Daily Gains Letter

jobs market


Homebuilders Starting to Feel the Crunch We’ve Been Predicting for Months

By for Daily Gains Letter | Feb 19, 2014

Investment Ideas for Plunging Homebuilder SentimentIf the state of the U.S. housing market is a key indicator on the health of the U.S. economy, things aren’t looking great. Against a backdrop of an obviously weak U.S. economy, U.S. housing prices have been rising steadily higher, beyond the reach of affordability for the average American.

According to a CoreLogic report, national housing prices are expected to climb 10.2% year-over-year. In 2012, U.S. housing prices increased 11%. While these are solid numbers, it’s important to remember that U.S. housing prices are still roughly 20% below their 2007 pre-recession highs. (Source: Gruszecki, D., “HOUSING: CoreLogic report, Inland home prices up 22% in January,” The Press-Enterprise web site, February 4, 2014.)

In spite of this divergence, fewer homebuyers are able to actually take advantage of the near-record-low interest rate environment and get into the market. That’s because first-time homebuyers—the fuel of the U.S. housing market—are being shut out by investors.

First-time homebuyers account for just 27% of all U.S. housing purchases in December—a huge spread over the 30-year average of 40%. But in spite of U.S. housing prices still being depressed compared to 2007, December existing-home sales rose just one percent month-over-month, which was less than expected.

Granted, some will say that first-time homebuyers tend to purchase lower-priced homes and are not necessarily a true reflection of the U.S. housing market. New homes are, as that theory goes, more geared toward those looking to climb up the property ladder. Well, for those who recall, December new-home sales fell more than expected—seven percent to a seasonally adjusted annual rate of 414,000. At the time, we were told not to worry, … Read More


Top-Yielding Stocks to Combat Low Interest Rates

By for Daily Gains Letter | Feb 13, 2014

Low Interest RatesFederal Reserve Chair Janet Yellen has confirmed what most already knew. The recovery in the U.S. jobs market is far from complete. Yellen noted that the unemployment rate has improved since the Federal Reserve initiated its last round of quantitative easing in late 2012, falling from 8.1% to 6.6%. Curiously, in 2013, the U.S. economy grew just two percent.

That said, against the backdrop of a so-called improving U.S. economy, the numbers of the long-term unemployed and part-time workers are far too high. In fact, 3.6 million Americans, or 35.8% of the country’s unemployed, fall under the “long-term unemployed” umbrella—that is, those who have been out of work for more than 27 weeks. The underemployment rate (which includes those who have part-time jobs but want full-time jobs and those who have given up looking for work) remains stubbornly high at 12.7%.

The improving unemployment numbers come on the heels of two straight months of weak jobs numbers. In January, economists were expecting the U.S. to add 180,000 new jobs to the U.S. economy; instead, just 113,000 new jobs were added. In December, economists were projecting 200,000 new jobs would be added—instead, the number was an anemic 74,000.

For the head of the Federal Reserve, this translates into more money being dumped into the bond market ($65.0 billion per month) and a continuation of artificially low interest rates.

Once again, bad news for Main Street is good news for Wall Street. After Yellen’s speech, the S&P 500, NYSE, and NASDAQ responded by surging higher. Again, the Federal Reserve’s ongoing bond buying program and open-ended artificially low interest rate environment is great … Read More


Where the Fed Went Wrong When It Decided to Taper

By for Daily Gains Letter | Jan 14, 2014

What Wall Street Celebrated Too EarlyThe merriment, mirth, and cheer on Wall Street over the holiday season may have been a bit premature; in fact, the optimism about the U.S. economy that ushered in the New Year may have already come to a screeching halt.

In mid-December, the Federal Reserve surprised investors when it announced it was going to start tapering it’s generous $85.0-billion-per-month easy money policy in January to just $75.0 billion per month. The pullback was a surprise, because the Federal Reserve initially hinted it wouldn’t ease its monetary policy until the U.S. unemployment rate fell to 6.5% and inflation rose to 2.5%. At the time of the announcement, U.S. unemployment stood at seven percent and inflation was hovering around historic lows below one percent.

