economic growth
What China-Japan APEC Talks Could Mean for Investors
By George Leong for Daily Gains Letter | Nov 12, 2014
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
Interest Rates: Why They’re Not Headed Up Anytime Soon
By George Leong for Daily Gains Letter | Sep 22, 2014
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
How the ECB’s Actions Could Boost U.S. Markets
By Moe Zulfiqar for Daily Gains Letter | Sep 22, 2014
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
How to Hedge Against a Stalling Global Economy
By George Leong for Daily Gains Letter | Sep 17, 2014
The stock market charts are showing some hesitation once again following the recent technical breaks to new record-highs for the S&P 500 and Dow Jones Industrial Average.
On the charts, the blue chip DOW is back below 17,000. Its continued failure to hold after breaking above 17,000 for the fifth time is a red flag that suggests more weakness and vulnerability could be in the works for the stock market on the horizon.
Small-cap stocks are also subject to some selling again with the Russell 2000 declining to below both its 50-day and 200-day moving averages on Monday morning. The breach of the moving average is worrisome. The index will need to find support at current levels or risk a fall to the 1,140 level.
Here are the issues I see for the stock market at this time. While I still see potential higher gains ahead for the stock market, there are also some indications of a possible stock market correction around the corner.
You may be seeing targets for the S&P 500 rise, but I feel there could likely be some pausing and weakness ahead of this.
The surfacing of soft economic news for the global economy is a concern for economies worldwide, including the U.S. economy, and overall economic growth.
The European Central Bank (ECB) recently launched fresh stimulus for the eurozone. Clearly, this is needed. The Organisation for Economic Co-operation and Development (OECD) just cut its outlook for the eurozone’s gross domestic product (GDP) growth, revising it to a paltry 0.8% this year and 1.1% for 2015. Folks, this is weak and in my view, it indicates … Read More
Where Oil Prices Are Headed
By George Leong for Daily Gains Letter | Sep 15, 2014
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
Top Metal for Profits Right Now
By George Leong for Daily Gains Letter | Sep 12, 2014
A look at precious metals shows gold and silver are devoid of any momentum at this time, while copper has been steadily retrenching from its recent highs.
Copper is playing off of the global economic growth, but a metal that is surging on the charts and catching the imagination of metal traders on the London Metal Exchange is zinc.
Zinc is used in numerous industrial and consumer applications. Steel companies use zinc as a rust inhibitor, so it’s quite important to manufacturing. The United States Mint also uses zinc to make pennies.
The problem is that the world supply of zinc is contracting.
However, zinc is currently around a three-year high and looks good as an investment opportunity at this time.
An intriguing small-cap zinc play that has been sizzling on the chart and is an investment opportunity in the global economic renewal and supply issues is Horsehead Holding Corp. (NASDAQ/ZINC). The company’s share price is up 62% from its 52-week low and has easily outperformed the S&P 500 over the past year with a 45% advance. But despite the company’s advance, Horsehead seems to still have upside potential, which suggests the company could offer a good investment opportunity.
Operating via its Horsehead Corp. subsidiary, the company produces specialty zinc and zinc-based products that are made from recycled materials.
The company closed an old plant and replaced it with a newer, more advanced facility that will produce better fabricated steel products along with raw materials found in the manufacturing of rubber tires, alkaline batteries, paint, chemicals, pharmaceuticals, and stainless steel.
Products include zinc metal used as a protective coating to … Read More
Why This Travel Company’s Stock Just Keeps Going Up and Up
By George Leong for Daily Gains Letter | Sep 3, 2014
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
What I’d Consider Buying as the Market Moves Higher Again
By George Leong for Daily Gains Letter | Aug 27, 2014
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
Trouble in the Global Economy? (McDonald’s, Wal-Mart Say So)
By George Leong for Daily Gains Letter | Aug 13, 2014
Think all is well—or at least OK—with the global economy? Don’t relax too much, as that doesn’t seem to be the case. As we all know, spending drives economic growth, whether it’s from consumers, businesses, investments, or governments. Without one part or another, there would be added pressure on other areas.
The United States recently saw a strong advance second-quarter gross domestic product (GDP) growth reading that pointed to relatively strong economic growth. But there are other signs that suggest otherwise.
