Elaine Thompson/APA Boeing employee playfully shows off his muscles while working on a Boeing 787 jet at the company's plant in Everett, Wash. WASHINGTON -- New orders for U.S. factory goods jumped in July and automobile sales in August were unexpectedly strong, offering further signs of strength in the manufacturing sector. The Commerce Department said Wednesday new orders for manufactured goods increased a record 10.5 percent on robust demand for transportation equipment. June's orders were revised to show a 1.5 percent increase instead of the previously reported 1.1 percent rise. Orders excluding the volatile transportation category slipped 0.8 percent in July. But that followed a 1.4 percent increase the prior month, leaving the overall trend positive for manufacturing activity. Separate reports from automakers suggested August sales were set to reach volumes not seen since before the 2007-2009 recession, as Ford Motor (F), Chrysler Group and Nissan Motor easily beat analyst estimates. Ford's sales were up 0.4 percent, while Chrysler, a unit of Fiat, showed a 20 percent gain, the automakers reported on Wednesday. Nissan's sales were up 11.5 percent. Analysts looked for sales gains of 11.8 percent for Chrysler and 2.8 percent for Nissan, and a decline of 1.9 percent for Ford. General Motors (GM) said August sales fell 1.2 percent, narrowly missing expectations. Manufacturing is accelerating, with the Institute for Supply Management reporting Tuesday that its gauge of factory activity hit its highest level in nearly 3½ years in August. In addition, a measure of new orders touched a 10-year high. Economists say the acceleration in factory activity suggested a pickup in business spending on capital and supported their forecasts for sturdy growth in the third quarter. Growth estimates for the July-September period range as high as a 3.5 percent annual pace. The economy expanded at a 4.2 percent rate in the second quarter. The dollar was trading lower against the euro and the yen, while U.S. stocks rose. Record Orders Orders for transportation equipment soared a record 74.1 percent in July, reflecting outsized civilian aircraft orders received by Boeing (BA) that was flagged in the durable goods orders report published last week. Auto orders rose 7.3 percent, the largest increase since March 2011, and capital goods orders surged a record 52.5 percent. But orders for primary metals, machinery, computers and electrical equipment, appliances and components fell. Unfilled orders at factories increased 5.4 percent, the largest advance since June 2000. That followed a 1 percent gain in June. The Commerce Department also said orders for durable goods, manufactured products expected to last three years and more, increased a record 22.6 percent in July, as reported last week. Durable goods orders excluding transportation slipped 0.7 percent instead of the previously reported 0.8 percent fall. Orders for non-defense capital goods excluding aircraft -- seen as a measure of business confidence and spending plans -- declined by a slightly bigger 0.7 percent. They were previously reported to have slipped 0.5 percent. -.
Transportation Gives Factory Orders a Lift in July
Home Depot Data Breach is a Home Wrecker
Home Depot (NYSE: HD ) may be the home of orange aprons, but more than a few of its customers may be about to start seeing red. Home Depot stock took a hit on Tuesday September 2, 2014 after a spokeswoman confirmed that the home improvement superstore chain is investigating a potential data breach.
The Home Depot data breach report originally surfaced on Krebs on Security -- a little more than halfway through the trading day -- pointing out how many banks were singling out Home Depot stores as a source of a "massive" data breach exposing credit and debit card information. Krebs on Security also goes on to say that signs point to the breach being the same handiwork of the same group of Russian and Ukrainian hackers that made lives miserable for Target (NYSE: TGT ) shoppers during last year's holiday shopping season.
Here's where things get thorny for Home Depot. We saw what the breach did to Target. Shoppers stayed away from the cheap chic retailer, and those that still crossed off their holiday shopping lists at the discount department store chain tried to avoid swiping plastic to complete the transaction. Even after taking the drastic measure of marking down the entire store -- offering a 10% discount to all shoppers during the final weekend of the holiday shopping season -- comps took a hit.
Target wound up suffering a 2.5% dip in comparable-store sales, and giving away the store resulted in a 21% plunge in earnings. Even now, nine months after the brand-blasting breach, comps have yet to bounce back at Target. Is Home Depot the next major retailer to let hackers send loyal customers scurrying for alternatives?
Home Depot data breach is serious stuff
Home Depot can't afford to slip. It's rolling these days. It clocked in with a 6.4% spike in comparable-store sales for its stateside superstores in its latest quarter. If the do-it-yourself giant's data breach scares away shoppers it would do a lot of damage to the chain's brand and its near-term financials performance.
The silver lining for Home Depot investors is that it's not Target. Holiday shoppers could have filled their carts with toys, clothing, and holiday decor items from dozens of other retailers if they wanted to steer clear of the store with the red bullseye on the front. They had enough time to snag even lower prices online.
If someone needs an emergency generator after a power outage or a contractor needs a half dozen ceiling fans are they really going to keep driving past their nearest Home Depot store? There are rivals, smaller hardware stores, and contractor specialty shops, but in a pinch Home Depot will have to do. If anything shoppers may feel safer handing over their credit and debit cards to the cashier at Home Depot because it's under the microscope as it investigates the possible data breach.
