Week in Review: 5/10/2013

This past week there was an interestingly piece of investment news that got virtually no recognition in the business world. In the week ended 5/1/2013, almost $4.4 billion flowed out of equity mutual funds. It’s possible that individual investors are switching from mutual funds to indexed exchange traded funds (ETFs) because mutual funds have been underperforming the major indexes. But, there could be another explanation for the outflow of money from equity funds, one that I have mentioned before. Baby Boomers are entering retirement and might desire less risk. Accordingly, these investors might be using any upward move in stocks to reduce their equity portfolio allocations.

Certainly, something unusual is happening. The S&P 500 has risen about 140% from the March 2009 low. What has been “normal” behavior is for individuals to be clamoring for stocks after such a big upswing. Instead, equity funds are losing money and bond funds …

Three Conversations: 5/6/3013

Within the past few days, I have had three interesting conversations that had some implications for investing. The first one was with one of my brothers-in law who works for a supplier to the construction industry in the Atlanta, GA area. He told me that his company is seeing a significant increase in speculative building and buying of homes with the intention of using the units for rentals.

This is a trend that has been in place throughout the country for at least a year. A substantial amount of home inventory has been purchased by hedge funds, private equity firms, and construction companies for the purpose of renting now and selling later. In addition, homebuilders are buying or using their land on hand to build new homes to rent. The result is that the supply of homes for sale has been reduced to a point that causes home values to …

Week in Review: 5/3/2013

Since the stock market has been so focused on the Federal Reserve Board’s (FRB) liquidity program (Quantitative Easing – QE), which says it intends to buy $85 billion in securities each month, I will begin with related news.  The FRB had a 2-day meeting this past week and issued a communication on Wednesday. The key takeaway from the meeting is that the FRB has changed the tone of its recent public comments from indicating the possibility of easing back its security purchases to saying it might decrease or increase its bond buying, depending upon economic conditions. This really wasn’t news, but will give bulls some room to argue the FRB is not close to reducing pumping money into the financial system because recent economic news implies the economy has slowed.

There was an abundance of economic data this past week, most of which was in line with previous reports …

Week in Review: 4/26/2013

Most of the economic news last week related to March. These reports confirmed that the economy down-shifted to a lower growth rate in that month. We don’t yet have enough data to know if the March weakness continued throughout April.

On the housing front, March existing homes sales were lower than expected and new single-family home sales were higher than expected. If you combine the two reports, the picture painted is one of a housing market that in still recovering but has been moving sideways for the past few months. The Architectural Billings Index, which takes a broader look at construction of all types, declined in March. However, as with the housing numbers, this measure appears to be in recovery mode from the lows of the Great Recession.

The disconcerting issue with home purchases is that a large portion continues to be investment speculation. Hedge funds and individual speculators have …

The “Lucky” Rich

A recent Bloomberg BusinessWeek blogpost, “How Did the World’s Rich Get That Way? Luck” makes the case that much of the world’s growing income inequality is more due to “luck” than hard work. I tend to agree with most of what the author, Charles Kenney, wrote. Certainly, hard work can play a part in determining financial success. However, the huge chasm between the rich and the poor is mostly determined by where and to whom we were born. I don’t really view this as a question of “luck,” but more the randomness of life.

Because of the decisions they personally make, some people break out of the pattern created by the circumstances of their births, both positively and negatively. But I think, in general, wealth is mostly a function of chance. In any case, those of us who have greater financial wealth should be careful not to think …

Eating and Playing Golf During Retirement: 4/20/2013

This weekend’s New York Times carries an article, “Companies Substitute Tangibles, Like Cheese, for Investments,” that tells the story of how companies can get around using cash to meet their workers’ retirement obligations. There is currently a huge deficit at companies and state and local governments between the estimate of what is owed to retirees and the assets available. To plug this big hole, some companies and municipalities are contributing hard assets instead of cash to their retirement pools. Examples given in the article were golf courses, land, hard liquor and, my favorite, cheese.

The most amazing thing about this practice is that regulators allow such substitutions. This is just another instance of how our government has become increasingly corporate-friendly at the expense of the average taxpayer.

With the approaching retirement of the Baby Boom generation, firms and governments will become increasingly pressed to come up with funds …

Gold: A Brief Comment

The price of gold in the U.S. has dropped substantially from its peak. Over the next few weeks, economic commentators will be talking a lot about whether now is a good time to buy or sell gold. During President Richard Nixon’s term in 1971, the price of gold was allowed to trade freely after having been pegged at $35 per ounce for almost 40 years. Since that time, there has been a fairly close relationship between the price of gold and the price of oil. The charts below display this relationship since 1971, which has been a decent indicator of gold’s and oil’s relative valuations.

Based upon what I see in these charts, either oil is underpriced versus gold or gold is still overpriced, but not by a wide margin. Of course, this is a rough and volatile relationship.

In any case, some huge losses have been sustained in gold …

Debt De-Leveraging Update: 3/10/2013

The Federal Reserve Board (FRB) recently released 2012 year-end flow of funds data. Included in this release is information on the progress (or lack thereof) of reducing the huge debt load in the U.S. The following charts I found to be most interesting and telling about our country’s current financial condition. I have broken these charts into three categories: Total U.S., Households, and Corporations.

U.S. Debt Trends

Overall debt in the U.S. continues to rise, primarily because of huge increases in federal government and non-financial corporate debt. Financial companies continue to lower their debt leverage. Households had been reducing debt, but debt in this sector might once again be on the upswing.

Total debt to Gross Domestic Product (GDP) rose in the 2012 4th quarter. Prior to this uptick, total credit market debt to GDP had fallen in 12 of the previous 13 quarters. U.S. Treasury and Agency debt is …

An Update on the “Great Rotation”: 2/13/13

I continue to monitor mutual fund flows to determine if there is any substance to the continued belief that individual investors are switching vast amounts of money from bonds to stocks. There are two important things to keep in mind while evaluating these numbers:

1. There has been a seasonal tendency for large contributions to equity funds in the first few months of the year.
2. If there were to be a “Great Rotation” from bonds to stocks, it should present itself with massive positive flows into equities funds in tandem with little or negative flows for bond funds.

This first chart shows the weekly flows for equity and bond funds beginning with the week of 1/9/2013. Indeed, flows into equity funds have been strong. However, the trend in flows is declining, something one would expect to see as seasonal strength ebbs. In addition, flows into bond fund have also been strong. …