The world’s two biggest economies seem to be competing against one another to see which can be a bigger drag on the global economy.
In the U.S., the problem is the regulators. As the old saying goes, you can’t fight the Fed.
On Wednesday, June 19, the Federal Reserve announced it would continue its quantitative easing program—at least until America’s jobs market improves substantially. At the same time, the Federal Reserve also said it would ease the $85.0 billion-per-month program by the end of the year, and could end it altogether in 2014.
For a bull market rooted more in the Federal Reserve’s monthly alimony payment than sound economic numbers, this is bad news. After five years, the world’s largest economy might have to stand on its own legs in 2014; that’s not something it’s prepared to do.
The U.S. markets reacted to the news the following day in a sea of red. In fact, less than two percent of S&P 500 companies were trading up.
And in China, the problem is disappointing manufacturing news, and it suggests the global economy is in worse shape than anyone thought.
The HSBC Flash China Purchasing Managers’ Index hit a nine-month low of 48.3 (49.2 in May). The Flash China Manufacturing Output Index came in at 48.8 (50.7 in May), a new eight-month low. A measure below 50 indicates contraction. (Source: “HSBC Flash China Manufacturing PMI,” Markit Economics, June 20, 2013.)
Here’s a quick summary of the China Flash Manufacturing Index: output is decreasing at a faster rate, new orders are decreasing at a faster rate, new export orders are decreasing at a … Read More
For much of last week, the global markets were taking a beating on growing concerns that the central banks will start easing their economic stimulus. Before the markets opened Friday morning, Reuters boldly announced that the rout was over, and U.S. markets opened trading up. (Source: Jones, M., “GLOBAL MARKETS-Shares pick up, dollar steady after bruising selloff,” Reuters, June 14 2013.)
Two hours later, though, Wall Street was singing a different tune. The U.S. markets slipped after the International Monetary Fund (IMF) announced it cut its 2014 growth outlook for the U.S to 2.7% from three percent. The unemployment rate for 2014 is projected to decrease slightly (on average) to 7.2 %. (Source: “Concluding Statement of the 2013 Article IV Mission to The United States of America,” International Monetary Fund web site, June 14 2013.)
Time will tell if these projections will come true. After initially predicting U.S. 2013 growth of 2.2%, the IMF revised it downward to 1.9%; the IMF continues to maintain that lowered projection. This tepid growth is expected to keep unemployment hovering around 7.5% for the remainder of 2013.
The IMF noted that the Federal Reserve needs to carefully plan its exit strategy to avoid hurting financial markets. The best way to do this, it maintains, is to continue its $85.0 billion a month bond-buying program until at least the end of 2013.
In addition to continued economic stimulus, the IMF also said Washington wasn’t doing enough to cut long-term budget deficits—though it would seem that higher deficits go hand-in-hand with money printing—and that Washington needs to cut entitlement spending and generate higher revenues.
What this … Read More
So this is what it looks like when global investors take their eyes off the Federal Reserve’s quantitative easing policy and focus on the real economy instead! As I’ve been predicting, the global sell-off of stocks looks like it’s beginning in earnest.
And you can pinpoint the exact moment investors and economists around the world began to get jittery. It was on May 22, right after the Federal Reserve hinted it might start tapering off its $85.0-billion-per-month quantitative easing policy as early as Labor Day.
The global markets haven’t been the same since.
Japanese stocks have entered bear market territory, tanking more than six percent last Thursday to a nine-month low on the threat of reduced economic stimulus from central banks. South Korean shares slipped 1.4%, hitting their lowest close in seven months.
Concern that China’s economic growth is grinding down has seen the Shanghai Composite Index trading at its lowest levels since mid-December 2012 and has dropped 12% from the year’s high on February 6.
One of China’s biggest trading partners may also be feeling the pinch. Australia’s economy expanded just 2.5% in the first quarter, below projected forecasts of 2.7%. While the country’s economy had been chugging along due to increased demand for natural resources, it is beginning to sputter thanks to the slowdown in China. Couple this with the country’s underperforming non-mining sectors, and you can see why Goldman Sachs and others think Australia could, after 22 years, slip into recession. (Source: “Australia’s economic growth rate misses forecasts,” BBC web site, June 5, 2013.)
On top of that, the World Bank cut its global 2013 growth forecast … Read More
As I’ve been noting in this column since the beginning of the year, there is a major economic disconnect between what is happening on Wall Street and what is happening on Main Street. Eventually, the great divide will come into focus and the U.S. economy will react accordingly.
