Home renovations hit record highs

Stocks gained today on upbeat economic news, including a stronger-than-expected GDP reading and data showing jobless claims remaining at a record low. The Dow advanced 221 points, with 25 of its 30 components advancing; the S&P 500 Index rose 12 points; and the Nasdaq added 16. Advancers led decliners by nine to five on the NYSE and the Nasdaq. The prices of Treasuries strengthened. Gold futures fell $26.30 to close at $1,198.60 an ounce. The price of crude oil lost $1.08 to settle at $81.12 a barrel.

In earnings news:

  • Kraft Foods Group Inc. reported third-quarter earnings that met analysts’ estimates despite falling to $446 million, or 74 cents a share, from $500 million, or 83 cents a share, a year ago. Revenue was flat at 0.1% growth to $4.4 billion, due in part to higher commodity prices. The company’s shares (KRFT) fell 1.32%.
  • Samsung Electronics Co. Ltd.’s third-quarter net income sank 60% to 4.1 trillion won ($3.9 billion) from the prior year, on revenue of 47.5 trillion won ($44.6 billion), down 20%. Weak smartphone sales were to blame, as the firm saw its mobile unit’s operating income drop from 6.7 trillion to 1.75 trillion won. Samsung’s shares gained 4.51%.
  • Time Warner Cable, Inc.’s shares (TWC) declined 0.61% after posting a 6% drop in third-quarter net income to $499 million from a year ago. Despite a 3.6% revenue increase to $5.7 billion, the cable provider lost 184,000 video customers and its expenses rose nearly 10%. Time Warner cuts its full-year revenue guidance from $22.9 billion to $22.8 billion.

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Health of the economy: U.S. and Europe (excerpt)

Dr. Brian Jacobsen, CFA, CFP®, chief portfolio strategist with Wells Fargo Funds Management, LLC, provides an update on the health of the economy in the U.S. and in Europe in this On the Trading DeskSM excerpt from Tuesday, October 28, 2014.

Listen to the podcast.

Brian Jacobsen: Health of the economy: U.S. and Europe

Brian Jacobsen

Could you paint a picture of the state of the U.S. economy right now?
When you’re looking at the U.S. economy, you have to look at it across two different broad dimensions. One is where we are right now and where we’re likely to head in the near term. Right now we know that the inflation rate is below where the Fed would like it to be. It’s running at a pace of about 1.7% year over year. We know that the unemployment rate has come down significantly over the past few years. It’s down at about 5.9%, but there is still some healing that needs to be done, and we also know that, in terms of the total output of the economy, it is rebounding from a very miserable winter. First quarter GDP [gross domestic product] was really slow. Second quarter GDP showed a decent rebound. And now third quarter is looking to run at about a 3% annualized pace. So where we are now is actually looking a lot better, but it could still improve. Consumer confidence has increased to a seven-year high, and we also see the eurozone, after having the bank completing their stress test recently, perhaps going from basically dragging on global growth to actually making a positive contribution to it. So where we are now—I think that it’s okay, but it could be better. And where is it that we’re headed? I think that the signs are pointing to accelerating economic growth here.

So third-quarter earnings season is playing out. What’s the profit picture?
So far so good, and I think that’s one of the reasons why the market is rising faster than the economy overall. The market has accelerated faster than the overall economy. Part of that was because the market collapsed a lot more than the economy did, so I use sort of the period from 2009 to about September 2013 as a period of catch up for the market because it overshot on the way down. And then it probably got back to normal range back in 2013. But now a lot of the gains in the market are being driven by profit growth. We know earnings per share are continuing to increase. So far, third-quarter earnings are beating a lot of analysts’ expectations.  About half of all the companies within the S&P 500 have reported their earnings, and about 71% of those reports have beaten expectations. I think, most importantly, the revenue picture is a lot better, because one of the things that people have been lamenting has been how in the past we’ve had a lot of earnings growth due to cost cutting. Well, that’s not true. There has been revenue growth, and we actually see the revenue growth beginning to pick up.

