worried inflation in the U.S. could be headed south, too, if the Federal Reserve raises interest rates too much, too soon.

While stock markets have been struggling (the Dow and the S&P 500 are down but still within 5 percent of their December record highs, according to Barron’s), the government bond market has been thriving. Experts cited by Barron’s estimated about 16 percent of the government bonds they track, about $3.6 trillion worth, traded at negative yields last week. MarketWatch.com reported, for just the fourth time in more than 50 years, the dividend yield on the S&P 500 Index was higher than the yield on benchmark 10-year Treasury bonds last week.

Its value is estimated at more than $1 Trillion…

Is it the 2014 U.S. government-spending bill?

Is it the 282 billion Big Macs?
Is it 3.1 million Ferrari 599 GTBs?
Is it the amount of U.S. currency currently in circulation?

All of the above are estimated to be worth more than $1 trillion and so is student loan debt in the United States. Outstanding student loans are roughly equal to all of the greenbacks circulating the world. According to The Wall Street Journal:

“Ever-escalating tuitions, especially in the past dozen years, have produced an explosion of associated debt as students and their families resorted to borrowing to cover college prices that are the only major expense item in the economy that is growing faster than health care. According to the Federal Reserve, educational debt has shot past every other category – credit cards, auto loans, refinancings – except home mortgages, reaching some $1.3 trillion this year.”

The Journal said about 70 percent of 2014 graduates borrowed to pay for college, and they left school with an average debt of $33,000. The amount owed varies significantly by state, according to U.S. News & World Report. In 2013, students in New Hampshire, Delaware, Pennsylvania, Rhode Island, and Minnesota graduated with debt exceeding $30,000 on average, while those in New Mexico, California, Nevada, the District of Columbia, and Oklahoma had debt of less than $20,000 on average.

While there may be some attractive alternatives for student borrowers – including income-based repayment loans and crowdfunding for college – the Journal cited statistics showing America’s student debt could be negatively affecting our country’s economic dynamism. The percentage of younger Americans who own part of a business dropped from 6.1 percent to 3.6 percent between 2010 and 2013. Also, during the past decade, the percentage of new businesses started by people younger than age 34 fell from 26.4 percent to 22.7 percent.

 

Weekly Focus – Think About It

“If your actions inspire others to dream more, learn more, do more and become more, you are a leader.”

--John Quincy Adams, Sixth U.S. President