The evidence: if the stock market is a leading indicator of economic health, then the U.S. is running full steam ahead. The current bull market is now in its fifth year. The S&P 500 is up more than 18% since December 31, 2012 and the Dow Jones Industrial Average is up almost 20% since the end of 2012; both are trading near record highs.
If the life of the average American is the litmus test for America’s economic health, then things are not as rosy as they would appear. U.S. unemployment remains high at 7.5%; median income levels are down 8.1% from their 2007 levels; the number of Americans relying on food stamps has soared 80% to 47.5 million (or 23 million households) since 2007; wages are stagnant; and 40% of Americans have at least one credit card with a balance of close to $15,800.
This economic reality is being reflected in the 2013 first-quarter and second-quarter financial results. During the first quarter of 2013, 78% of the so-called red-hot S&P 500 companies issued negative earnings-per-share (EPS) guidance. For the second quarter, almost 80% of S&P 500 companies have issued a negative outlook.
Sure, the S&P 500 may be reporting strong returns, but it’s not because of an economic recovery. The current bull market has more to do with the Federal Reserve’s … Read More
Revenues are coming in light, but earnings are holding up.
Now that it’s the heart of earnings season, it’s a good time to reevaluate portfolios for risk.
There is still a lot that could go wrong in this market, and there is no help from the rest of the world in terms of economic growth.
Also evidenced by this earnings season is the continuing buildup corporations have in terms of cash. What this signals to me is that corporations are still very nervous about making major new investments, which is holding the U.S. economy back.
Getting corporations to invest in new businesses, plant and equipment, and new employees requires certainty. And this is the one thing that is lacking in so many important markets for the simple reason that there is too much debt.
There are actually a lot of fundamentals that are positive for corporations. Interest rates are very low, so borrowing costs have never been more favorable for big companies.
There is some price inflation in the economy, which translates to higher earnings, and because of the weakness in commodity prices, the cost of raw materials is going down.
But large corporations are not going to invest in major new operations in markets where there is the potential for massive instability—currency instability, for sure.
So the result is just the status quo for many corporations in terms of their business operations. This is why cash balances continue to build and share buybacks are so common.
I would say that given the earnings results so far, the stock market is not overvalued. If there isn’t any meaningful revenue growth … Read More
In an effort to reduce volatility and protect their investments against the rising cost of living, many investors add commodities to their retirement portfolios. That’s because a large number of commodities are influenced by inflation well before it impacts the overall economy.
The perfect reflection of supply and demand, commodity prices climb when there is strong demand and taper off when the economy is doing poorly; in the latter case, the future looks bleak.
Gold prices collapsed earlier this week, suffering their sharpest fall in 30 years. Silver is also down; so, too, is copper, oil, lead, aluminum, corn, wheat, soybeans—simply put, commodities are getting hammered.
It’s not as if there isn’t news to support the decline in commodities. The U.S. has seen a raft of negative economic news trickle in. April consumer confidence levels fell from 78.6 in March to 72.3—its lowest level in seven months. (Source: Smialek, J., “Consumer Sentiment in U.S. Declines to a Nine-Month Low,” Bloomberg, April 12, 2013.) U.S. retail sales fell 0.4% in March—the largest drop in nine months. (Source: Kowalski, A., “Retail Sales in U.S. Decline by Most in Nine Months,” Bloomberg, April 13, 2013.)
Weaker-than-expected growth in China, Asia’s largest economy, is weighing on global sentiment. China’s economy expanded just 7.7% during the first quarter, below the forecasted eight percent. Industrial output was expected to expand by 10%, but it only climbed 8.9%. (Source: “Market Buzz: Negative outlook on weak data from China,” RT web site, April 15, 2013.)
And conditions in the 17-member eurozone are still dismal. Joachim Starbatty, one of Germany’s pre-eminent economists, said he wants to see the dissolution … Read More
The Dow Jones Industrial Average and the S&P 500 have both been on herculean rolls, hitting new high after new high, in spite of the underlying economic indicators. While the Dow Jones is reaching for the stars near 14,825 and the S&P 500 is running in step at 1,585, the corporate numbers don’t seem to add up.