The Federal Reserve moved sooner than expected with its tapering because of a (so-called) stronger U.S. economy and jobs growth. And, going forward, it said that U.S. unemployment figures will improve faster than expected. But, a raft of new economic numbers is calling that optimistic forward guidance into question.

In December, the U.S. economy created just 74,000 jobs, the slowest pace in three years, with the majority of the jobs (55,000) coming from the retail industry. Despite the weak jobs growth, the U.S. unemployment rate managed to fall from seven percent to 6.7%—the lowest rate since October 2008. But numbers are deceiving—the big drop in the unemployment rate was primarily a result of 347,000 people dropping out of the labor force.

Throughout 2013, the U.S. economy created 2.18 million jobs; in 2012, the U.S. economy created 2.19 million jobs. Looking at this from another angle, in 2013, the … Read More


The Contrarian: Why I Think Stocks Will Rise in 2014

By for Daily Gains Letter | Jan 6, 2014

Stocks Will Rise in 2014Now that New Year’s has come and gone, as we look forward into 2014, the big question will be how the stock market performs this year, especially following an impressive advance in 2013 that was beyond my estimates.

The past year was seen as the year of the Fed-induced market rally that resulted in some strong gains across the board from blue chips to technology and growth stocks. It was one of the best years to make money on the stock market in recent history.

At this stage, the economy is looking better and will need to strengthen in order for the stock market to advance higher toward more record gains. A strong January would be positive and would suggest an up year for the stock market.

My early view is that the stock market will head higher in 2014, but not at the same rate as we saw in 2013, which was out of whack.

The key will be how fast the Federal Reserve, under Janet Yellen, decides to taper its bond buying. A slower taper is supportive for the stock market. However, the flow of money will depend on the rate of economic renewal and, more specifically, the jobs market and whether job creation continues to move along at a steady pace. If we see growth and more jobs created, the Fed will continue to cut its bond buying, though it has said that it will keep interest rates near record lows until the unemployment rate falls to 6.5% or lower, which could happen sometime in mid- to late 2014.

I see another up year for the stock … Read More


How to Profit from the Market’s Change of Heart Toward Tapering

By for Daily Gains Letter | Dec 23, 2013

Market’s Change of Heart Toward TaperingInvestors are a surprising lot. Since May, any suggestions about tapering by the current Federal Reserve chairman, Ben Bernanke, or even one of the dozen district Federal Reserve economists, sent the markets reeling.

Back in May, just the whisper of a hint from the Fed that it might consider tapering its $85.0-billion-per-month bond buying program was enough to stop the bull market in its tracks. It recovered, of course, but only after Bernanke soothed the markets by saying he had no intention of pulling back on the Fed’s quantitative easing (QE) policy anytime soon.

The general fear, of course, was that any reduction in QE would translate into an immediate rise in interest rates. Having kept interest rates artificially low (near zero), the Fed made it cheaper for people to borrow. As a result, these artificially low interest rates are generally recognized as being the fuel that’s been propelling the stock market increasingly higher.

The Federal Reserve quashed those fears last week after announcing a $10.0-billion monthly cut in its QE strategy by telling investors it wouldn’t raise interest rates until unemployment hits 6.5%. By the Fed’s own estimates, the country will not hit this target until late 2014 to mid-2015. So, artificially low interest rates live on.

The assurance of cheap money kept the markets upbeat; so much so that the following day, the Dow Jones Industrial Average and S&P 500 opened at record highs, and the NASDAQ opened at a 13-year high.

News on a few key economic indicators released last Thursday, the day after the Federal Reserve’s announcement, probably didn’t hurt either, as these indicators suggested the … Read More


Best Days for Gains in Housing Stocks Behind Us?

