Market News: September 29, 2013

September 29th, 2013

The Markets

What the Fed giveth, the House taketh away: Jubilation on Wall Street after the Fed decided not to begin tapering immediately gave way to concerns about the potential impact of renewed battles over the federal budget and U.S. debt ceiling. The Dow and the S&P 500 hit record closing highs after the Fed announcement only to give back most of those gains by week’s end. The small-cap Russell 2000 also rose post-Fed but was more resilient than its large-cap brethren after the House of Representatives passed a budget that virtually guarantees more fiscal infighting. Meanwhile, investors took advantage of the reprieve from Fed tapering to boost bond prices, sending yields down.

Market/Index

2012 Close

Prior Week

As of 9/20

Week Change

YTD Change

DJIA

13104.14

15376.06

15451.09

.49%

17.91%

Nasdaq

3019.51

3722.18

3774.73

1..41%

25.01%

S&P 500

1426.19

1687.99

1709.91

1..30%

19.89%

Russell 2000

849.35

1053.98

1072.83

1..79%

26.31%

Global Dow

1995.96

2300.09

2349.36

2..14%

17.71%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..78%

2..90%

2..75%

-15 bps

.97 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· The Federal Open Market Committee said it will continue to buy $85 billion worth of bonds, at least until it sees whether the threat of fiscal gridlock in Washington will threaten the economy.

· Increases in the cost of housing and medical care were largely responsible for a 0.1% increase in consumer prices in August. The Bureau of Labor Statistics said that put the consumer inflation rate at 1.5% for the last 12 months, which is well within the Federal Reserve’s target range.

· Housing starts on single-family homes–the largest segment of the residential construction market–rose 7% in August, putting overall housing starts up 0.9% for the month and 19% ahead of August 2012. However, the Commerce Department said building permits–an indicator of future construction–were down 3.8% for the month, though they were still 11% ahead of last August.

· A 1.7% increase in sales of existing homes in August put home resales at their highest level in more than six years. The National Association of Realtors® said the nearly 15% increase in the median sales price since August 2012 represented the ninth straight month of year-over-year increases.

· The nonpartisan Congressional Budget Office said the current level of federal debt relative to gross domestic product is higher than at any time since World War II. The budget deficit has declined to its lowest level since 2008–about 4% of GDP. However, the CBO projected that though the deficit would fall to 2% of GDP in two years, deficits would then gradually begin to rise again, primarily because of higher borrowing costs due to rising interest rates as well as the growing costs of Social Security, Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies provided through health insurance exchanges.

· German Chancellor Angela Merkel handily won reelection, though her political party will still face a challenge in forming a coalition government with political opponents. The vote essentially ratified Merkel’s strong support of financial assistance for troubled eurozone countries.

· Industrial production rose 0.4% in August, according to the Federal Reserve Board, and was up 2.7% from a year earlier.

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

The Cost of Being Educated

September 17th, 2013
I recently saw a very cool infographic on the extraordinary cost of getting educated in the United States.  The education funding market is really not my business focus, as it is for many financial planners, but I thought the topic was very compelling in how it characterizes our approach to higher education, and indeed to education in general.
What is striking about the American system is its unabashed shifting of enormous financial risk to students in the last decade.  What is peculiar about the amassing of student loan debt, now $1.1 Trillion and the largest debt behind mortgages, is that the burden of realizing this long term investment rests solely on the student.  Industry in general does not subsidize tuition, universities do not assume any responsibility to repay nor guarantee any job.  And yet the whole education system seems to rest upon, even profits from, the students ability to get loans and become indebted for a lifetime.  Unlike many debts, education loans cannot be erased by bankruptcy, so it turns out this debt is a kind of indentured servitude.
I am not sure what the solution is, but privatizing the financial risk like this seems dicey.  Again it seems to come down to our financial system’s penchant for privatizing profits and socializing losses.  Recently Bank of America, Citigroup, JP Morgan and US Bancorp all have announced their exit from the education financing business.   They don’t see any future in it, and probably are already seeing signs of performing loan erosion Apart from a few standouts, like Wells Fargo, most future education financing will have to fall on the already overleveraged quasi-government lender, Sallie Mae,  or  on families and individuals.
In a sort of libertarian ( or Machiavellian) way, I suppose the coming end of the student loan bubble is a good thing.  Parents and students need to view higher education as a business proposition and closely examine the Return on Investment.  Unfortunately for many, it is already too late, as they will be saddled with debt for which few jobs will generate enough cash flow to repay.  In any case, colleges and universities will have to rethink their value proposition like never before.  With much scholastic information practically free online (see The Open University), the pure rote knowledge no longer functions as the value add.  While some schools like Harvard will probably parley their elite status successfully, many in the lower echelons will either have to get better at delivering “income opportunities” or face extinction.
That is American Capitalism working at its finest  – “creative destruction”.  Hopefully, the $1.1 Trillion doesn’t come at the cost of home sales, car sales, furniture sales, business investment, and ultimately a taxpayer bailout.  Only time will tell, and in the spirit of Darwin . . . . Failure is the Greatest Teacher.
Daniel R. Bennett
Managing Director
Insurance & Financial Services
12100 Wilshire Blvd, Ste 800
Los Angeles, CA 90025
T. 310-496-8025
C. 310-968-3161

