Economic Notes for the Week of April 2nd

The final estimate for the Q4 2011 real GDP was released last week, and stood unchanged at +3.0%.  Personal consumption was flat, goods spending was revised upward a bit, and services consumption was revised down slightly—nothing too significant overall.  More importantly, gross domestic income was revised up to +5.2%, which is the same level realized in Q3.  Looking at the GDI’s rate of growth can be somewhat helpful from the standpoint of the economy’s momentum.  While it’s interesting and informative to see the economy’s path of growth in the last several quarters, this is now old news and doesn’t matter much anymore—three months into the next quarter.  It is really just a reflection on how right or wrong the initial estimates were and how adjustments might be made that could affect the current quarter’s growth pace.  Preliminary estimates place 2012 Q1 real GDP at anywhere from +2.0% to +3.0%, although predictions differ for the year as a whole.  Several firms just raised their 2012 projections for the U.S. and world by a quarter percent or so.

Pending home sales were weaker for February by -0.5%, quite a bit lower than the consensus expected rise of +1.0%.  This index has been unchanged roughly since last November, but is up +13.9% year-over year.  The important facet of ‘pending’ sales is the fact that it leads existing home sales by a month or two as signed contracts become final.  By region, the South and West were down by several percentage points while the Midwest was over 6% higher…again, this points to a very uneven and choppy housing market environment nationwide.  MBA mortgage applications were down -2.7%, which was a small deceleration from February’s -7.4% decline.  There’s still very little activity here—partially due to lack of housing sales, as well as an environment of tightened credit restrictions by lenders for both new buyers and those conducting refinancings.  Speaking of mortgages, Treasury Secretary Geithner suggested to the Senate Appropriations Committee last week that Fannie Mae and Freddie Mac should reduce principal on some home mortgages.  Talk about a political hot button.  And we’ll leave it at that.

The Case-Shiller housing price index was flat for January (it shows up late relative to other metrics).  Forecasters were expecting a slight decline nationwide, but, again, the index was mixed from region to region, which adds to the difficulty in estimating the housing picture.  Additionally, some downward revisions to earlier months made this worse than it looked.  Regionally, half of the cities in the survey were up (Phoenix, Washington DC and Miami), while the other half lost ground (led by Atlanta, Cleveland and San Francisco).  This is nothing compared to several vacation areas (some in the West come to mind) that effectively doubled in value during the 2000’s, only to drop by half again during the past several years.  Now that is volatility—especially for those who thought real assets were always a better investment than ‘paper’ assets.

Consumer confidence was in line with consensus, experiencing a 70.2 reading (which represented a decline from February’s adjusted number).  This was a decline from February’s upwardly revised figure and underlying components were a bit weaker, such as ‘future  expectations.’

Durable goods orders were up +2.2%, which was a bit of a rebound from January’s weaker figure.  This reading was still below the consensus forecast of +3.0%, but most underlying components were on par with expectations.  Core capital goods (non-defense, non-aircraft) were up and the January decline was revised upward, which affected things the most, and core shipments were higher.  Although this was a slight disappointment, the general upward trend has continued.  Expect these production and similar figures to be closely scrutinized in coming months as data comparisons get tougher.  The Chicago Purchasing Managers’ Index declined slightly more than expected, from 64.0 to 62.2—mostly due to lower levels of new orders.  However, the production side rose about a point.  These regional reports are still a little choppy, but continue a slow improving trend when multi-month moving averages are looked at.

Personal income for February was a little weaker than expected, at +0.2% versus a consensus expectation of +0.4%.  At the same time, consumer spending was up +0.8%, which was a bit more than anticipated.  Services spending moved from flat growth upward last month, while real goods spending continued the upward trend of the past several months.

Consumer sentiment, as measured by the University of Michigan, improved from 75.3 in February to 76.2 in March.  Both current conditions and expectations were up.  The expected inflation component for 5 and 10 years out was the same as last month at 3.0%.

Initial jobless claims declined by 5,000 down to 359,000 for the March 24 week, slightly higher than the expected 350,000 figure.  Continuing claims came in at 3,340,000, which was slightly less than expected.

Market Notes

Period ending 3/30/2012

1 Week (%)

YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.




















REITs led among the asset classes last week, followed by broader U.S. equities.  Defensive sectors of health care and utilities posted the best performance, while telecom and energy brought up the rear with negative numbers.  Foreign equities were largely flat on average, despite word that Germany is allowing an increase to the European debt crisis bailout fund (presumably to combat concerns about Spain).