Investors will still want to keep an eye on how things play out this quarter. It's no longer just fears that the housing boom is starting to cool down that will weigh on the minds of Home Depot investors.
Top dividend stocks for the next decade
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Why Small Caps Make Sense for Retirees
As investors approach retirement, many start dropping small-cap stocks from their portfolios in favor of investments that are considered more of a sure thing. Small caps may be great for growing your portfolio when you're young, they assert, but once you're retired you need to use a more conservative strategy. So they begin loading up on government bonds, established companies and other "safe" investments.
But in reality, the higher annualized returns from small-cap stocks can help prolong the life of a retirement portfolio and increase the annual safe withdrawal rate (SWR). Small caps are not just for young people seeking to grow their nest eggs, but also for retirees seeking to prolong their net eggs' life.
Intelligent stock selection matters a lot in maintaining that safe withdrawal rate, of course. But research by economists and finance experts shows that the payoff in terms of higher returns more than outweighs the slightly higher risks involved.
Research by Eugene Fama and Kenneth French has shown that small-value stocks have produced superior returns. They looked at the real (inflation-adjusted) performance of small-value stocks, large-capitalization stocks and intermediate-term government bonds going all the way back to 1927 and now carried forward to 2013.
The difference was significant: Small-cap stocks averaged a 16.2 percent return, larger stocks 9 percent, and intermediate-term government bonds 2.4 percent. So that's a 7.2 percent advantage for smaller stocks.
Small-cap stocks are typically more volatile than their large-cap equivalents, which can be unnerving for some investors. But as long as you maintain sufficient diversification in your portfolio, small-cap stocks can be a crucial ingredient in ensuring that your retirement income will be around for as long as you are.
After reviewing the historical record, there is a solid case for overweighting sma! ll-cap value stocks in retirement portfolios, even if there are future reductions in the premiums earned over large-company stocks. However, there is still considerable debate about whether small-cap value stocks truly provide excess returns when risks are appropriately recognized.
It’s important to distinguish between assertions made about small cap in general versus small-cap value, since the value category has performed better historically than growth on an absolute and risk-adjusted basis. There are indications that the small-cap category has performed about in line with stocks in general when adjusted for risk.
Larry Swedroe, for one, showed that between 1927 and 2012, small caps outperformed large caps by about 3%, but with virtually identical Sharpe ratios (a ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance). However, a Vanguard study of the period 1927-2004 showed small-cap value earning an average annual return of 15.1% versus 9.9% for growth, with similar standard deviations.
Financial planners have researched the role of the small cap in asset allocation, beginning with a 1997 article by Bill Bengen. His original research on the 4% rule used only large-cap stocks and intermediate-term government bonds, and he later determined that he could improve safe withdrawal rates (SWRs) by adding small-cap stocks to the mix.
Bengen used a small-cap category that included both value and growth and, based on historical data from Ibbotson, showed that SWRs increased from 4.1% to 4.3% by including small-cap stocks. He determined that including 30% small cap in the mix was enough to achieve the 4.3% SWR. Further increases did little to increase the SWR, so he settled on recommending a stock mix that included 30% small cap.
There is something special about small-cap value, and the question is whether its superior performance is likely to continue. Behavioral economists argue that that there is a bias against value stocks that giv! es rise t! o the return premium.
Obviously, older investors do have to be more cautious than younger ones, so smart stock selection is paramount. You'll find the best choices today in my Value Portfolio.
The Road Ahead
What's going to happen to the stock market in the near term? The market is likely to continue rising until "something" gives, either higher interest rates or lower corporate profits. In other words, that "something" may be unknown but it will be a negative event, whatever it turns out to be. So, risk is high and warning signs are flashing:
Stock trading volume is "dead." Almost nobody is buying and sellers have their hands on the sell button but waiting for a trigger.The largest buyers of stocks are the corporations themselves, which have a notoriously bad record of buying at market tops. The smart money (hedge funds, corporate insiders, and institutional investors) are currently net sellers.Merger & acquisitions (M&A) activity is at a seven-year high. Historically, extremes in M&A are correlated with market tops.Number of initial public offerings (IPOs) in the second quarter was the highest in 14 years and the number of IPOs in week of July 28th is the highest since August 2000. Companies tend to go public when they think valuations are at their highest.Margin debt is declining, which historically signals increased investor risk aversion and results in a subsequent decline in equity prices.Corporate profit margins are at all-time highs and primed to revert back down to their long-term average level.The Bank for International Settlements stated that stock markets are "euphoric" and "detached from reality" thanks to the unsustainable easy-money policies of global central banks.Based on the Q Ratio (market price divided by asset replacement cost), the market is 80% overvalued.Market cap to GDP ratio of 114.5% is nearly two standard deviations above its mean and is higher than at any other market peak of the past 45 years except the Inter! net bubbl! e of 2000.I'm keeping a close eye on the Federal Reserve; a strong signal from the Fed that it's time to raise rates could have a huge impact. But for now, it's too soon to say that this bull market has no more room to run.