Weekly Commentary July 27th, 2015

The Markets

There was a spate of bad news last week, and it drove U.S. markets lower.

China’s wild ride isn’t over yet. The Purchasing Managers’ Index, a private measure of Chinese manufacturing, came in below expectations at 48.2, according to BloombergBusiness. Results below 50 indicate the sector is contracting. That doesn’t bode well for growth in China, which is the biggest global consumer of metals, grains, and energy, or the rest of the world.

Things weren’t rosy in the United States either. Sales of new homes in June came in below expectations, and the median new home price fell from a year ago. That news was a U-turn from recent data indicating strength in the housing market.

Earnings news was also less than stellar. The Standard & Poor’s 500 Index is kind of pricey, according to Reuters, and second quarter earnings for companies in the index were mixed. Seventy-four percent of companies beat earnings expectations but not nearly as many delivered on expected revenues.

Earnings weren’t the only issue on investors’ minds. Last week, the Federal Reserve has signaled a September rate hike was a possibility. This week it inadvertently released a confidential staff forecast that included estimates for inflation, unemployment, economic growth, and the fed funds rate. The Washington Post reported:

“Currently, the fed funds rate is between 0 and 0.25 percent, the same level it has been since the financial crisis hit in 2008… The staff prediction is that the prevailing fed funds rate during the fourth quarter will be 0.35 percent. Though there is no reference to exactly when or how that could happen, analysts say the most likely way is for the central bank to raise its target rate in September.”

Experts cited by Barron’s cautioned, “…it’s not the first rate hike that’s important. It is what comes after that.” Stay tuned.

a high school degree. Companies often take an interest in education. Some involve themselves in community outreach efforts, sending employees to teach financial literacy or educate students about careers that demand knowledge of a particular field of study. Others have foundations that provide financial support to school districts.

Recently, a new model of assistance was introduced. Pathways in Technology Early College High Schools (P-Tech) were the brainchild of New York City, City University of New York, and a large technology company. The schools offer a six-year educational program that combines public high school, community college courses, and paid work experience. Students graduate with an associate degree and it doesn’t cost them a penny of tuition.

The first six students graduated from P-Tech – two years early – in June 2015. All received job offers from the technology company. Three accepted and three decided to go on to college. The Economist described one graduate, who opted for employment:

“He applies his programming and technical skills to a digital platform that provides market research to his colleagues. It is a good job: he makes $50,000 a year, has a health-care package, and a pension plan. Mr. Saddler is 18 years old. He earned his high-school diploma last month. A few weeks before finishing school, he also received an associate degree in computer systems technology.”

Experts cited by U.S. News & World Report explained early college high schools help bridge the gap for students from low-income families who sometimes struggle with the transition from high school to college or university.

Since about 30 percent of the companies in the United States cannot fill open positions, P-Tech is an idea that’s gaining traction. More than 70 small and large companies are collaborating with high schools and colleges to promote the concept. Twenty-seven schools have been introduced in New York, Connecticut, and Illinois, to date. Colorado is expected to be the next state to follow suit.

 

Weekly Focus – Think About It

“Rightful liberty is unobstructed action according to our will within limits drawn around us by the equal rights of others.”

--Thomas Jefferson, Third President of the United States

Weekly Commentary July 20th, 2015

The Markets

Investors around the world breathed a sigh of relief last week.

It wafted many markets higher. The NASDAQ jumped by more than 4 percent. The Standard & Poor’s 500 Index gained 2.4 percent. France’s national benchmark index rose 4.5 percent, Germany’s was up 3.2 percent, Italy’s increased by 3.6 percent, and China’s Shanghai Composite was up 2.1 percent. So, what happened?

Global markets stabilized.

First, the Chinese stock market staunched its wounds and recovered some value, which eased investors’ worries. According to Barron’s, by the end of the week, the Shanghai Composite Index was up 13 percent from its early July low. The market’s recovery owed much to Chinese government intervention. BloombergBusiness explained:

“Chinese policy makers have gone to unprecedented lengths to put a floor under the market as they seek to bolster consumer confidence and prevent soured loans backed by equities from infecting the financial system. Over the past few weeks, they’ve banned large shareholders from selling stakes, ordered state-run institutions to buy shares, and let more than half of the companies on mainland exchanges halt trading.”