Despite the euphoria, the International Monetary Fund (IMF) is expected to cut its estimate for U.S. gross domestic product (GDP) growth in 2013 to 1.7% from the previously forecasted two percent. Global growth was also revised downward to 3.4% for 2013, compared to the original 3.5% estimate. (Source: York, P., “IMF leak points to cut in growth forecasts,” IFA Magazine April 12, 2013.)
U.S. consumers, the nation’s economic engine, are becoming increasingly pessimistic about the country’s outlook. Consumer confidence fell from 78.6 in March to 72.3 in April—its lowest level since July 2012. Economists were expecting consumer confidence to increase to 79.0, suggesting Wall Street is a little out of touch with how the average American is faring. (Source: Smialek, J., “Consumer Sentiment in U.S. Declines to a Nine-Month Low,” Bloomberg, April 12, 2013.)
Not surprisingly, U.S. retail sales also fell 0.4% in March, the second decline in three months and the largest drop in nine months. Once again, economists missed the mark, expecting sales to be flat. Americans cinched their pockets tighter at gas stations, department stores, and electronics and appliance retailers. Auto sales also dropped. (Source: Kowalski, A., “Retail Sales in U.S. Decline by Most in Nine Months,” Bloomberg, April 13, 2013.)
Economists may be calling for an indefinite number of … Read More
Corporations, like investors everywhere, are very reticent about current business conditions. They have been this way for years. And they have way too much cash, which is why dividends have been increasing.
The financial crisis really was the catalyst for a huge change in the way corporations allocate their capital. Corporations hunkered down on costs and became extremely tight with their money.
It is highly likely that large corporations will increase their dividends this earnings season. Of course, this will be great news for those investors who seek out dividends from blue chips.
This market is at a high, but it is fairly valued and has a lot of potential to increase further—if corporations can produce growth and there is no major new shock from an event, like a currency default in Europe, for example.
There is still tremendous reticence on the part of corporations to invest in new business operations, new plant and equipment, and new full-time employees. And while this is not a positive for the Main Street economy, it is a positive for shareholders collecting dividends.
Corporations are sitting on a mountain of cash. In many of the earnings results so far, large corporations are reporting too much free cash flow. And they need to do something with all this money, because cash does not earn a rate of return greater than the rate of inflation.
One of the easiest ways to do this is to return the money in the form of dividends to stockholders. I still firmly believe that blue chip investing will do well over the long term.
There may be some spectacular downside … Read More
When an investor is planning to grow their portfolio over time, they must realize that any economy—be it the U.S., Canada, Germany, or any other country in the world—goes through many business cycles. Some terms associated with these business cycles include “recession,” “recovery,” and “peak.”
In each stage of a business cycle, markets behave differently. Investors need to make sure they adjust their portfolio accordingly to minimize their risk. What may be good during times of economic prosperity may not be the best option during economic misery.
Recession simply refers to a period in a business cycle when a country experiences a downturn in its economy. Some characteristics of a recession include slowing industrial production, rising unemployment, and declining sales. A country is said to be in a recession when its gross domestic product (GDP)—what the economy produces—contracts for two consecutive quarters.
In a recession, businesses do poorly, so as a result, stock markets aren’t usually a great place to be. Think of it this way: if people don’t have jobs, will they go out and buy? Not likely. Companies’ profit margins get squeezed, and the stock market falls.
During a recession, investors need to look for safety—their losses in the stock market can add up. They may want to consider high-grade government bonds and companies with good fundamentals. Investors might also want to look at financial “safe havens,” such as gold, to protect their assets.
Recovery, or expansion, is a stage in the business cycle when things are getting better for the economy. Consumer confidence improves, businesses hire, and individuals find jobs. Consider the U.S. economy, for … Read More
In light of the events that occurred in Cyprus over the last couple weeks, many investors may be wondering if it’s safer to hide your retirement savings under a mattress. After all, what’s to say it couldn’t happen here?
In June 2012, Cyprus, like many members of the European Union (EU), sought a bailout after suffering heavy losses. The company’s banking sector was hit by the economic crisis that crippled Greece. Cypriot banks had made loans to Greek borrowers that were worth 160% of the country’s gross domestic product (GDP).
In mid-March, the EU and the International Monetary Fund (IMF) agreed on a bailout for Cyprus, which included Cyprus raising billions of euros of its own money by taxing bank deposits—essentially seizing money. The government said it would impose a one-time tax of 6.75% on savings of $26,000–$130,000, and would tax higher savings at 9.9%. Not surprisingly, this didn’t sit well with wealthy Russians who shelter their money in Cyprus. It also didn’t sit well with the rest of country.
