The annual Asia-Pacific Economic Cooperation (APEC) summit started on Monday in Beijing, and I bet there will be a lot of discussion on the state of China and Asia in the global economy.
My readers all know the impact of China on the global economy, as I’ve written on its relevance before. If China fails, so will the global economy, including the United States and the fragile eurozone. Russia is already looking to extend its economic ties beyond the Great Wall.
Yet it’s clear the country that gave us spectacular double-digit gross domestic product (GDP) growth for years is now struggling. The Chinese economy has already seen its growth slow, coming in at 7.3% in the third quarter, the slowest pace since 2008. And it isnow threatening to fall short of the 7.5% target set by the government. At this point, it doesn’t look like the target will be met. In fact, there are whispers that the target could be cut to seven percent in 2015 if the global economy doesn’t experience a stronger recovery.
Pundits and China bears have been calling for the great collapse of China, specifically in the real estate and financial spaces. Yes, there is softness here, but we have yet to see a bigger crack form. You can bet the Chinese government will do whatever is necessary to reinforce its economy’s weak points. And China can definitely do this, given the fact that the country has about $3.0 trillion in reserves.
President Xi Jinping, who is in his second year of his 10-year term, knows the country needs to spread its wings globally. That is … Read More
The Federal Reserve has spoken and to no one’s surprise, there was really nothing new from Fed Chair Janet Yellen, who did as was expected after shaving off another $10.0 billion in monthly bond purchases. The Federal Reserve will cut the remaining $15.0 billion in October, bringing its third round of quantitative easing (QE3) to an end.
What the stock market here and around the world also heard was that the Federal Reserve will likely maintain its near-zero interest rate policy for a “considerable time” after the QE3 cuts.
The problem is that the stock market is focusing so much on when interest rates may begin to ratchet higher.
The consensus is calling for rates to move higher by mid-2015, but some feel it will not happen until 2016 if the economic growth stalls. The downward revisions in gross domestic product (GDP) growth around the world could extend the time before the Federal Reserve will raise interest rates.
In the eurozone, the European Central Bank (ECB) is adding more monetary stimulus to jump-start the economy that is faltering due, in part, to the mess in Ukraine.
The news release from the Federal Reserve says the economic growth is moderate but also warns the labor market still has work ahead of it, which appears to be the main focal point.
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate,” read the press release by the Federal Reserve. “In determining how long to maintain the current 0 to 1/4 percent target range for the federal … Read More
Not too long ago, the European Central Bank (ECB), to fight the economic slowdown in the eurozone, lowered its benchmark interest rates. The hope with this move was the same as it was in the U.S., England, Japan, or other countries that are facing economic scrutiny: lowering interest rates will eventually increase lending and eventually bring in economic growth. In addition to this, the ECB also announced that it will be taking part in an asset purchase program—something similar to what was implemented by the Federal Reserve.
When I look at all this, it creates a very interesting situation. The ECB is lowering its interest rates as the Federal Reserve and others, like the Bank of England, are building grounds to raise their benchmark interest rates.
For example, the Bank of England is hinting at raising interest rates by spring of 2015. The governor of the central bank, Mark Carney, recently said that if interest rates were to rise in the spring as the markets expect, this move would allow the bank to meet its mandate regarding inflation and jobs creation, according to its forecasts. Simply put, the bank is prepared to raise interest rates early next year. (Source: Hannon, P., “Bank of England Gov. Mark Carney Signals Spring Rate Rise,” The Wall Street Journal web site, September 9, 2014.)
And the Federal Reserve may do the very same.
With this in mind, I question where the next big trade is going to be.
Remember what happened during the financial crisis, when the Federal Reserve and other central banks lowered their interest rates? In search of yields, the easy money … Read More
Gasoline prices are finally headed lower at the pumps, but it’s happening slowly. It always seems prices at the pumps rise much faster when oil prices increase, but they move much slower when oil prices decline. I guess that’s big oil for you.
The average price of regular gas across the nation is around $3.55 a gallon. That’s down from the more than $4.00 a gallon we witnessed in July 2008 and again in May 2011.
Lower gas prices translate into more money in your wallet to spend on other goods and services. This is good for the country’s economic growth.
As a consumer, while we are experiencing lower gas prices at this juncture, I’d suggest you enjoy it while you can, as oil companies will look for any excuse to drive oil prices higher—and gas prices will follow.
As an investor, however, you need to pay attention to the bigger picture.
Oil prices have been steadily declining to around $91.00 a barrel from the more than $100.00 a barrel witnessed not long ago.
Chart courtesy of www.StockCharts.com
Some calm to the situation in Gaza and Israel, along with a current truce to the fighting in Ukraine has contributed to the decline in oil prices. Geopolitical events can have a huge impact on the price of oil.
The problem that I see here is that the situation in either region could boil over at any moment, possibly launching gasoline and oil prices sky-high. But my biggest concern is not the events happening in Ukraine or Gaza; rather, the biggest question mark lies in the volatile regions of Syria and Iraq, … Read More
The travel market in China continues to be strong in spite of the country’s economic growth stalling around 7.4%. Spending has been triggered not only by personal travel, but the country is on the verge of surpassing the United States in the area of business travel.
Just take a look at the industry metrics. In 2013, total travel business spending in China came in at $225 billion, based on research by the Global Business Travel Association.
In the country, you can witness the explosive growth in travel infrastructure, which includes airlines, high-speed rail transit, cars and car rentals, and hotels.
In fact, China is already the world’s largest market for airlines, cars, and rail. The country is spending hundreds of billions of dollars in these areas and it’s only going to get bigger. And with more than 1.3 billion people in China alone, you know the travel market within the country will also expand.
You can now travel from Shanghai to Beijing in a few hours by taking a high-speed train and based on the government’s ambitious plans, the high-speed rail network is only going to expand.
In the airline sector, just ask The Boeing Company (NYSE/BA) about China and you’ll realize it’s becoming the most lucrative global market for airplanes.
The vehicle market is also continuing to be the largest in the world, only held back by quota restrictions placed on car sales by the government in an effort to limit pollution.