Investors also were appreciative when Greece reached an agreement with its creditors. It accepted austerity measures, which voters had soundly rejected with a ‘no’ vote on July 5 to forge a bailout agreement with European Union (EU) leaders.

That doesn’t mean the Greek debt debacle is over. Late last week, the International Monetary Fund issued a memo indicating it would not support a bailout for Greece unless significant debt relief was involved. Neither the EU nor the European Central Bank is interested in forgiving Greek debt. In fact, that was one of the main reasons negotiations with creditors failed the first time around.

Are you missing out on a possible triple tax advantage? If you have a high deductible health insurance plan and you’re not contributing the maximum to a health savings account (HSA), then you may be missing out. A study cited by The Washington Post found just one in 20 people with HSAs take full advantage of the opportunity.

In general, HSAs offer three tax benefits:

1.      Contributions are federally tax-deductible up to certain limits ($3,350 for a single person and $6,650 for a family in 2015; add $1,000 to those limits if you’re age 55 or older).

2.      Any interest earned on money in an HSA grows tax-deferred.

3.      Withdrawals used to pay qualified medical expenses are income tax free.

Tax advantages aren’t the only reason to open an HSA. Money set aside in these accounts can be used to pay health insurance deductibles as well as qualified medical expenses. Although, according to The New York Times, determining which products can be purchased with HSA savings can be confusing:

“Under a change enacted with the Affordable Care Act, most over-the-counter drugs, like common allergy medications or pain relievers, are HSA-eligible only if you get a prescription for them from your doctor. On the other hand, items like sunscreen and contact lens solution are eligible for purchase – without a prescription – with your HSA funds.”

HSA assets also can be used to pay health insurance premiums (if workers are receiving unemployment benefits) and long-term care premiums.

It’s important to make sure HSA funds are used for qualified expenses because any money withdrawn for non-qualified expenses is taxed as ordinary income, plus a 20 percent penalty tax is assessed if the account holder is younger than age 65.

That brings us to another advantage provided by HSAs. Kiplinger.com explained money not spent during the contribution year remains in the account. Any earnings grow tax-deferred and the savings that accumulate may be used for qualified medical expenses in the future or, once the account holder reaches age 65, for living expenses. In the latter case, withdrawals may be taxed as ordinary income.

 

Weekly Focus – Think About It

“In theory there is no difference between theory and practice. In practice there is.”

--Yogi Berra, American baseball player

Possible Implications of Greece's Vote

The Greek people had their voices heard on July 5 and decisively voted “no” on the Greek referendum to accept the latest bailout deal from creditors. This outcome, which was surprising to many, will potentially raise the level of economic and financial market volatility in the weeks ahead, as global investors assess the risks associated with an increasingly likely Greek exit (Grexit) from the Eurozone and from the Eurozone’s common currency, the euro.

Here in the U.S., the uncertainty surrounding the possibility of a Grexit may lead to:

·         Slower global economic growth, which may hurt U.S. export growth at the margin

·         A delay in the Federal Reserve (Fed) raising interest rates, and a slower pace of rate hikes

·         A stronger U.S. dollar for longer, as the European Central Bank (ECB) will likely speed up its bond buying program, i.e., quantitative easing (QE)

·         An overall increase in economic and market uncertainty

The longer the uncertainty, the greater the potential impact. The market and economic disruption ahead of a potential Grexit may modestly slow U.S. economic growth and could push the first Fed rate hike into early 2016. But ultimately, the Fed will make the decision on when—and by how much—to raise rates based on the U.S. economy’s progress. For now, the Fed remains on track to potentially hike rates for the first time in this cycle in late 2015; but the longer the uncertainty around Greece lingers, the greater the odds that the Fed doesn’t hike rates until early 2016.

We all know the stock market does not like uncertainty, but the risk of contagion is expected to be manageable and, for the U.S. market, the impact to be relatively short term. The economic backdrop in Europe has improved, and peripheral European countries such as Italy, Spain, and Portugal—where contagion risks are centered—are in much better shape than they were when the Greek debt crisis began five years ago. In addition, the va                                                   st majority of Greece’s debt is owned by supranational entities like the ECB and the International Monetary Fund (IMF), and not by private investors, as was the case with Lehman Brothers.