Where I like to look is to the major multinationals and the spending on their goods in the global economy.
A pretty decent barometer on the global economy is consumer spending in restaurants, especially with fast foods.
Fast-food heavyweight McDonalds Corporation (NYSE/MCD), for instance, is struggling to find growth in the global economy, and that’s because spending from the other 99% is stalling.
The maker of the Big Mac announced that its comparable sales for its stores in the global economy fell 2.5% in July. The decline was highlighted by a 3.2% drop in the U.S., along with a massive 7.3% plummet in the Asia/Pacific, Middle East, and Africa (APMEA) regions. Only Europe edged slightly higher.
In its second quarter (ended June 30, 2014), McDonald’s reported a 1.5% contraction in its comparable sales in the U.S.
The reality is that the numbers clearly suggest a continued struggle to lure customers into stores. This is significant, as McDonald’s is a big buyer of products, such as beef, milk, chicken, and vegetables, so a decline in sales in the global economy means less demand for these products. This would translate into … Read More
How to Play the Strong GDP Growth
By George Leong for Daily Gains Letter | Aug 4, 2014
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
Why This Company Will Fare Well as the Economy Stutters
By George Leong for Daily Gains Letter | Jul 28, 2014
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
What the World Cup and the Stock Market Have in Common This Year
By George Leong for Daily Gains Letter | Jul 14, 2014
Last Wednesday, I had fun watching the World Cup game between Argentina and the Netherlands. As strange as it may sound, I actually found that the tension and apprehension throughout the match reminded me of the stock market.
Despite the Dow Jones Industrial Average recently trading above 17,000 and the S&P 500 at another record-high, I still sense the stock market is vulnerable to selling. I think this will be especially true if the second-quarter earnings season pans out as expected, devoid of any major growth in earnings or revenues.
Alcoa Inc. (NYSE/AA) offered up a nice report, but I’m not sure how much it counts, as the company really is not a major bellwether as to the health of the global economy.
The reality is that consumer spending drives the economy and the stock market. I would rather look at what’s happening at bellwether global retailer Wal-Mart Stores Inc. (NYSE/WMT) than Alcoa. The “Death Star” of the retail sector is struggling for growth around the world—and that cannot be good news. Even discount stores, which tend to be more immune to slowing, are showing signs of weakness.
In other words, while the stock market has edged higher, I still wouldn’t get too comfortable at this time. I think we could see another minor stock market correction should earnings tank. Of course, this would provide us with an investment opportunity to buy shares on weakness in the stock market.
Now there’s some optimism following the Federal Reserve’s dovish remarks from its June meeting, as there’s a sense that interest rates will not ratchet higher until after mid-2015, depending on the … Read More
Getting Ready for the Stock Market’s Coming Bumpy Ride
By George Leong for Daily Gains Letter | Jun 27, 2014
The S&P 500 traded at an intraday record on Tuesday, but it’s not time to relax and take it easy, as was the situation for the past few years since the Great Recession.
It’s time for some hand-holding again. While the broader market has edged higher, I continue to see some nervousness and selling pressure in the small-cap and growth elements of the stock market. The Russell 2000 is holding above its 200-day moving average (MA), but it’s tenuous.
As has been the case in the past years, the direction of the Federal Reserve is helping to support the stock market. Since taking over for the former Fed chairman Ben Bernanke, Janet Yellen appears to be just as, if not more, dovish than her predecessor, and this pleases the stock market.
The reality is that the Fed has said it will likely not begin to increase the historically low interest rates until sometime in 2015, and even then, it will likely only be a small increase. The central bank wants stronger jobs creation and economic growth.
The disastrous first-quarter gross domestic product (GDP) contraction of 2.9% was horrible despite blaming some of the poor results on the winter. A closer look shows declines on spending across the board that negatively impacted the GDP growth. The contraction in durable goods spending in May also supports the continued fragility in the economy and stock market.
The problem is that investors have minimal options for investing compared to the stock market. While the risk is prevalent, it’s clear investors are willing to assume some of the risk, but not to the same degree … Read More
Why Now Is the Opportune Time to Invest in Gold
By George Leong for Daily Gains Letter | Jun 18, 2014
Gold and oil are finally seeing some upward lift, but it has more to do with the geopolitical landscape than inflation and economic growth.