With all of this added travel in the skies, on the roads, across the water, and by rail, you know the demand for hotels is also surging. … Read More
The stock market appears anxious to move higher to new record highs.
In the past week, the Federal Reserve released its Federal Open Market Committee (FOMC) meeting minutes that suggested it wanted to see stronger, sustained growth before deciding on when to raise interest rates. This includes both economic growth and jobs creation.
On Thursday, the Bureau of Economic Analysis (BEA) will report the second reading of the second-quarter gross domestic product (GDP), which came in at a surprising annualized four percent for the advance reading.
The consensus is that the second reading will show the GDP growth holding at the same four-percent level. If it does, it would be excellent for the economy but at the same time, ironically, it would make investors and the stock market nervous about the status of interest rates.
The issue is that the Fed wants to see controlled and steady economic growth and a four-percent reading could raise red flags, pointing to inflation—which means higher interest rates. The inflation rate is benign at this time as consumers continue to hold back on spending.
The stock market will get anxious if the reading remains the same, but we would want to wait to see how the economy fares in the third and fourth quarters of the year before making any drastic moves.
Of course, the stock market is all about expectations going forward and clearly, a strong second reading of the 2Q14 GDP will send some to the exits.
The Fed also wants to see the jobs market continue to expand at its previous trend of generating an average of more than 200,000 monthly … Read More
On one hand, it’s great the economic growth is showing renewed progress as the advance reading of the second-quarter gross domestic product (GDP) growth came in at an annualized four percent, according to the Bureau of Economic Analysis. (Source: Bureau of Economic Analysis web site, July 30, 2014.)
Now I realize this is only the advance reading and things can change over the next few weeks as more credible estimates come into play, but I’m sure the Federal Reserve is keeping close tabs on the numbers. Investors are also likely quite nervous.
It appears that the weak showing in the first-quarter GDP was an aberration, driven by the extreme winter conditions. But the reality is that if the GDP continues to expand at this pace, we could see the Federal Reserve begin to increase interest rates quicker than expected in 2015.
The GDP reading saw gains across the board in consumption, investment, exports, imports, and government spending, which will catch the eye of the Federal Reserve.
We know the Federal Reserve doesn’t want to slow the economic renewal, but at the same time, it also wants to make sure inflation doesn’t rise too fast.
The report from the BEA pointed to the fact that the price index for gross domestic purchases used as a measure of inflation increased an annualized 1.9% in the second quarter, well above the 1.4% in the first quarter. Even when you take out the volatile food and energy components, the reading increased 1.7%, versus 1.3% in the first quarter.
And given that the jobs numbers continue to show progress with the unemployment rate standing at … Read More
If you think Americans are firmly comfortable in the economy and jobs, think again. Yes, the stock market has returned strong gains and has been an investment opportunity over the past five years (since the end of the Great Recession in 2008), but much of it was artificially driven by the lax monetary policy put forth by the Federal Reserve. Now that the quantitative easing is dissipating and interest rates are set to edge higher sometime in mid-2015, I’m not all that comfortable.
The jobs numbers are improving, but they are still well below the 500,000 per month that some pundits deemed to be a sign of a healthy jobs market. We are generating about 200,000 jobs each month, which is well below what we want to see. In fact, we have only recovered the jobs lost during the recession—and we still need to build on that.
Given that there are still approximately 46 million Americans collecting food stamps, you’d understand why I still feel uneasy about the so-called economic growth in progress.
Consumers are still not spending at a rate many are hoping for. This is especially true in durable goods, which are not required for everyday living, so their buying can be bypassed.
As far as I’m concerned, the retail numbers still stink and don’t point to an investment opportunity in retail. Just take a look at the metrics at the big multinationals, such as Wal-Mart Stores Inc. (NYSE/WMT) and other retailers. While retail sales grow at a muted pace here, the growth is around 12% in China, where there is an investment opportunity in retailers.
Dick’s Sporting … Read More
The retail sector is clearly undergoing some duress early on in 2014 as there is a worrisome feeling that the country’s economic growth may be stalling.
The first quarter’s gross domestic product (GDP) growth was muted. Retail sales were also soft in April. The core reading showed spending contracted by 0.1% in April after 1.3% growth in March. Of course, economists are not concerned, suggesting the first-quarter retail sales will rise.
The winter weather may have wreaked havoc with consumer spending in the retail sector, but it’s now show time; the retailers need to begin to deliver as the weather warms up.
My top rates in the retail sector continue to be the discounters and, oddly enough, the high-end luxury-brand stocks, given the amount of wealth created among the top one percent.
In the luxury area, vying for the “Best in Breed” are Michael Kors Holdings Limited (NYSE/KORS) and Tiffany & Co. (NYSE/TIF). I also like Coach, Inc. (NYSE/COH) as a contrarian pick in the retail sector.
In the discount segment, Costco Wholesale Corporation (NASDAQ/COST) is one of the top stocks. I also like discount stocks Family Dollar Stores, Inc. (NYSE/FDO) and Dollar General Corporation (NYSE/DG). The discount area has also been impacted by the weather, but it remains a top area in the retail sector.
If you are looking at the department stores, the top stock is Macy’s, Inc. (NYSE/M), which is probably the best-managed and top-performing company among the department stores in the retail sector.
Macy’s just reported a first quarter in which it beat on earnings per share but fell short on sales. The results show the … Read More
Federal Reserve Chair Janet Yellen confirmed what we’ve been espousing in these pages for the last couple of years—that the so-called recovery feels an awful lot like a recession for most Americans.
Addressing a crowd in Chicago, the head of the Federal Reserve said the U.S. jobs market is still underperforming and will continue to need the help of an artificially low interest rate environment “for some time.”
Investors were, as you can imagine, afraid the Federal Reserve was going to raise short-term rates. A rate hike would elevate borrowing costs and pull the rug out from under stock prices.
But instead, the Federal Reserve said it was committed to keeping interest rates low in an effort to stimulate borrowing, spending, and economic growth. The artificially low interest rate environment is a welcome sign for Wall Street—which essentially ended the first quarter of the year where it began.