By for Daily Gains Letter | Dec 16, 2013

Housing Stocks Behind Us 2Mortgage rates are on the rise. In November, the 30-year fixed rate mortgage stood at 4.26% compared to 3.35% a year earlier in November 2012. The average rate for the 30-year fixed rate mortgage in 2007 prior to the subprime meltdown was 6.34%, according to data from Freddie Mac. (Source: “30-Year Fixed Mortgage Rates Since 1971,” Freddie Mac web site, last accessed December 13, 2013.)

Much of the decline in mortgage rates was driven by the Federal Reserve’s massive quantitative easing policies that saw the central bank buy $85.0 billion in bonds per month in an effort to drive down lending rates and drive up consumer demand in the housing market.

Yet after adding trillions to the balance sheet of the Fed, the housing market has recovered and is currently on pretty solid ground, with higher demand and prices.

But all of this bond buying will eventually stop and the impact will push mortgage rates higher. Of course, the amount by which bond buying is reduced will be dependent on the economic renewal and jobs market. I do not know how high mortgage rates will rise in one, two, or even five years, but they will move higher as long as the economy and jobs market continue to improve.

The housing market could easily absorb a small rise in mortgage rates, but with the lowest mortgage rates behind us for the time being, I suspect the housing market will inevitably slow down as far as home price increases and sales. This could take a few more years.

With the Fed expected to begin its bond tapering early in the New … Read More


Taper or No Taper, Here’s How to Protect Your Portfolio

By for Daily Gains Letter | Sep 12, 2013

Protect Your PortfolioWill the Federal Reserve taper quantitative easing in September? This question has become the main topic of discussion among investors, since reducing or ending quantitative easing can have significant implications on the broader market. By the way, the Federal Open Market Committee (FOMC) meets on September 17 and 18. (Source: “Meeting calendars, statements, and minutes (2008-2014),” Federal Reserve web site, last accessed September 9, 2013.)

It’s no surprise that there is speculation. We are hearing some say the Federal Reserve will start to slow its purchases, and others are saying it won’t. It’s all becoming very confusing, to say the least.

Investors who are looking to invest for the long term need to first evaluate the situation by looking at what we know.

Last year, when the Federal Reserve started buying $85.0 billion worth of mortgage-backed securities (MBS) and government bonds, it said it would continue this operation until the unemployment rate hit 6.5% and the inflation outlook was 2.5%. (Source: “Press Release,” Federal Reserve web site, December 12, 2012.)

Where do we stand on unemployment and inflation?

Unemployment

Unemployment in the U.S. economy has certainly improved—if you look at the numbers on the surface, at least. In August, the jobs market report found that the unemployment rate in the U.S. economy was 7.3%, slightly lower from July, when it was 7.4%. Sadly, this is nowhere close to the Federal Reserve’s target; as a matter of fact, it’s running at more than 12% from its target. (Source: “The Employment Situation — August 2013,” Bureau of Labor Statistics, September 6, 2013.)

Inflation

According to the data provided by the Bureau of … Read More


New Employment Trend Threatens U.S. Economic Growth

By for Daily Gains Letter | Aug 6, 2013

Employment Trend Threatens U.S. Economic GrowthThe Bureau of Labor Statistics (BLS) reported that 162,000 jobs were added to the U.S. economy in July. The unemployment rate registered at 7.4%; in June, it was 7.6%. (Source: “Employment Situation Summary,” Bureau of Labor Statistics web site, last accessed August 2013.)

Looking at this, one must ask the question: is this a good sign for growth ahead in the U.S. economy?

On the surface, the picture does look rosy. The unemployment rate decreasing is actually a good sign, but sadly, there are some fundamental issues with the jobs market in the U.S. economy that need to be fixed before economic growth can fully take place.

First of all, the rate of decline in unemployment isn’t as impressive, having been above seven percent since December of 2008. Prior to the financial crisis in the earlier part of 2007, the unemployment rate in the U.S. economy was below five percent. There are still 11.5 million individuals unemployed in the U.S. economy, while 8.2 million Americans are working part-time because they are unable to find a full-time position. (Source: “Databases, Tables & Calculators by Subject,” Bureau of Labor Statistics web site, last accessed August 2, 2013.)