As I said in recent weeks, the price of gold could be headed higher, but only if we see a rise in geopolitical tensions. That’s what we are witnessing at this time, so there could be quick money to be made.
While the Ukraine situation appeared to be settling down, the destruction of a Ukrainian aircraft with soldiers on board will not help the already tense situation. Russia has also halted the flow of oil into Ukraine after failing to reach a compromise on only owing for past oil and the price for future oil. This failure could cause a bottleneck not only in Ukraine, but also in Poland and other European countries that depend on Russian oil. Of course, in the worst-case situation, this could impact growth in the eurozone at this critical time when the region is still fragile, with high unemployment and mixed economic renewal.
We also have the massive uprising in volatile Iraq, where the brutal ISIS (the Islamic State in Iraq and al-Sham) rebel militia is spreading its control in the country, now marching on Baghdad. The negative implications of ISIS increasing its control over the country could wreak havoc not only on the oil production out of Iraq, but it could also create geopolitical instability in this already volatile region that also includes tensions on Syria and Iran.
The two events will likely drive safe haven buying in gold, which has been moving higher after bouncing off some support around … Read More
Why I Believe This Market Is Heading Higher—For Now
By George Leong for Daily Gains Letter | Jun 11, 2014
This is a stock market that continues to want to move higher despite the lack of any major catalyst.
Sure, the economy is “recovering,” but there are still issues with consumer spending, especially on non-essential durable goods. The headline durable orders reading came in at 0.8% growth in April, above the consensus 1.3% decline but below the revised 3.6% growth in March. For the economy to really confirm the stock market, we need to see growth here. This will also help to drive buying in small-cap stocks that trade with the economy.
The jobs scene is finally beginning to look better since the Great Recession in 2008. Jobs creation came in above 200,000 for the fourth straight month. The unemployment rate held at 6.3%. With the latest batch of jobs numbers, the economy has now recovered all of the 8.7 million jobs lost during the recession. The Federal Reserve will likely refrain from raising interest rates until sometime in mid-2015, but continue to cut its bond buying to zero by year-end.
The fact there’s really a lack of investment alternatives to the stock market is helping. With the yield on the 10-year bond at around 2.5%, I doubt investors or institutions are rushing to buy. Why would you when you can buy higher-yielding dividend paying stocks with capital upside?
The renewal in the global economy is also helping. China hasn’t sunk into the economic abyss as some pundits have been predicting. Its neighbor Japan is finally showing signs of economic growth following decades of doing little. Like the United States, Japan is spending its way to recovery. The country’s first-quarter … Read More
My Investing “Shopping List” for a Tough Retail Environment
By George Leong for Daily Gains Letter | May 16, 2014
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
Three Variables to Consider Before Investing in Gold
By George Leong for Daily Gains Letter | Apr 16, 2014
While there continue to be many gold bugs out there, I’m not one of them—but I do see gold as a trading opportunity.
Given what we have seen so far and looking ahead, I just don’t see gold as a buy-and-hold strategy at this time. Yes, there’s money to be made, but it’s going to be for traders only.
The recent break below $1,300 an ounce and the subsequent rally to the current $1,325 level is an example of such a trade, not a new trend that’s developing on the charts, based on my technical analysis. The chart below shows the potential declines in the metal towards $1,200 and $1,100 an ounce.
Chart courtesy of www.StockCharts.com
Many gold supporters will counter that China is hoarding gold and India will soon pick up its buying. While I don’t argue against this, I just don’t see the yellow metal retaining its luster at this point unless a war breaks out in Ukraine and Russia intensifies its threat. If this should happen, it would drive Russia’s gross domestic product (GDP) growth lower and could result in the fragile eurozone and European economies retrenching back into a recession that just ended.
I wrote about gold several weeks back as a trading opportunity on dips below $1,300. I continue to hold on to that belief, but longer-term, the yellow metal could fade and fall back towards $1,200 or less.