By committing to keeping interest rates low, the Federal Reserve is ensuring a steady flow of money into the stock market…which cannot help but raise the already-bloated indices higher. The S&P 500 continues to trade near record-highs, as does the Dow Jones Industrial Average. Even the NASDAQ’s all-time high is, all things considered, within striking distance.
With the current bull market now in its fifth year—all is well in the U.S.A.! That is, if you’re one of the fortunate few to even realize we’re in a bull market. There are far too many weak underlying indicators to suggest we’re on a stable—let alone sustainable—economic footing.
For instance, the U.S. unemployment rate has improved from 10% in 2009 to 6.7% today. On the … Read More
Remember what happened in the U.S. economy when the financial system was about to collapse? The banks weren’t lending to each other, businesses, or even consumers. The U.S. economy was in a deep economic slowdown. Investment banks like the Lehman Brothers had already collapsed and more would follow. Something had to be done or else it would be a disaster situation.
When all of this was happening, the Federal Reserve stepped in to save the U.S. economy. It started to use a monetary policy tool called quantitative easing. The idea was simple: print money out of thin air and then buy back bad debt from the banks. As a result of this, the banks would have liquidity, which would eventually create more lending, moving the U.S. economy towards the path of economic growth.
You can look at Japan as another example of this. In order to fight the economic slowdown in that country, the Bank of Japan took similar actions to those of the Federal Reserve—I must say, the central bank of Japan has been involved with quantitative easing for a while.
The central bank of Japan wanted economic growth, which was what the Federal Reserve had hoped for in the U.S. economy. Japan’s central bank believed that by introducing quantitative easing, the value of the currency would go down and exports from the country would increase. The Bank of Japan also hoped that the quantitative easing would take the country away from the deflationary period it has been experiencing for some time.
With this in mind, you will come across various arguments. Some will say that quantitative easing has … Read More
Spring is finally here, but that certainly doesn’t mean corporate America will cease to use the cold weather as an excuse for abysmal corporate earnings. Throw a dart at any sector, and you’ll find CEOs blaming the weather in some capacity—well, save for the utilities companies.
One sector that might be able to (on some level) justifiably blame the weather for a weak start to the year is the auto sector. Overall, U.S. auto sales were up eight percent year-over-year, while Canadian auto sales were up four percent. (Source: Isidore, C., “Car sales make a strong comeback in 2013,” CNN Money web site, January 3, 2014.)
In 2013, U.S. auto sales topped 15 million for the first time since 2007. While auto sales of 15.6 million were below the 16.0 million forecast by analysts, it was still an encouraging sign for the auto industry. Ford Motor Company’s U.S. sales were up 11%, while Chrysler Group LLC saw its sales climb by nine percent, and General Motors Company reported a 7.3% increase.
The 2013 auto sales data is encouraging in light of the disappointing December sales numbers; this also happened to coincide with the start of the dastardly winter of 2014. The weak end-of-the-year auto sales sentiment skidded over into 2014. Auto sales missed both their January and February expectations.
So far, 2014 has been good for global auto sales. Global sales hit record territory in February, climbing seven percent year-over-year. Auto sales in China climbed 22%, while car sales in Western Europe climbed year-over-year for the sixth consecutive month. Spain led the way with an 18% jump in auto sales. … Read More
For months and months now we’ve been pointing to seemingly obvious economic data to prove that the U.S. housing market is in trouble because of the weak U.S. economy. Those in the “know”—economists and the real estate board—have been waxing eloquence on how the weather is the main culprit behind the disappointing U.S. housing market numbers.
The National Association of Realtors (NAR) said existing-home sales in December were adversely affected by bad weather in many areas. Sales of existing homes in January were down 5.1%, reaching their lowest levels in 18 months. At the time, the NAR echoed it’s sentiment from the previous month and said the prolonged winter weather was playing a role and positive housing market activity would be delayed until spring.
Well, spring has sprung, and it looks like blaming the weather is getting a little old. Existing-home sales in February fell 0.4% month-over-month and 7.1% year-over-year to their lowest level since July 2012. (Source: “February Existing-Home Sales Remain Subdued,” National Association of Realtors web site, March 20, 2014.)
First-time homebuyers, the litmus test for how well the economy is doing, accounted for 28% of purchases in February—that’s up from 26% in January (which was the lowest market share since the NAR first started compiling monthly data). In February 2013, first-time homebuyers accounted for 30% of sales. The 30-year average for first-time homebuyers is 40%—a number both real estate professionals and economists consider ideal.
As per usual, the U.S. housing market is being propped up by those with lots of money. All-cash sales made up 35% of sales in February—up from 33% in January and 32% in … Read More
Another month of cold weather is being blamed for the most recent weak consumer confidence numbers. Consumer confidence levels for the Thomson Reuters/University of Michigan preliminary index fell from 81.6 in February to 79.9 in March—the lowest level in four months. (Source: Lange, J., “U.S. consumer sentiment slips; bad weather eyed,” Reuters, March 14, 2014.)
Economists had forecast March consumer confidence levels to climb to 82. Instead of celebrating a barely there increase, economists are waxing eloquence on the two-percent decline and two-point gulf between expectations and reality.
In spite of living in North America and having to deal with the cold winter weather that affects most of us, analysts still expected consumer confidence to improve in March…and they seem surprised that it didn’t.
Analysts basically think consumers are too depressed by the weather to shop. This would, of course, bolster their opinion that the U.S. economy is only temporarily stuck and sunnier skies will prevail.
But who can say, really? March’s weak consumer confidence numbers mark the eighth miss in the last 10 months. In all of 2013, consumer confidence numbers beat forecasts only three times.