Safety nets are a big reason why market impact from Greece is likely to be limited. The ECB’s long-term bank lending facility remains largely unutilized but has 300 billion euros of capacity; and the European Union’s rescue fund, the European Stability Mechanism (ESM), is now fully operational and has several hundred billion euros of capacity. Finally, last week the ECB added several corporate bond issuers to its list of eligible issuers for its QE program. By widening the pool of available bonds to purchase, the ECB increases its ability to fight off the spread of Greece-related debt fears across the Eurozone. These safety nets were gradually put in place in recent years and represent a key difference from 2008 and 2011.

Greece’s latest crisis is not expected to lead to the end of the U.S. economic expansion or the bull market. Heightened uncertainty may be setting up an attractive buying opportunity, particularly in Europe. But regardless of whether Greece remains in or exits the Eurozone, patience is recommended. Market volatility may potentially remain high over the next several weeks and months as we await further information on Greece’s path.

Weekly Commentary July 13th, 2015

The Markets

It’s a cautionary tale…

Many Chinese investors were so optimistic about the prospects for Chinese stock markets they bought on margin, meaning they borrowed money to buy stocks. Borrowing to invest has been so popular that the amount of margin loans doubled in just six months to about $320 billion, according to Barron’s. Experts cited in the article said, “…margin financing in China is equal in size to Indonesia’s entire stock market valuation and as high a portion as it has been in any market at any time…”

The problem with buying on margin is repaying the loan if stocks move in the wrong direction. Since the middle of June, Chinese stock markets have lost more than $3 trillion, reported CNN.com. Barron’s explained how margin works:

“In China, a typical investor can borrow $1.25 for every dollar of cash she has, giving her what China calls a “guarantee ratio” of 180 percent, or $2.25 (cash and stock bought on margin) divided by $1.25 (loan value). But, as her stock loses value, the guarantee ratio also falls. At 150 percent, the broker will start to issue margin calls. When the ratio hits 130 percent, the brokerage will force the liquidation of the position to meet the loan.”

About 80 percent of the investors in China’s markets live in China. Many have suffered significant losses as markets have moved lower.

The BBC reported China’s market regulator responded to the market downturn by making it even easier for people to borrow money to invest. Apparently, the hope is small investors will put more money in stocks. Regulators also banned investors who hold 5 percent or more of a company’s stock from selling their shares for six months.

By the middle of last week, Chinese markets had stopped losing value. Only time will tell whether they have truly stabilized.

Closer to home, the New York Stock Exchange (NYSE) suffered a computer glitch that halted trading for several hours last week. The NYSE tweeted, “The issue we are experiencing is an internal technical issue and is not the result of a cyber breach.”

Big data is making the news. A well-known search engine company has introduced a cloud-based big data service and a news laboratory which provides data about trends to journalists. During 2014 and 2015, it provided:

·         The Economist with information about the employers and industry sectors that were most popular with American job seekers.

·         TIME with five of the top trending people and topics for 2014: Ebola, the Ice Bucket Challenge, Ferguson [Missouri], Vladimir Putin, and Dilma Rousseff.

·         The New York Times with a state-by-state assessment of popular Thanksgiving foods. In California they like persimmon bread; in Texas it was sopapilla cheesecake; in Minnesota they were searching for wild rice casserole; and in New York the favorite was stuffed artichokes.

·         The Washington Post with data on depression, pain, anxiety, stress, and fatigue, so it could create a daily misery index for the year.

·         Buzzfeed and Vocativ with British and American political data, including the most searched candidate names and questions most frequently asked of candidates.

The search engine also tracks what we don’t know or can’t remember. For instance, it has created a cocktail tool to provide instructions for making the drinks most frequently sought in online searches and a nutrition comparison tool to facilitate food smack downs (mashed potatoes beat sweet potatoes for sugar, but sweet potatoes win when it comes to Vitamin A, potassium, and calcium).

Always remember: When you go online and use certain search engines, your data is being stored and sorted. It’s important to know.

 

Weekly Focus – Think About It

“We think too small, like the frog at the bottom of the well. He thinks the sky is only as big as the top of the well. If he surfaced, he would have an entirely different view.”

--Mao Zedong, Former Chairman of the Communist Party of China

Weekly Commentary July 6th, 2015

The Markets

It’s been a wild, wild quarter.

In early April, stock markets were doing so well (14 of 47 national benchmark indices hit all-time highs) that global market capitalization — the value of stocks trading on exchanges throughout the world — pushed past $70 trillion, according to Bloomberg Business. The publication attributed the climb to stimulus programs. About two-dozen countries’ central banks were either engaged in quantitative easing or had committed to lower interest rates.