The markets have experienced a few choppier weeks lately, just as we became so used to it going straight up.  Ben Bernanke’s comments on Monday about the labor market reinforced hopes for more quantitative easing if economic growth is not self-sustaining enough on its own.  On one hand, from a shorter-term standpoint, markets love the idea of additional stimulus; however, it is puzzling that the prospect of the economy having the strength to stand on its own two feet is not better-received news than it is.  The lack of need for additional QE should be a positive development.

For the quarter, stocks have undoubtedly bounced back strongly and the one-year trailing return has become almost normal at +8.5%.  The question on a lot of minds is ‘what’s next?’  Stocks continue to look attractive for a variety of reasons:  100 companies in the S&P 500 have raised their dividends this year (only three cut them), and dividend growth rates have moved into the double-digits.  Forward P/E’s stand at about 13.3 (several points below its long-term average) and we’re still over 10% below the all-time closing high back in 2007.  Pessimism (measured by cash flows into/out of different asset classes) is still high, so it appears we may still have room to go before stocks become popular again.  As has happened before in asset classes we follow, mainstream popularity could very well be the catalyst for a second phase of price movement.  Looking at this from an opposite angle, other competing asset classes (such as bonds), have experienced huge amounts of cash inflows during the past few years and may be losing their luster.

Speaking of bonds… last week, foreign and U.S. corporate debt outpaced U.S. government issues.  Bonds have held pace this year, although returns have been nothing to write home about as government long-bond yields have risen 0.25-0.50% during the first quarter.  ‘Spread sectors’ such as corporate credit and emerging market issues continue to look much more attractive than treasuries, especially as the economy improves.

Commodities were much weaker last week as West Texas crude oil prices corrected mid-week back towards $102 a barrel.  Despite the stronger demand conditions and geopolitical turmoil in the Middle East, prices may have got ahead of themselves a bit.  Other contracts were up, such as cotton, coffee and copper.

In the Extended portfolios, we benchmark ourselves against the S&P GSCI, which is one of the older and more established commodity indexes, constructed using weightings based on world commodity trade volumes.  Of course, this is dominated by energy (crude oil, mostly).  For the majority of our portfolios, we utilize commodity vehicles that track another index, the Dow Jones-UBS (formerly Dow Jones-AIG, back when that firm was acceptable), which ‘caps’ certain commodity sector weights at the maximum of 1/3 of the total.  This was done to compel that certain diversification was built into the system.  While we’ve lagged the GSCI a bit due to oil’s strong run-up, we are better protected from single-commodity volatility.  A trade-off, but not a bad one.

We haven’t heard much about gold in a while.  Despite an increase in the price of about 7% this year so far (based on the ETF), some of the excitement seems to have waned.  It has been under a bit of pressure as of late, in a direct negative correlative relationship to the lower likelihood of central banks creating more monetary stimulus as well as general improvement in global economies overall.

It is important to look behind the scenes as to why gold has performed well during the last few years, as well as why it has lagged recently.  The story behind gold is a simple one, which is why it appeals to many investors seeking a simple answer to a more complex set of problems.  Historically, gold has been seen as a potential ‘store of value’ (much like a currency in its own right) during periods of deflation or inflation—mostly the latter.  Also, it has provided the perception of stability during more chaotic geopolitical and economic world events, much like U.S. Treasury bonds and bills have.  These investments all worked well in 2011.

One problem with valuing gold is that is has no inherent cash flows or other income to determine what investors can use to ‘discount’ its price relative to other assets.  We only have the ‘hope’ that someone else, someday, will find it to be worth more than it currently is, or that it may hold its value a bit better than some other vehicles if conditions become volatile.  However, that is relative, since the price of gold itself can be extremely volatile year-to-year—like many other commodities—so the reputation for stability is also misplaced by many.

Today, relative to the stock market, gold is as expensive as it’s been any time in the last 50 years—including the late 1970’s when runaway inflation was the norm.  It is expensive in relative terms to the price of bonds, residential housing and average worker pay as well which also is a bit surprising considering that inflation now is lower than decades ago during gold’s last ‘shining’ period.  It is also priced higher relative to other commodities.

Have a good week.

Karl Schroeder, RFC, CSA, AACEP

Investment Advisor Representative
Schroeder Financial Services, Inc.

Sources:  FocusPoint Solutions, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Reuters, Schroder’s, Standard & Poor’s, U.S. Federal Reserve, Wells Capital Management, Yahoo!.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.  Schroeder Financial Services, Inc. is a registered investment advisor.