Maybe the weather can’t take all the blame. In spite of the winter storms, the average U.S. temperature for January was normal, with the warmer West Coast weather offsetting the cooler East Coast weather. The average was 30.3 degrees Fahrenheit, which is only 1/10 of a degree below normal for the month. Things weren’t much different in February and consumer confidence levels actually increased to 81.2 from a projected 80.6. (Source: “National US temperature for January normal despite winter storms,” The Guardian, February … Read More
By Sasha Cekerevac for Daily Gains Letter | Mar 14, 2014
There is something going on right now in the copper market that should alarm you. Over the past week, the price of copper has plunged, recently hitting a four-year low.
Why should this matter?
Most investors and analysts are placing bets that economic growth is about to re-accelerate globally. Never before has the world been so interlinked, so we must pay attention to what is occurring internationally.
Copper is an important part of the potential for economic growth, not just because it is used in building and construction, but because it is also a major factor in the Chinese lending market, which is now showing severe strain leading to a potential debt crisis.
Remember, the last financial emergency was led by a debt crisis brought on by a housing bubble that eventually popped. High levels of debt creating a bubble are always dangerous, as the hangover is quite severe.
How does this impact economic growth for us here in America?
To begin with, we all know that the U.S. is doing relatively better than other parts of the world, but we are not exactly running at full speed. Any slowdown in economic growth—especially with a country as large as China—that is brought on by a debt crisis in that nation could severely impact our economy.
In China, the lending market is quite different than in North America, and firms have to rely on what’s called shadow banking.
Many firms in China have trouble borrowing, so they buy copper and use it as collateral. We are not talking about a small amount of money, as a shadow banking system in China … Read More
The feeling is mutual: consumers are failing retailers, and retailers are disappointing consumers.
First, let’s look at consumers; apparently, we’re not spending as much as we need to.
During the first month of the year, new orders for manufactured durable goods slipped by one percent, or $2.2 billion, to $225.0 billion—the third decrease in the last four months. Core durable goods (excluding transportation), on the other hand, rose 1.1%. That’s not a huge leap when you consider core durable goods slipped a further-than-expected -1.9% in December.
Retail numbers aren’t any better. U.S. retail sector sales for January fell by the most since June 2012. January retail sector and food services sales for January fell 0.4% month-over-month to $427.8 billion. In December, retail sector sales slipped 0.1% month-over-month to $429.5 billion. (Source: “Advance Monthly Sales for Retail and Food Services January 2014,” United States Census Bureau web site, February 13, 2014.)
Of the 13 sectors the U.S. Census Bureau looks at, nine reported month-over-month declines. The biggest retail sector drops were in motor vehicle & parts dealers (-2.1%); sporting goods, hobby, book, and music stores (-1.5%); department stores (-1.5%); and clothing & clothing accessories stores (-0.9%). Necessities like food and gas experienced month-over-month gains.
As a nation, we expect consumer spending to generate roughly 70% of our gross domestic product (GDP) growth. These retail sector numbers do not point to sustained economic growth. Though you can hardly blame us, initial claims for jobless benefits rose more than forecast and wages remain pretty flat.
Now, let’s look at retailers. For an industry that needs consumers to buy its products or services, they … Read More
According to Wall Street, the cold winter weather is responsible for holding back an economy that’s just itching to take hold. And as we’ve recently learned, when it comes to poor earnings and revenues, nothing makes for a better excuse than the weather. After all, the cold harsh winter that has blanketed much of North America doesn’t care how much money you make.
But while the cold winter weather might not care what area code people live in, the feeling is mutual—people in the wealthy area codes don’t care about the cold weather either, especially when it comes to auto sales.
February auto sales figures came in earlier this week, and it’s as if auto sales have flat-lined. Overall, February auto sales were unchanged year-over-year at 1.19 million for an annualized auto sales rate of 15.34 million—at the low end of the estimated 16 million the industry expects to sell in 2014. (Source: “U.S. Market Light Vehicle Deliveries February 2014,” Motor Intelligence web site, March 2, 2014.)
Leading the February auto sales’ non-event are the “Big 8” (General Motors Company; Ford Motor Company; Toyota Motor Company; Chrysler Group LLC, Honda Motor Co., Ltd.; Hyundai Motor Company/Kia Motors Corp.; Nissan Motor Co., Ltd.; and Volkswagen AG), which accounted for 1.06 million units, or 89% of the month’s sales.
Nissan and Chrysler were the only two Big 8 automakers to report year-over-year growth. Nissan reported year-over-year auto sales growth of 15.8%—ahead of analysts’ predictions of 12%. And Chrysler reported another solid month with auto sales up 11%—analyst forecasts were expecting an 8.8% increase. Chrysler surprised to the upside in January with an … Read More
I hate to harp on the U.S. housing market so much, but it is a major indicator of the health of the U.S. economy. Following previous recessions, investment in the U.S. housing market increased early on and helped drive the recovery. In fact, the U.S. housing market was a major factor that helped lift the U.S. economy out of past recessions in 1981, 1990, and 2001. But it isn’t happening this time around.
According to the National Association of Home Builders, the U.S. housing market contributes to the country’s gross domestic product (GDP) in two ways: private residential investment and consumption spending on housing services. Historically, residential investment, which includes construction of new single-family and multi-family structures, residential remodeling, the production of manufactured homes, and brokers’ fees, has averaged around five percent of U.S. GDP. (Source: “Housing’s Contribution to Gross Domestic Product (GDP),” National Association of Home Builders web site, last accessed March 3, 2014.)
Housing services, which includes gross rent, utility payments, and imputed rent (an estimate of how much it would cost to rent owner-occupied units), averages between 12% and 13%. That leads to a combined total of 17%–18%.
But the U.S. housing market has been falling short as an engine of economic growth. In 2005, residential investment accounted for 6.1% of U.S. GDP. In 2012, it accounted for just 2.8%, and it has averaged just three percent since then—meaning that two percent of the national GDP is missing from private residential investment.
More broadly, since the U.S. housing market collapsed in 2008, the industry has made less than half its normal contribution to U.S. economic growth. According … Read More
Income inequality plays an important role in whether or not an economy experiences economic growth. If a small number of people earn the majority of the wages in a country, that sets the country up for a disastrous situation. What this essentially does is create a significant disparity. You can expect to see certain businesses do really well while others struggle severely, which is the result of those who are earning fewer wages spending less and those who are earning a significant portion spending more.