My thinking is that inflation is nowhere to be seen in the United States, China, or Europe. (In fact, deflation may be more of a concern here.) And unless inflation picks up, the yellow metal isn’t … Read More
Three Ways to Combat a “Recovery” That Even the Fed Says
By John Whitefoot for Daily Gains Letter | Apr 2, 2014
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
How to Profit from ECB’s Attempts to End Economic Slowdown
By Moe Zulfiqar for Daily Gains Letter | Mar 31, 2014
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
S&P 500 Approaching Inflection Point; How to “Insure” Your Portfolio
By Sasha Cekerevac for Daily Gains Letter | Mar 26, 2014
The winds are changing, my friends. For most of the past year, each time the S&P 500 sold off, it was a buying opportunity. I think we are at an inflection point this year, as we all know nothing lasts forever.
I believe it all began to emerge last week with the Federal Reserve meeting. As long-time readers know, over the past couple of months, I’ve been warning that once the Federal Reserve begins to adjust monetary policy, this will have a negative impact on the S&P 500.
With the Federal Reserve continuing to reduce its asset purchase program, investors are now calculating the length of time until it’s no longer. The reason for distress in the market is that Federal Reserve Chair Janet Yellen announced a tentative six-month timeframe upon completion of the asset-purchase program that the Federal Reserve will begin increasing short-term interest rates.
Why the concern?
Taking a quick look from several angles, this transition won’t be smooth. To begin with, there’s the old saying on Wall Street: “Don’t fight the Fed.” It is obvious that the Federal Reserve is dead set on reducing monetary stimulus and raising interest rates.
Very rarely does the S&P 500 increase during a period of monetary tightening. This is not to say that the S&P 500 will drop tomorrow; the Federal Reserve is continuing monetary easing for the moment. But investors in the market should be aware that once the Federal Reserve begins changing its monetary stance, the S&P 500 will be affected.
Another concern is that economic growth in America isn’t exactly on fire. While it’s true that we aren’t … Read More
Three Stocks to Profit from New and Old Cars Alike
By John Whitefoot for Daily Gains Letter | Mar 25, 2014
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
What’s Handicapping First-Time Homebuyers?
By John Whitefoot for Daily Gains Letter | Mar 24, 2014
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
How to Profit from the Two Things Consumers Can’t Do Without
By John Whitefoot for Daily Gains Letter | Mar 18, 2014
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
What’s Happening in the Copper Market Should Alarm You…
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
This Sector Sure to Benefit as Online Retail Sales Grow
By John Whitefoot for Daily Gains Letter | Mar 10, 2014
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
Should Investors Leave Auto Stocks Behind This Spring?
By John Whitefoot for Daily Gains Letter | Mar 6, 2014
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
Three Homebuilders to Short During $336-Billion Housing Gap
By John Whitefoot for Daily Gains Letter | Mar 4, 2014
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
This One Factor Could Make or Break Your Portfolio
By Moe Zulfiqar for Daily Gains Letter | Mar 3, 2014
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
Two Precious Metal Plays for Waning Consumer Confidence
By John Whitefoot for Daily Gains Letter | Feb 27, 2014
Against a backdrop of record-highs for stocks, consumer confidence is waning—seeing its greatest drop in four months. The S&P 500 touched record intra-day territory earlier in the week, suggesting the bull market remains intact and the well-earned and (far too) short-lived mini correction may be over.
Investors and analysts, it seems, have embraced blaming the cold weather for all our economic ills, effectively brushing aside weak U.S. housing numbers, jobs data, and manufacturing and retail sales.
Meanwhile, consumers—those who need jobs, houses, cars, and other items that support the companies that actually make up the S&P 500—seem to have lost faith in the economy. Consumer confidence levels in the U.S. fell more than expected in February, as Americans became more pessimistic about the economy and jobs.
Consumer confidence levels fell to 78.1 in February from a revised 79.4 in January. Economists were expecting consumer confidence levels to increase in February to 80.2, proving, once again, that Wall Street does not have its finger on the pulse of American consumer confidence levels. (Source: “The Conference Board Consumer Confidence Index Declines Moderately,” The Conference Board web site, February 25, 2014.)
Not to fear though; The Conference Board said the decline in February’s consumer confidence toward business conditions, jobs, and earnings was only “moderate,” meaning, I suppose, that it could be worse.