Market Week: September 17, 2013

September 17th, 2013

The Markets

After weeks of uncertainty, investors last week seemed to feel more optimistic about the prospects for averting both conflict in Syria and heavy-handed tapering at home by the Federal Reserve. Three straight days of triple-digit gains gave the Dow industrials their best week since the first of the year, and the small-cap Russell 2000 was only nine points from its all-time high set in early August. The Nasdaq also surpassed its August high.

Market/Index

2012 Close

Prior Week

As of 9/13

Week Change

YTD Change

DJIA

13104.14

14922.50

15376.06

3..04%

17.34%

Nasdaq

3019.51

3660.01

3722.18

1..70%

23.27%

S&P 500

1426.19

1655.17

1687.99

1..98%

18.36%

Russell 2000

849.35

1029.55

1053.98

2..37%

24.09%

Global Dow

1995.96

2240.81

2300.09

2..65%

15.24%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1..78%

2..94%

2..90%

-4 bps

112 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

· The United States and Russia jointly announced an agreement over the weekend that would establish a framework for confiscating and destroying chemical weapons in Syria by the middle of 2014. The agreement would refer the issue to the United Nations Security Council for action if Syria fails to comply with the terms of the bargain.

· Strong sales of autos, electronics, furniture, and appliances continued to push up overall retail sales in August. The Commerce Department said the 0.2% bump was the fifth straight monthly increase. However, back-to-school sales of clothing as well as sporting goods and building materials saw weakness.

· Wholesale prices rose 0.3% in August, according to the Bureau of Labor Statistics. That was more than in July but less than June’s 0.8% increase, and put the annual wholesale inflation rate for the last 12 months at 1.4%.

· The Dow Jones Industrial Average got a makeover as S&P Dow Jones Indices replaced Alcoa (which had been part of the Dow for 54 years), Hewlett-Packard, and Bank of America with Nike, Visa, and Goldman Sachs. S&P said the change–the most dramatic in almost a decade–was made to increase the index’s industry and sector diversity. The relative stock prices of the companies being ousted also was a factor, as stocks are weighted within the index by their price.

· Economic data from the world’s second largest economy was generally encouraging. China’s National Bureau of Statistics said factory production was up 10.4% in August from a year earlier and up 0.7% from July. Retail sales there rose 13.4% in the same time. Government spending on fixed assets such as infrastructure projects increased by 20.3% year-over-year, while private investment in fixed assets was up 23.3%. The consumer inflation rate was up 0.5% for August and 2.6% on an annualized basis.

· Deposits in foreign branches of U.S. banks will not automatically be insured by the Federal Deposit Insurance Corp. In response to a proposed British banking regulation, the FDIC approved a rule that clarifies the status of such deposits and provides insurance for them only if the money in those accounts is dually payable in the United States. The FDIC said some large U.S. banks will be changing their deposit agreements to make such funds payable in both the United States and the United Kingdom so that if a bank fails, overseas accounts will have the same status as those of the bank’s U.S. depositors. The rule does not affect deposits in overseas military banking facilities that are governed by Department of Defense regulations, which continue to be insured by the FDIC.

· Verizon’s sale of $49 billion worth of bonds to help finance its acquisition of Vodafone’s shares of Verizon Wireless set a record for the largest single sale of corporate debt in U.S. history. The sale almost tripled the previous record of $17 billion worth of bonds issued by Apple last April.

· Former Treasury Secretary Lawrence Summers, a leading candidate to replace Ben Bernanke as chairman of the Federal Reserve Board, withdrew his name from consideration.

Eye on the Week Ahead

Economic data will be eclipsed by anticipation of and reaction to the Federal Reserve’s monetary policy meeting, which ends Wednesday. If the Fed cuts its bond purchases less than anticipated or continues them at the same level, that decision coupled with the announcement of a U.S.-Russian deal on Syrian chemical weapons could leave investors sighing with relief. On the other hand, larger-than-expected reductions in bond purchases could mean the opposite. Quadruple witching options expiration at week’s end also could affect volatility.

Key dates and data releases: industrial production, Empire State manufacturing survey (9/16); consumer inflation, international capital flows (9/17); Federal Open Market Committee announcement/forecasts, housing starts (9/18); home resales, Philly Fed manufacturing survey (9/19); quadruple witching options expiration (9/20).

All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.