Sadly, this is what we see in the U.S. economy. Income inequality is increasing. It suggests economic growth is a farfetched idea.
According to a study by the Paris School of Economics, in the U.S. economy, the richest 0.1% earns nine percent of the national income. The bottom 90% of Americans—the majority of the population—only earn 50% of the national income. (Source: Arends, B., “Inequality worse now than on ‘Downton Abbey,’” MarketWatch, February 27, 2014.)
Former Federal Reserve chairman Allan Greenspan said, “I consider income inequality the most dangerous part of what’s going on in the United States.” (Source: Well, D., “Greenspan: Income Inequality ‘Most Dangerous’ Trend in US,” Moneynews, February 25, 2014.)
Income inequality in the U.S. economy is very evident, no matter where you look.
As I mentioned earlier, when there is income inequality in a country, you can expect certain businesses to do poorly. For example, consider Wal-Mart Stores, Inc. (NYSE/WMT)—one of the biggest retailers in the U.S. economy known for its low prices. Due to the U.S. government pulling back on its food stamp programs, the company is worried. The executive … Read More
By Sasha Cekerevac for Daily Gains Letter | Feb 21, 2014
This past weekend, a friend of mine made a statement that there must be a large amount of economic growth coming shortly because of the booming stock market, driven by investor sentiment.
As I told him, the two are not necessarily tied together.
Over the past few months, we have heard about how economic growth is about to accelerate here in America, and this has helped drive investor sentiment in the stock market higher. However, I think there are many questions that need to be answered before we can assume economic growth will reach escape velocity, and investor sentiment is heavily contaminated with a large addiction to monetary policy.
Some of the data has improved; however, many other reports only lead to murkier water.
For example, we all know that economic growth requires the consumer to be active, since consumption is approximately 3/4 of the U.S. economy. But for the holiday season, many retail companies issued disappointing results, even though there were signs that consumer spending was beginning to pick up. This is an interesting data point: during the fourth quarter of 2013, consumer debt increased by $241 billion from the third quarter, the biggest jump in debt since 2007. (Source: “Quarterly report on household debt and credit,” Federal Reserve Bank of New York web site, last accessed February 19, 2014.)
Should investor sentiment view this increase in consumer debt as a positive or negative for economic growth?
A large amount of the debt increase came from the automobile industry, but what really worries me that could impact future economic growth is the combination of higher debt with weaker retail … Read More
For an economy that relies on consumer spending to fuel the vast majority of its economic growth, ongoing weak retail sector sales and increased jobless claims cannot be part of the equation. But they are. And have been.
In January, U.S. retail sector sales fell by 0.4%—the most since June 2012. Economists had predicted that January’s retail sector sales would be unchanged in January after falling by a revised 0.1% in December. (Source: “Advance Monthly Sales for Retail and Food Services January 2014,” U.S. Census Bureau, web site, February 13, 2014.)
January retail sector sales, excluding automobiles, gasoline stations, and restaurants, showed the worst year-over-year growth since 2009. And with the harsh winter weather, January’s sales reflect the sometimes unpredictable, cyclical nature of our spending, from discretionary (e.g., cars) to non-discretionary (e.g., heating).
At the same time, more Americans filed applications for unemployment benefits for the week ended February 8. Jobless claims climbed by 8,000 to 339,000; the four-week moving average for new claims increased to 336,750 from 333,250. Many economists continue to blame the cold weather for both weak retail sector sales and increased jobless claims. (Source: “Unemployment Insurance Weekly Claims Report,” United States Department of Labor web site, February 13, 2014.)
Fortunately, there is a silver lining to all of this. They suggest we’ll start to see an acceleration in hiring and retail sector sales in the spring and summer seasons—meaning they have written off the entire first quarter of the year, a quarter most economists initially predicted would be bullish. Myself and the financial editors here at Daily Gains Letter, on the other hand, have been warning … Read More
The theme since 2010 has been very simple: the U.S. economy is witnessing economic growth. As a result of this, the stock market increased and broke above its previous highs made in 2007. Investor optimism soared, and those who were bearish saw their stock portfolio disappear.
As the new year, 2014, began, the theme became a little more complex: the U.S. economy is going through a period of economic growth, but it’s becoming questionable. The question asked by investors these days: is the U.S. economy headed for economic slowdown, and is the stock market—which has provided investors with great returns—about to see another downturn?
The economic data that suggested the U.S. economy is growing has started to suggest this may not be the case anymore. For example, after the financial crisis, the unemployment rate in the U.S. economy declined. It meant more people were getting jobs and they had money to spend—the kind of jobs created and if they made any impact is still up for debate. In December, we heard that only 75,000 jobs were added to the U.S. economy, and in January, this number was only 113,000. (Source: “The Employment Situation,” Bureau of Labor Statistics, February 7, 2014.) The number of jobs added to the U.S. economy has missed the market estimate by a huge margin for two months in a row, and the growth compared to the early part of 2013 isn’t very impressive.
The gross domestic product (GDP) growth rate of the U.S. economy doesn’t look so impressive, either. We have created a table to show how it has been declining. Look below:… Read More
With the markets selling off, many may not think now is the best time to consider discretionary stocks. But it’s because the markets are selling off that beaten-down stocks selling non-essential products and services (what people want, not need) might be worth a second look—not just because many discretionary stocks are beaten down, but rather because consumer spending fuels the majority of economic growth in this country.
Normally, when consumers have the money to spend, they do so on discretionary items like travel, electronics, cars, and luxury brands. But, as virtually all of us can contest, this isn’t always the case. Credit card purchases may not be the same as having discretionary income, but they accomplish the same short-term goals.
Granted, there is a mountain of evidence to suggest investors should shun discretionary stocks. Unemployment is high, wages are stagnant, and, for the first time ever, working-age Americans are the primary recipients of food stamps. On top of that, median household income (adjusted for inflation) has declined for five straight years. (Source: DeNavas-Walt, C., et al., “Income, Poverty, and Health Insurance Coverage in the United States: 2012,” United States Census Bureau web site, September 2013.)