But not too much…
Those optimistic Americans claiming jobs are plentiful increased slightly to 13.9% from 12.5%. Those who think jobs are hard to get were virtually unchanged at 32.5% from 32.7%. It’s incredible, really, that The Conference Board can, with a straight face, proclaim that our appraisal of current economic … Read More
Top Two ETFs for When Interest Rates Increase, Investor Sentiment Plummets
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
Weak Retail Environment an Investment Opportunity in Cash-Based Businesses?
By John Whitefoot for Daily Gains Letter | Feb 18, 2014
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
How the Trend Is Changing for Silver
By Sasha Cekerevac for Daily Gains Letter | Feb 12, 2014
One of the interesting things about investors is how so many become complacent over time. When precious metals like silver were rising steadily, more and more people jumped on the bandwagon. But times have changed.
With few people in the media talking about precious metals, I think it’s a good time to take a look at silver, as 2014 could potentially be a very strong year for the metal.
Obviously, we know that 2013 was a tough year for most of the precious metals, as investors began to believe that economic growth was going to accelerate globally. Over the last couple of months, it is clear that global economic growth is far from certain.
Uncertainty is an important component for the precious metals market, and we have seen silver react much more sharply than the other commodities, both to the upside and the downside.
As people become more uncertain, they look to assets that they believe can help protect their wealth. The emerging markets are getting hit badly, including Turkey hiking rates massively in one day, Argentina and Venezuela having serious issues, the Ukraine experiencing riots, and China now exhibiting signs of a slowdown in economic growth. Considering all of this, it’s no surprise that many people in nations around the world continue to accumulate precious metals, including silver.
An interesting note from last week made by the European Central Bank (ECB) president, Mario Draghi, in his comments following the central bank meeting is the possibility that there could be additional monetary stimulus (money printing) coming shortly.
With economic growth nowhere in sight in Europe, to have yet another central … Read More
The Stocks That Are Most Attractive After January’s Sell-Off
By Moe Zulfiqar for Daily Gains Letter | Feb 11, 2014
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
Year
Real GDP
Stock Market Sell-Off Making This Sector an Attractive Buy?
By John Whitefoot for Daily Gains Letter | Feb 10, 2014
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
How to Prepare for the Stock Market Sell-Off I’ve Been Warning About
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
First Step to a Winning Investment Strategy
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
How to Profit from the Collapse in Emerging Markets
By John Whitefoot for Daily Gains Letter | Jan 30, 2014
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
Why Gold Looks Good to Me in 2014
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
As Consumer Confidence Wavers, Gold Bugs Come Back from the Sidelines
By John Whitefoot for Daily Gains Letter | Jan 21, 2014
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
What the Worst Start to the Year for the Stock Market Since 2005 Means
By Moe Zulfiqar for Daily Gains Letter | Jan 17, 2014
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
Are Retail Sales Indicators Really as Positive as They Seem?
By John Whitefoot for Daily Gains Letter | Jan 16, 2014
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
Hidden Value in the Emerging Markets?
By Moe Zulfiqar for Daily Gains Letter | Jan 14, 2014
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
What Really Bothers Me About the So-Called U.S. Economic Growth
By Moe Zulfiqar for Daily Gains Letter | Jan 10, 2014
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
In Review: 2013 and the Game Plan for Investors in 2014
By Moe Zulfiqar for Daily Gains Letter | Dec 23, 2013
We are reaching the end of the year, and it has really been one stellar year for the key stock indices. The S&P 500 is up roughly 25%. Other key stock indices, like the Dow Jones Industrial Average and the NASDAQ Composite index, have shown very similar returns.
Just look at the chart of the S&P 500 below:
Chart courtesy of www.StockCharts.com
The chart shows nothing but a solid uptrend—the S&P 500 continues to make higher lows and higher highs. It seems the momentum is towards buying.
But looking at how 2013 progressed, as the key stock indices continued to march higher, a few disturbing phenomena took place.
First, sales of companies on key stock indices aren’t really meeting expectations. For example, in the third quarter, only 52% of the S&P 500 companies were able to beat their revenue expectation, while 73% of them were able to beat their corporate earnings estimates. (Source: “Earnings Insight,” FactSet, December 6, 2013.)