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GDP surprises to the upside with little fanfare

Real (that is, inflation adjusted) gross domestic product (GDP) advanced at a better-than-expected 3.5% annualized rate in the third quarter, according to the advance estimate from the Bureau of Economic Analysis. That’s a slower pace than the second quarter, when GDP advanced at a 4.6% annualized rate. The slowdown in growth was widely expected, mainly because the second quarter saw a big bounce from the miserable first quarter number of -2.1%, which was dragged down by an unusually bad winter.

Annualized change for the U.S. real GDP for the third quarter 2014 was 3.5%

Production of goods contributed 2.01 percentage points to the 3.5% GDP growth rate. Services contributed 1.32 percentage points.

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So long QE3

The third round of quantitative easing, or QE3, ended as expected today after the Federal Open Market Committee announced it would end asset purchases at the end of October. The markets, which had been trading lower before the announcement, took a brief dip before partially recovering.

The Dow fell 31 points, with 16 of its 30 components losing ground; the S&P 500 Index dropped 2; and the Nasdaq lost 15. Decliners led advancers by four to three on the NYSE and seven to six on the Nasdaq. The prices of Treasuries were mixed, with the 30-year strengthening and the 10-year weakening. Gold futures fell $4.50 to close at $1,224.90 an ounce, and the price of crude oil gained 78 cents to settle at $82.20 a barrel.

In earnings news:

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QE3, RIP?

QE3, RIP. Picture of a graveyard.As the Federal Open Market Committee (FOMC) has been telling the world for a while, the large-scale asset-purchase program known as QE3 (quantitative easing, part 3) is being wrapped up. Economic conditions have improved sufficiently, and the outlook is better, such that FOMC members decided QE3 could end.

The FOMC noted that labor market conditions have improved such that there is only “underutilization of labor resources,” instead of “significant underutilization.” Thus, on the margin, this FOMC statement was more hawkish than the previous statement. Considering these changes, it’s not too surprising that there was only one dissent, Narayana Kocherlakota—perhaps the most dovish member—who thought the economy’s persistently low inflation merited continued asset purchases and stronger forward guidance on the Federal Reserve’s (Fed’s) part. As it is, the Fed retained the language that rates will stay low for a “considerable time,” which is vague. Kocherlakota wanted a numerical inflation target of 2% one to two years ahead. The problem with a numerical target is that the target might not be the right one, which is what the Fed wrestled with when discussing when the taper might occur.

Although QE3 is over, it’s not gone. QE3 has enlarged the Fed’s balance sheet to nearly $4.5 trillion. The Fed’s intention is to reinvest principal and interest payments from its portfolio of securities, keeping the balance sheet the size it is. That’s still a lot of purchases in the Fed’s future.

Listen to additional commentary from Dr. Brian Jacobsen.

  • Were there any surprises in Wednesday’s FOMC announcement?
  • Is the Fed’s move positive or negative for the economy?
  • How does this outcome translate for investors?

Analogies are wonderful things, but they can be pushed too far. Some investors have been dreading the day the Fed takes the punch bowl away. (That unintentionally rhymes, but I do like it.) William McChesney Martin, chairman of the Fed from 1951 to 1970, is credited with the punch-bowl metaphor. In a speech in 1955, he said, “If we fail to apply the brakes sufficiently and in time, of course, we shall go over the cliff … The Federal Reserve … is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

Is the Fed removing the punch bowl? No. It’s a bad metaphor. All of the Fed’s asset purchases were not to get people drunk. The purchases were to remove toxins from the financial system, buy time, and give a little boost. But, if you insist on using the punch-bowl metaphor, don’t fret; the punch bowl will still be there. The Fed isn’t selling assets, after all. It’s just that the punch bowl isn’t getting bigger. The Fed will keep refilling the bowl with its reinvestment plan.

The economy and markets are not facing some sort of QE cliff now. When QE3 started, the unemployment rate looked stuck between 7.8% and 8.2%. Payroll growth was only 88,000 to 150,000 per month. Business investment had been contracting. Today, gross domestic product growth looks to be around 3.0%, the unemployment rate is 5.9%, payrolls are expanding by over 200,000 pretty consistently, and inflation is still low—around 1.5% to 1.7%. QE3 can fade away.