That hasn’t stopped us from spending. At $3.04 trillion, consumer credit is up 22% over the last three years. Total household debt is more than $13.0 trillion, close to its 2007 pre-recession level and just below the $17.0-trillion government debt load. (Source: Cox, J., “It’s back with a vengeance: Private debt,” CNBC, October 12, 2013.)
During the last quarter of 2013, the U.S. economy expanded at an annual rate of 3.2%. During the third quarter, … Read More
By Sasha Cekerevac for Daily Gains Letter | Feb 7, 2014
Well, that didn’t take long! Just a few weeks ago, I wrote an article stating that investors should begin to worry about the lofty level of the stock market. Since that time, the S&P 500 has dropped by more than five percent in less than two weeks.
This market correction won’t be a surprise to my readers, as I have been suggesting investment strategies that can help prepare your portfolio for a large downswing in the market for some time now.
When I wrote the article in late January, the S&P 500 was surging, even though the preliminary Thomson Reuters/University of Michigan index of consumer sentiment dropped month-over-month. Since then, we have seen additional data coming from China showing that its economy is beginning to slow.
The Markit/HSBC China Manufacturing Purchasing Managers’ Index (PMI) for January was 49.6, much weaker than expected. (A PMI data point below 50 denotes a contraction in activity.) While many analysts have been expecting China to begin accelerating, this recent data is a dose of reality, as manufacturing jobs in China dropped for the third consecutive month. (Source: “HSBC China Manufacturing PMI,” Markit Economics, January 30, 2014.)
I know what you’re thinking; “Why should investors in the S&P 500 care about what happens in China?” A market correction doesn’t occur based on a single event. When you’re trying to develop investment strategies, especially if you are considering the potential for a market correction in a large index, such as the S&P 500, you have to take many factors into account, as if you’re working on a jigsaw puzzle.
First ask yourself, what are the positive … Read More
By Sasha Cekerevac for Daily Gains Letter | Jan 31, 2014
One of the more common themes that I keep reading about these days is the strength of U.S. economic growth. It’s important to get at least some understanding of the potential for economic growth, as this will impact your investment strategy.
Recent data is definitely making me ask the question: just how strong is the level of economic growth in America?
We all know that this holiday season was much weaker than expected for retail companies. Considering that consumer spending fuels the majority of economic growth in America, this is certainly not a positive environment for that sector—but that shouldn’t be a real surprise to my readers, as I have recommended an investment strategy that has avoided retail stocks for months.
If economic growth is weak in retailing, are there any bright spots for larger goods?
According to the U.S. Department of Commerce, the latest advance report on durable goods was quite disappointing. New orders for durable goods during the month of December dropped 4.3%, core durable goods orders during December dropped 1.6%, and excluding defense, new orders were down 3.7%. (Source: U.S. Department of Commerce, January 28, 2014.)
Another worrisome data point in the report showed that the inventory level of manufactured goods in December was up 0.8%, the highest total amount since this data series was published and also the eighth monthly increase over the last nine months.
How should you formulate an investment strategy with this information in mind?
Economic growth depends on a continued increase in consumption and production. We saw consumers pull back over the holiday season, which is clearly not a positive sign for … Read More
After years of easy money and a failure to secure a well-executed exit plan, it looks as though the emerging markets are getting a taste of the Federal Reserve’s economic tapering. Over the last five years, the emerging markets have benefited from low interest rates and listless growth in developed countries.
But, with the U.S., Japan, and Europe—the three biggest economies globally—all expanding for the first time in four years, the tables are turning and the sheen is beginning to wear on the emerging markets.
In an effort to help kick start the U.S. economy after the financial crisis in 2008, the Federal Reserve enacted it’s overly generous bond buying program (quantitative easing). All told, the Federal Reserve dumped more than $3.0 trillion (and counting) into the markets and has kept interest rates artificially low.
The ultra-low interest rates might have been great for home buyers, but income-starved investors had to look elsewhere to pad their retirement portfolio. Many retail and institutional investors went to the emerging markets, where the interest rates were higher and there was a real opportunity for growth.
In December, the Federal Reserve said it was going to begin tapering its $85.0-billion-per-month quantitative easing strategy to $75.0 billion a month in January. Just yesterday, the Fed announced it will be reducing that number to $65.0 billion a month in February. While the amount is negligible, it signals the eventual end of artificially low interest rates. The cheap money that propped up asset prices in emerging markets, like India, China, and Indonesia, is beginning to crumble.
The Argentinean peso, Indian rupee, South African rand, and Turkish lira … Read More
By Sasha Cekerevac for Daily Gains Letter | Jan 29, 2014
Just the other day, I was talking to a friend of mine who seemed extremely cheerful. I asked why, and he said that his investments have performed well over the past few months and he saw no reasons to worry.
This is a common problem with investor sentiment; people tend to become complacent and only look to the recent past as an indication of what tomorrow will bring.
This is quite dangerous. Investor sentiment is often wrong and can be used as a contrary indicator, buying when others are dumping their stocks and taking profits when others are blissfully unaware of the changing landscape around them.
Americans need to be careful of becoming too complacent in their bullish investor sentiment, because the U.S. is not isolated from the rest of the world.
When the real estate bust and financial crash occurred here in America several years ago, the effects spread to many nations around the world, including the emerging markets.
With the Federal Reserve pushing the gas pedal on money printing here in the U.S., it has created a shock absorber to some extent, temporarily keeping global pressures at bay, especially in relation to the emerging markets.
However, investors do need to be aware that there is much uncertainty around the world. Investor sentiment for global institutions has been aware of these potential issues and is now running for the exits.
Last week this began in Asia, as economic growth appears to be slowing and reports of a financial crisis in China are beginning to grow. With the Chinese shadow-banking sector showing signs of cracking, this is creating negative investor … Read More
If you listen to the Wall Street analysts, January consumer confidence numbers weren’t really all that bad. The preliminary University of Michigan Consumer Confidence index came in at 80.4 versus a forecast of 83.4—and down from 82.5 in December. (Source: “Tale of two consumers continues as US consumer sentiment slips,” CNBC, January 17, 2014.)