Second, companies on key stock indices have logged a record high for share buyback activity. In fact, in 2013 so far, share buybacks have amounted to $460 billion—this is the highest amount since 2007. (Source: Jaisinghani, S. and Raghavan, M., “3M sets year’s biggest U.S. buyback plan, raises dividend,” Reuters, December 17, 2013.) At the very core, share buybacks are a kind of “financial engineering.” Through buybacks, companies on the key stock indices can make their corporate earnings per share look better without having to increase their overall earnings.
Last but not least, 2013 wasn’t all that great when it comes to economic growth in the U.S. economy. The unemployment rate … Read More
The Mirage Called a “U.S. Economic Recovery”
By Moe Zulfiqar for Daily Gains Letter | Dec 17, 2013
“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
U.S. Misery Index Falls to Four-Year Low
By John Whitefoot for Daily Gains Letter | Dec 16, 2013
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
These Value and Growth Stocks Could Outperform the Bull Market
By John Whitefoot for Daily Gains Letter | Dec 13, 2013
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
The “For Sale” Sign on Precious Metals
By Sasha Cekerevac for Daily Gains Letter | Dec 13, 2013
Do you feel wealthier today compared to last year?
According to the Federal Reserve, you should, as the household net worth of Americans rose 2.5% between the second and third quarters of 2013 for a total of $77.3 trillion. (Source: “Financial Accounts of the United States,” Federal Reserve, December 9, 2013.)
The Federal Reserve calculates household net worth by looking at the value of stocks, homes, and other assets, minus mortgages and debts.
In fact, the nominal total wealth is at a record high. Adjusted for inflation, the current level of net worth is approximately one percent below the peak prior to the Great Recession. On paper, it appears as though economic growth is booming thanks to the Federal Reserve.
But if you’re like most Americans, you’re probably skeptical of this so-called economic “growth,” and rightfully so, since the underlying fundamentals of economic growth really are missing.
While we are seeing some jobs growth, it’s obvious that the current situation is far from ideal. Millions of people remain unemployed, and the jobs being created are of poor quality.
However, because of the Federal Reserve’s easy money printing, asset prices have been boosted upward, creating a significant amount of wealth for the top portion of America’s society.
Over the long term, we cannot have sustainable economic growth if only the top five to 10% of Americans participate. While the Federal Reserve has tried to create economic growth for everyone, the policies are quite clearly tilted toward the very wealthy.
What does this say about the current level in the stock market?
Many people in the mainstream media are stating that the … Read More
Are These Retailers Worth the Investment?
By Moe Zulfiqar for Daily Gains Letter | Dec 3, 2013
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
Why It “Won’t Be Different” This Time Around
By Moe Zulfiqar for Daily Gains Letter | Nov 26, 2013
Buy the U.S. dollar, because it’s going to gain strength going forward, or so say the mainstream. The reasoning behind this investment strategy is very simple: the central banks of major economic hubs are working to devalue their currencies. As a result, there will be a rush to buy the U.S. dollar—it’s proven to be safe in the past. Just look at Japan, for example; it continues to be in favor of printing, which is why you should sell the Japanese yen. The European Central Bank (ECB) has hinted it might go ahead with quantitative easing—sell the euro. Others, like Australia, have already lowered their interest rates, and while they haven’t started printing yet, but say they are open to it—sell the Australian dollar.
In the short run, these investment strategies may be viable. In fact, since late October, we have been seeing the U.S. dollar gain strength compared to other major currencies. Please look at the chart below of the U.S. dollar index.
Chart courtesy of www.StockCharts.com
I question if this strategy of buying the U.S. dollar is going to be profitable in the long run. Those who are looking at the fundamentals of the U.S. dollar from a long-term perceptive will agree with me that they are looking very bleak.
First, the printing continues. We heard from the Federal Reserve that it will continue to print U.S. dollars in exchange for government bonds and mortgage-backed securities (MBS). Sadly, what many don’t realize is that even if the central bank says it will taper, it simply means it will be printing, just at a slower pace. What this printing … Read More