As one would expect, Cyprus managed to cobble together an 11th-hour deal with the EU and IMF, taxing only those accounts with deposits over $130,000.
Could it happen here? What couldn’t? Since 2008, the U.S. and much of the Western world have experienced an economic implosion no one would have otherwise thought possible. In response, governments around the world have taken unprecedented action to “remedy” the situation.
Cyprus aside, there are many reasons why we shouldn’t stash our retirement savings under the mattress.
First, cold-hard cash provides little protection against inflation and increases in the cost of living. While the … Read More
The Dow Jones Transportation Average experienced a powerful breakout this past December. And it’s been a stealth rally ever since, with an expansion in valuations, not earnings.
The stock market’s strongest sector over the past few months has been transportation stocks, which have been much stronger than technology stocks or the S&P 500 companies. Even though it doesn’t seem real, leadership in the Dow Jones Transportation Average is a classic stock market sign.
Helping the cause are lower oil prices. Countless names among large-cap transportation stocks are soaring. And at new 52-week highs, they still aren’t expensively priced on the stock market, which means they can go higher.
The stock market likes betting on the future. Institutional investors are not fighting the Federal Reserve; they are buying in anticipation of first-quarter earnings season. Fourth-quarter earnings season wasn’t that bad for corporations, but for individuals, it’s another story. This is why the stock market and the Dow Jones Transportation Average can still tick higher—valuations and oil prices. The stock chart for the index is featured below:
Chart courtesy of www.StockCharts.com
The stock market will use first-quarter earnings season as its new catalyst for action. My expectation is that we’re in for a meaningful correction, even if first-quarter numbers are decent.
There is a real disconnect in the U.S. economy between the stock market and the Main Street economy. Corporations have all the money, and any modest uptick in economic activity will amplify the bottom line. Corporations, being lean and mean with dividends and share buybacks, are way better than individual incomes.
This is a very difficult market to play. Risk for … Read More
The stock market is absolutely where it should be, given current earnings—and it’s across the board; from large-cap to small-cap, valuations are fair. But the real telltale sign will be first-quarter earnings season. The stock market wants to see growth, and it actually doesn’t need much of it in terms of the bottom line. This market wants to see revenue growth or stocks will go into correction.
Corporations, especially large ones, have done an exceedingly good job of maintaining their earnings through the last recession and the modest economic recovery. They’ve done this through diligently controlling costs, doing little in the way of new hiring, ensuring productivity gains per existing worker, and using technology. The health of U.S. corporations is very good; for individuals, it’s a whole other story.
Corporations have also been very conservative with their earnings outlooks, making it easier to outperform or beat the Street. With the large cash hoards that corporations have been built up by not investing in this economy, companies are keeping investors happy with increased dividends, even with the prospect of no earnings growth.
This stock market is due for a correction; but it’s still unclear whether there will be decent buying opportunities when this correction occurs. If this upcoming earnings season disappoints, then new buyers will be better off holding out for future weakness.
The S&P 500 has to show more breakout strength in order for the rest of the stock market to follow. We need technology stocks to further accelerate, along with the industrials. But in reality, what the stock market is doing now is really more of an expansion in … Read More
Dow Jones Industrial Average at Record High; Defensive Plays for the Bottom 99% of Americans Who Missed the Bull Market
The Dow Jones Industrial Average hit an all-time high of more than 14,400 last Friday, soaring past the 2007 pre-recession record of 14,164. Thanks to the Wall Street hoopla, most Americans probably believe the economic recovery is firmly entrenched and the good times will keep rolling.
Those on Wall Street are certainly cheering, as are those privileged few who were already rich before the markets took middle-class American down five years ago. Unfortunately, the rest of the country doesn’t have reason to celebrate.
If you’re the Federal Reserve, this disconnect doesn’t make sense. After all, higher stock prices boost consumer wealth and confidence, which translates into increased spending.
Over the last five years, we’ve learned that unlike water, wealth trickles upward.
During the first two years of the Great Recession (2007–2009), average real income per family plummeted by more than 17%, the largest two-year drop since the Great Depression. (Source: Saez, E., “Striking it Richer: The Evolution of Top Incomes in the United States,” Berkeley University of California web site, January 23, 2013.)