Some attributed the blip to the polar vortex that swept through most of North America earlier in the month. The warmer winds of February are expected to pick up the disappointing slack in U.S. consumer confidence levels next month.
But I’m not so sure. Friday’s consumer confidence numbers missed expectations by the widest margin in eight years. It also marks the seventh miss in the last eight months. Throughout 2013, consumer confidence numbers only beat projected forecasts three times, which (surprise!) means Wall Street doesn’t really have its finger on the pulse of Main Street America.
What isn’t surprising is that upper-income households have increased consumer confidence, having benefited the most from strong gains in income levels, the stock market, and housing values. On the other hand, low- and middle-income households that are not heavily invested in the stock market are being weighed down by stagnant wages and embarrassingly high unemployment.
And, since there are more middle- and low-income earners than high-income earners in the U.S., and 70% of our gross domestic product (GDP) comes from consumer spending, it’s fair to say that both consumer confidence levels and the economic outlook for the majority of Americans is bleak.
It’s not as if the disappointing consumer confidence levels have come out of a vacuum. A raft of … Read More
Out of the first seven trading days of 2014, the S&P 500 declined on five of those days, marking the worst start to the year for the stock market since 2005. This phenomenon has raised many questions. Looking at this, investors are asking how the returns on the S&P 500 will look this year. Why? Because in 2005, the S&P 500 only increased by 2.87%.
In 2005, the months of July and November were good for the S&P 500; the index increased by more than 3.5% in each of those months. On the other hand, January, March, and April were the worst-performing months that year. In these months, the S&P 500 declined by more than two percent. (Source: StockCharts.com, last accessed January 15, 2014.)
Will the S&P 500 follow the same trajectory in 2014 as it did in 2005?
As it stands, I believe the S&P 500 may perform worse than it did in 2005. As I’ve mentioned in these pages many times before, there are many factors that are leading me to believe this can happen; for example, we are seeing a surge in optimism towards stocks—stock advisors are the most bullish they’ve been since the last market sell-off. As well, the U.S. economic growth isn’t really surprising when you look much deeper into the details, and most importantly; the Federal Reserve has announced that it will start to reduce its asset purchases (quantitative easing). When combined, these phenomena could bring the S&P 500’s performance down this year.
Regardless, you have to keep one of the most important lessons of investing in mind: don’t predict tops and bottoms. The … Read More
Depending on who you ask, sales in the retail sector may be either brisk or failing to gain traction. Like most things in the stock market, when it comes to the retail sector, it’s all about perspective.
According to the U.S. Department of Commerce, December retail sector sales advanced 0.2% month-over-month, beating analyst forecasts that expected a one-percent increase. Auto sales fell 1.8%, pulling total retail sales numbers down. Not surprisingly, the weak December auto sales numbers are considered more of a reflection of the bad weather than a weak economy. (Source: “U.S. Census Bureau News: Advanced Monthly Sales for Retail and Food Services December 2013,” United States Census Bureau web site, January 14, 2014.) Excluding auto sales, December retail sector sales climbed 0.7% after a 0.2% increase in November.
Are these retail sector sales numbers the latest indication that the economy is getting stronger as we begin 2014?
Well, that depends on how you look at it. Month-over-month, the retail sector sales data looks encouraging. But if you step back a bit and look at the last few months—or even year-over-year numbers—the retail sector and, by extension, the U.S. economy don’t look so bright.
Overall sales of furniture, sporting goods, building materials, garden equipment, electronics, and appliances fell month-over-month. Electronics and appliance stores, two key gift-buying outlets during the holiday season, tripped in November and December. Year-over-year, electronics sales were up a paltry 0.7%.
Department store revenues were essentially flat in November compared to October and were down slightly in December. Overall 2013 department store sales were down 4.7% from 2012.
So now I ask you, will the good … Read More
Are emerging markets worth looking at in 2014? Not too long ago, emerging market equities witnessed a pullback—when the taper talk came on the horizon. As a result, investors are asking if this has now created some value in these markets.
Before going into any details, investors have to keep one very important aspect of investing in mind: cheap doesn’t mean good value. Investors shouldn’t be interpreting falling prices as “value coming back to the market.” In some cases, this may be true, but in other cases, if the prices are falling, there’s a reason.
You see, emerging markets are going through some troubles, and as a consequence, their equity prices are a little vulnerable.
For example, India, the third-largest economy in Asia, reported a decline of 9.6% in 2013 auto sales. This was the first decline in auto sales since 2002. This well-known emerging market is struggling with high inflation and low economic growth—or a period commonly referred to as “stagflation.” In the fiscal year 2013, India’s economic growth was the lowest in almost 10 years, and inflation is running at 10%. (Source: Choudhury, S., “Indian Car Sales Slump for First Time in a Decade,” Wall Street Journal, January 9, 2014.)
China, another major emerging market, has been seeing its fair share of trouble as well. This year the country is expected to post growth that’s nothing like its historical average. In December, the HSBC China Manufacturing Purchasing Managers’ Index (PMI)—a gauge of manufacturing activity in the country—declined to a three-month low. (Source: “HSBC Purchasing Managers’ Index Press Release,” Markit Economics web site, January 2, 2014.)
Brazil, a common … Read More
On the surface, the data suggest there’s economic growth in the U.S. economy. We hear that the unemployment rate is declining. Incomes in the U.S. economy are increasing. Consumers are buying more and more goods—as a result, we are going to see higher U.S. gross domestic product (GDP). Growth is intact…right?
Sadly, when I examine the details, I really question if this is all a mirage. Is there really economic growth in the U.S. economy?
You see, economic growth is when the general standard of living improves. It’s just that simple. If people are getting jobs that pay them well, you have economic growth. If average Joe American is able to buy the goods he wants, you have economic growth.