Rate hike speculation

Since the start of the year, analysts have been avidly seeking clues about when the Federal Reserve may begin to tighten monetary policy. Would it happen in June? In September? In December? In 2016?

After a mid-June policy meeting, The Wall Street Journal reported that Fed officials expect to raise rates during 2015. However, the latest turn of events in Greece, turmoil in Chinese markets, a strong dollar (which could slow U.S. growth), and other factors may cause that signal to change.

China’s bull market ends

By late May, China’s Shanghai and Shenzhen Stock Exchanges were valued at about $10.3 trillion dollars. The Shanghai Composite Index was up about 60 percent from the start of the year, and the Shenzhen was up about 120 percent for the same period. Markets were pushed higher by enthusiastic Chinese investors.  In April, the Financial Times described it like this:

“After years of poor performance, confidence in the stock market has returned in China with a vengeance. Savers have switched hundreds of billions of dollars out of property, deposits, and wealth management products in the hope of making a fast buck in stocks.”

Those hopes may have been dashed when Chinese markets headed south late in the quarter. During the last three weeks, Chinese markets have lost about $2.8 trillion in value, bringing the longest bull market in that nation’s history to a rather abrupt end.

Angst in the European Union

The European Central Bank’s 2015 quantitative easing (QE) program was a shot in the arm for Europe. Expectations that QE would spur economic growth and help the region conquer deflation helped push some stock markets to all-time highs.

Late in second quarter, however, the high gloss of QE was dulled by Greek gamesmanship. After a stellar first quarter, the Stoxx 600 Index, which includes stocks of companies in 18 European countries, saw its first-half gains fall to 11 percent, according to Bloomberg Business.

Crowdfunding for Greece?

You may be familiar with crowd funding. If not, boiled down, it comes to this: Someone has an idea, sets up an online campaign, and raises money to fund the concept. Often perks are offered for contributions.

Late in the second quarter, a 29-year-old shoe salesman in York, England, set up the Greek Bailout Fund. He wrote, “All this dithering over Greece is getting boring…The European Union (EU) is home to 503 million people, if we all just chip in a few Euro then we can get Greece sorted and hopefully get them back on track soon. Easy.”

You’ve got to admire his audacity. The goal? Raise €1.6 billion. As of July 5, 2015, €1.8 million had been pledged. 

 

the European central bank is no U.S. federal reserve or people’s bank of china or Bank of england… Recent matters in Greece have highlighted some of the problems with the European Union. One of the most important is the EU does not have a single government pursuing a coherent fiscal policy. Nope. As The Economist suggests, it’s a conglomeration of countries with disparate economic goals and circumstances.

 

A writer at Forbes captured the essence of the problem in a Tweet: “No currency-issuing national central bank would freeze the money supply in a depression. But that's what the [European Central Bank] ECB has done to Greece.”

 

The lesson about money supply was learned during the Great Depression. The Federal Reserve began tightening monetary policy in 1928. It allowed money supply in the United States to shrink by about one-third from 1929 to 1933, and that had a disastrous effect on the American economy. It’s hard to grow when you have less and less money. In 2002, then-Fed Chairman Ben Bernanke fessed up, “…the Great Depression can reasonably be described as having been caused by monetary forces.”

 

But the heart of the Forbes Tweet is the observation that no national central bank would freeze money supply. The Economist pointed out that the ECB is not a national central bank. It is an international central bank, and that is problematic.

 

“The ECB, of course, doesn't derive its mandate from the Greek government, but from all euro zone member governments. And here there is a clear conflict of interest; Greece owes money, not just to the rest of the EU, but to the ECB itself. When the ECB provides liquidity to Greek banks, it increases the bank's exposure to a government that may not repay it. This works both ways; neither the British nor the American government would want the credibility of their central banks to be undermined. But the Greeks don't have any interest in maintaining the reputation of the ECB.”

 

If the interests of the various countries in the EU don’t align, how does the region pursue a coherent fiscal policy? How does the ECB implement effective monetary policy? Should one country’s pension or healthcare system be more generous than another’s? How does the United States do it?

 

Eurozone countries have a complex relationship. We’re likely to learn a lot about its long-term sustainability in coming weeks.

  

Weekly Focus – Think About It

“It's not what happens to you, but how you react to it that matters.

-- Epictetus, Greek Philosopher