The second and most critical problem is that low-wage-paying sectors are witnessing robust jobs growth in the U.S. economy; for others, not so much. Jobs that pay better wages and provide employees with benefits are few in number.

In July, we experienced the same problem, as 47,000 jobs were added in the retail trade sector—this includes places like general merchandise stores, personal care stores, and building and garden supply stores. Meanwhile, 38,000 jobs were added … Read More


How Smart Investors Can Profit from Increased Consumer Spending

By for Daily Gains Letter | Jul 22, 2013

Profit from Increased ConsumerAs consumer spending in the U.S. economy improves, investors may be able to profit from exchange-traded funds (ETFs) like the Consumer Discretionary Select Sector SPDR (NYSEArca/ XLY) and consumer discretionary companies.

In the aftermath of the financial crisis, consumer spending in the U.S. economy stalled. The reasons behind it were obvious: there was a surge in foreclosures and rampant job cuts.

But consumers in the U.S. economy seem to be spending once again.

In June, retail and food services sales increased 0.4% over May to $422.8 billion. While this may sound minute, it makes the big picture clearer: consumer spending on retail and food services has increased 4.6% in the second quarter of this year compared to last year, and is up 5.7% from June of 2012. (Source: U.S. Census Bureau, July 15, 2013.)

Consumers are also buying cars again. In June, 1.4 million cars and light trucks were sold in the U.S. economy. At an annual pace of 15.96 million vehicles, June was the best month for car sales since November of 2007. Auto sales in the U.S. economy have increased nine percent from a year ago. (Source: Klayman, B. and Woodall, B., “U.S. auto industry posts best sales month since 2007,” The Globe and Mail, July 2, 2013.)

Consumer confidence is also increasing in the U.S. economy. Consider the chart below of The University of Michigan Consumer Sentiment Index. In June, consumer sentiment registered at 84.1—one of the best levels since late 2008.

Consumer Sentiment Chart

Chart courtesy of www.StockCharts.com

Consumer confidence is one of the best indicators of consumer spending. Once the consumer feels confident, they think the economy is … Read More


Safe Stocks to Shield You from Fed’s Bad Decisions

By for Daily Gains Letter | Jun 28, 2013

 unemployment rateIt was just a week ago that the Federal Reserve, pointing to an improving economy, said it would continue its quantitative easing program—at least until America’s job market improves substantially. We weren’t, however, told what “substantially” looks like.

Many think that means an unemployment rate of 6.5%. And to get there, the U.S. would have to create somewhere in the neighborhood of two million jobs. That’s assuming all things remain equal—but, of course, they never do.

The Federal Reserve also said that, thanks to the economic rebound, it would consider tapering its monthly $85.0-billion purchase of Treasuries and mortgage-backed securities by the end of the year.

On top of that, the Federal Reserve said it could end its quantitative easing policies altogether in 2014.

Federal Reserve Chairman Ben Bernanke’s celebratory remarks may have been a little premature.

The Department of Commerce reported on June 26 that gross domestic product (GDP) in the first quarter of 2013 grew 1.8% over the fourth quarter of 2012. Previously, the Bureau of Economic Analysis (BEA) forecast first-quarter 2013 GDP growth of 2.4%. (Source: “National Income and Product Accounts Gross Domestic Product, 1st quarter 2013 [third estimate]; Corporate Profits, 1st quarter 2013 [revised estimate],” Bureau of Economic Analysis web site, June 26, 2013.)

Aside from home construction and government, the final 2013 first-quarter GDP report from the Commerce Department showed downward revisions. For example, consumer spending—which accounts for almost 70% of U.S. economic activity—increased by just 2.6%, much less than the forecasted 3.4%. That may not sound like much, but it means spending was 23% below forecast.

Granted, the numbers reflect the U.S. economy as … Read More