There are troubling developments in the U.S. economy that can derail all the talks of economic growth. Unfortunately, they are not very often mentioned in the mainstream media.
First of all, I see a disparity happening between the rich and those who are not so fortunate in the U.S. economy. This is something to be mindful of, because it can have massive side effects. An example of this I witnessed was in the 2013 auto sales for the U.S. economy. The sales of automakers that make affordable and family-oriented cars like General Motors Company (NYSE/GM) and Ford Motor Company (NYSE/F) witnessed subdued growth. On the other hand, luxury car makers saw massive increases. For example, sales of the “Maserati” increased by 74.7%. On the other end of the spectrum, sales of cars and light vehicles at General Motors only increased by 7.3%. (Source: Motor Intelligence, “U.S. Market Light Vehicle Deliveries … Read More
“Just give up being so negative; there’s economic growth in the U.S. economy.”
These were the exact words of my good old friend, Mr. Speculator. Over the weekend, when I received a call from him, he added, “You see the average American is better off than before. There are jobs; and no matter where you look, you won’t find much negativity. Look at the stock markets; they probably will show a 30% increase for 2013.”
Sadly, Mr. Speculator has become a victim of the false assumptions that seem to prevail in the markets these days. He’s basing his conclusion on just a few indicators that he looked at from just the surface, not looking much into the details. For example, the stock market doesn’t really portray the real image of the U.S. economy, but it’s used as one of the indicators.
Here’s what is really happening in the U.S. economy that keeps me skeptical.
First of all, jobs growth in the U.S. economy has been center stage for some time. I agree that the unemployment rate has gone down, but I ask where the jobs were created. In November, for example, we saw the unemployment rate in the U.S. economy reach seven percent, and it sent a wave of optimism across the mainstream. Sadly, a major portion of the jobs created for that month were in the low-wage-paying industries. Mind you; this has been the trend for some time now. (Source: “Employment Situation Summary,” Bureau of Labor Statistics web site, December 6, 2013.) In periods of real economic growth, you want equal jobs creation, which we are clearly missing in … Read More
If you think you can judge a book by its cover, then you must believe the U.S. economy is doing really, really well. After all, consumer confidence is up and misery is down. However, looking past the cover, the pages of underlying economic indicators suggest the average American investor should be a little concerned.
But first, the good news! The U.S. Misery Index has fallen to a four-year low. The Misery Index is calculated by adding a country’s unemployment rate to the inflation rate, the logic being that we understand what stubbornly high unemployment mixed with the soaring price of goods translates into—misery.
The higher the score, the more miserable we are. For example, in August 2008, when the U.S. stock markets started to tank, the Misery Index stood at 11.47; when President Obama came to office in January 2009, it registered at 7.83; during the debt ceiling crisis in the summer of 2011, the index topped 12.87. Over the last three consecutive months, it’s been on the decline. In July, it came in at 9.36 and in October, it was 8.3. (Source: “Misery Index by Month,” United States Misery Index web site, last accessed December 13, 2013.)
According to the widely followed Thomas Reuters/University of Michigan preliminary December consumer confidence index, consumer confidence rose to 82.5—the strongest reading since July. In November, consumer confidence was 75.1, according to the index; economists were predicting a reading of 76.0.
Why the increased optimism? American consumer confidence levels are improving thanks to the better-than-expected drop in November unemployment, improved non-farm employment numbers, and strong preliminary gross domestic product (GDP) results. Stronger-than-expected consumer … Read More
When it comes to building a balanced portfolio, investors like to find stocks that provide both value and growth. If you’re a value investor, you’re always on the lookout for companies that are cheap relative to their earnings, assets, or price-to-book value; in other words, they look for what’s undervalued.
A growth investor, on the other hand, likes to look at publicly traded companies that are in a position to rapidly increase their revenues and profits; they want stocks with excellent long-term growth potential. This could include those stocks that have provided revenue and earnings guidance that is expected to outperform the market or industry.
While sticking with one strategy over the other can work, it can also lead to lurching gains when your investment strategy hits economic headwinds. However, combining both strategies can produce more consistent returns.
But if profitable investing really was that easy, everyone would be following this investment strategy, which means no one would be making money.
The fact of the matter is that in this economic environment, it’s pretty tough to find unloved, overlooked value and growth stocks. That’s because virtually everything is going up.
The S&P 500 is up 26% year-to-date and 15% since its pre-Great Recession high. Not to be outdone, the Dow Jones Industrial Average is up more than 21% since the beginning of the year and up roughly 13% from its pre-recession high. The NASDAQ is hands down the top performer so far this year, up 30% since January 2 and more than 40% since peaking in 2007.
In a bull market where it seems like everything is going up, it’s … Read More
Consumer confidence in the U.S. economy is bleak, and if it doesn’t pick up, the economic growth in the U.S. economy will be in jeopardy, and those who are highly affected by it—companies in the consumer discretionary sector—will face troubles.
What many forget is that consumer confidence and consumer spending have a direct relationship; if consumer confidence declines, we generally see consumer spending decline as well. As consumers become worried about their jobs, financial conditions, and/or general economic conditions, they tend to pull back on their spending. Would you go buy a luxury car or big household items if you knew that your job was in jeopardy, or you had no or very little savings?
The Conference Board Consumer Confidence Index, an index that tracks the sentiment of consumers in the U.S. economy, continued its slide in November after sharply declining in October. In November, it sat at 70.4, 2.8% lower from the previous month, when it was 72.4. (Source: “Consumer Confidence Declines Again in November,” The Conference Board web site, November 26, 2013.)
This isn’t all for consumer confidence. One of the clearest examples of bleak consumer confidence was just last week, at the Black Friday sales. We saw consumers become very cost-savvy, which resulted in retailers opening stores early and providing very deep discounts. Early indicators from the National Retail Federation state that consumers spent an average of $407.02 from Thursday through Sunday, down about four percent from what they spent last year. (Source: National Retail Federation press release, December 1, 2013.)
What does it mean for investors?
Investors have to keep a few important factors in mind … Read More