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Who stole my Count Chocula? (Check your local brewery.)

Stocks gained on upbeat reports on corporate earnings and consumer confidence. Meanwhile, investors are watching for a Federal Reserve statement, due tomorrow, that many expect will signal an end date for the central bank’s bond-buying program.

The Dow rose 187 points, with all but 3 of its 30 components advancing; the S&P 500 Index gained 23 points; and the Nasdaq added 78. Advancers led decliners by five to one on the NYSE and by four to one on the Nasdaq. The prices of Treasuries weakened. Gold futures rose 10 cents to close at $1,229.40 an ounce. The price of crude oil increased 42 cents to settle at $81.42 a barrel.

In earnings news:

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Health of the economy: U.S. and Europe (podcast)

Brian Jacobsen

Brian Jacobsen

Joining us with an update on the health of the economy in the U.S. and in Europe is Dr. Brian Jacobsen, CFA, CFP®, chief portfolio strategist at Wells Fargo Funds Management, LLC.

Listen to the podcast.

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Durable goods point to near-term weakness and a supportive Fed

Appliance retailer

New orders for durable goods dropped 1.3% in September. Excluding the volatile transportation component, new orders fell 0.2%. Even nondefense capital goods excluding aircrafts orders—a type of core measure of business demand for new equipment—were down 5.4%. The best thing to be said about the report on new orders is that 2014 is a lot better than 2013, with new orders up 7.6% year over year and shipments up 5.0%. Core capital goods orders were up 5.0% compared with 2013, and shipments were up 4.9%. Demand for new capital and equipment is still increasing, but it is weakening.

Equity futures weakened a bit on the release of the report but were still positive on news that the Riksbank—Sweden’s central bank—cut its policy rate to zero to hopefully boost inflation. It was also reported that China will expand the Free-Trade Zone concept that it’s been trying in Shanghai to more cities, making further incremental reforms to make growth more sustainable.

A weak durable goods report isn’t all bad news for the U.S. economy. One reason would be that it could support the views of the doves on the Federal Open Market Committee (FOMC). Instead of making wholesale changes to the FOMC statement, due out tomorrow, the FOMC may just wrap up its asset-purchase program without making any other changes to the language of the statement. It will likely still say that there is “significant underutilization of labor resources” and that rates will stay low for a “considerable time.” At the December meeting, depending on how the data rolls in, the FOMC could remove “significant” as an adjective and wait until January 2015 to modify the “considerable time” language.

Another reason a weak durable goods report isn’t all bad is that it was based on orders from September. Investors could be looking through the weakness of August and September toward a pickup coming from Europe.

Durable goods orders for the past 24 months

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Online consumers or experimental subjects?

Stocks were flat after last week’s strong rally, taking a wait-and-see approach ahead of the Federal Open Market Committee meeting on Wednesday when the Fed is expected to fully wind down its asset-purchase program.

The Dow managed a 12-point gain, with half of its 30 components advancing; the S&P 500 Index fell 2, with weakness in the energy and materials sectors; and the Nasdaq gained two. Decliners led advancers by four to three on the NYSE and seven to six on the Nasdaq. The prices of Treasuries strengthened. Gold futures lost $2.50 to close at $1,229.30 an ounce, and the price of crude oil continued to fall, dropping one penny to settle at $81.00 a barrel.

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Stock market set to pick up the pieces after October

blog-archeology“I fall to pieces, each time I see you again.” -Written by Hank Cochran and Harlan Howard; sung most perfectly by Patsy Cline.

All these years I thought Patsy was singing that line to me. Now I know it is the stock market singing to October.

It has been a terrible month to be an equity investor. Although, as of this writing, the S&P 500 Index declined less that 10% from its high, other popular indices were decimated. For a few days near the middle of the month, it felt just awful.

I still maintain that that awfulness is very symptomatic of a bull market correction: a sharp, nasty, shallow pullback that produces untold anxiety among the investing class.

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