But surely things got better for the average American after the so-called “economic recovery” kicked in? Not quite. Between 2009 and 2011, the top one percent of households by income reeled in 121% of all gains. How can anyone grab more than 100% of anything? It’s easy when you factor in inflation. The top one percent became 11.2% richer, while the bottom 99% became 0.4% poorer.
In 2010, the first full year of the economic recovery, the top one percent claimed 93% of all income gains.
The top one percent didn’t just do better than the bottom … Read More
The commodity price cycle still exists but many raw materials remain in correction. Gold, silver, and oil prices are all taking a break for their own reasons. Although I wouldn’t be buying them now, I still believe that gold should be a part of a well-balanced portfolio, especially as we enter a period of rising inflation.
In terms of gold-related investments, there are only a handful of gold miners even worth considering in this market. Costs for gold mining companies have being going up significantly, accelerating the decline of many gold stocks.
Oil prices aren’t going anywhere, with very slow growth in the U.S. economy and stable economic growth in China. In addition, the production boom in domestic oil and natural gas is holding these commodities down and should continue to do so for quite some time.
There is not a lot of new action for investors to be taking on right now. Those with large-cap equities should be benefitting from the rising stock market, which by the numbers, is not expensively priced. It is difficult to be a new buyer in an environment like this. Nobody likes buying stocks at their highs.
We should get a meaningful correction in the stock market soon and, if we do, I hope it’s a big one in that it will be an opportunity to buy dividend-paying blue-chip stocks.
Gold is likely to remain in a consolidation mode for quite some time. The better bet on its upside is the commodity itself, not gold stocks. Oil prices recently dipped below $90.00 a barrel, and while that’s good for consumers, it still represents the … Read More
Skepticism is very high among individual investors. Institutional investors who run buy-and-hold mutual funds don’t need to be as worried; they get paid to buy stocks. The stock market’s run makes total sense in that the Federal Reserve continues to promise low interest rates and continues to increase the money supply, while revenues and earnings from corporations are growing modestly.
Other than real estate, there is no other place for an investor to put his or her money to generate income above the inflation rate. So the stock market is likely to keep ticking higher over the near-term. Now, all the power is with corporations.
I believe we’re on the final leg of the bull market recovery from the March 2009 low. All investors want to see is revenue growth and they will keep buying stocks. Growth is the name of the game as corporations have actually done a great job keeping a lid on costs. I expect more new announcements regarding share buybacks and rising dividends this upcoming earnings season.
The toughest problem facing the Main Street economy is employment conditions. But even though the Federal Reserve has catered an extravagant menu of stimulus to Wall Street and corporations, large companies just don’t want to invest in new plant, equipment, or employees. The cash hoarding will continue; the beneficiaries are stock market investors, not workers.
In the final leg of this stock market recovery, there are some attractive buys out there. One particular investment theme that I believe in is that corporations will begin to open their wallets, but the cash won’t be spent on new employees; it will … Read More
The eurozone has become one of the biggest concerns lately, and it’s sending ripples through countries in the global economy. In addition, the debt-infested nations, such as Greece, Spain, Portugal, and Italy, are dragging their peers down the path of economic misery—hurting their economic growth prospects.
Greece is in a depression, with increasing unemployment and its economic conditions quickly deteriorating. The International Monetary Fund (IMF) suggests Greece still needs more help from the other eurozone countries. The IMF believes that all the measures taken so far by the eurozone nations since the crisis began in Greece aren’t enough to bring Greece’s national debt to a sustainable level. The IMF predicts that Greece will need as much as 9.5 billion euros from 2015 to 2016, just to bring its national debt to a sustainable level. (Source: Rastello, S. and Petrakis, M., “IMF Says Greece Will Need More Money, Has Elevated Risks,” Bloomberg, January 18, 2013.)
Similarly, Spain is sinking further into recession. Spain’s economy contracted 0.7% in fourth quarter 2012. Mind you, this was the steepest decline in the country’s production since 2009. (Source: “Spanish Economic Contraction Accelerates,” Deutsche Welle, January 30, 2013.)
As a result of all this chaos, strong countries in the eurozone started to suffer, and the entire region entered another recession in the third quarter of 2012. The 17 nations of the eurozone contracted 0.1% in the third quarter, after seeing a decline in the region’s gross domestic product (GDP) of 0.2% in the first quarter. (Source: “Eurozone falls back into recession,” BBC News, November 15, 2012, last accessed February 13, 2013.)
Looking ahead, things appear to … Read More