“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
The U.S. stock market rally has been on a solid run this year, thanks in large part to the Federal Reserve’s $85.0-billion-per-month quantitative easing policy—well, that and some solid economic indicators. But the question remains: will the momentum continue into 2014?
It all depends on whether or not the U.S. stock market rally follows the laws of physics. For example, when it comes to momentum, an object will continue unless force is applied against it, either a huge amount of force all at once or an applied force over a given period of time. On the other hand, the more momentum something has, the harder it is to stop.
The fuel that has helped propel the U.S. stock market rally over the last number of years could be flickering out. Thanks to better-than-expected employment and retail numbers and strong preliminary gross domestic product (GDP) numbers, many think the Federal Reserve will start to taper its quantitative easing strategy sooner than later.
The end of easy money, some think, could put a cramp in the stock market’s four-year-plus rally—or at least make it run a little more slowly in 2014 than it did in 2013. Whereas the S&P 500 is up roughly 25% year-to-date, analysts think it will grow by as little as six percent and as much as 11% in 2014. This means that the S&P 500 will experience another year of record-highs in 2014, but not quite as bullish as 2013. (Source: “Here’s What 14 Top Wall Street Strategists Are Saying About The Stock Market In 2014,” Business Insider web site, December 13, 2013.)
Those looking to outpace the … Read More
There’s an investment opportunity in the making at one of the eurozone nations for U.S. investors, and it’s becoming more compelling each passing day.
We know the eurozone still burns. The economic slowdown in the common currency region still prevails. We have heard from the European Central Bank (ECB) that it’s still trying to work very hard to break the strength of the economic slowdown. The central bank has lowered the benchmark interest rate and hinted that it might go ahead with a form of quantitative easing. In the past, we also heard the ECB say it will do whatever it takes to save the eurozone.
Sadly, it’s failing.
You see, when the eurozone crisis began, the problems were contained to a limited number of countries, but now we see the economic slowdown spreading through the region; now, the stronger eurozone nations are falling prey to it.
The opportunity? France.
France is the second-biggest economic hub in the eurozone. The economic slowdown in the French economy continues to gain strength. We heard that in the third quarter, the French economy contracted by 0.1%. In the second quarter, it showed growth of 0.5%. (Source: “French economy contracts 0.1 pct in third quarter,” Reuters, November 14, 2013.)
Unemployment in the French economy is also on the rise. In September, the unemployment rate in France reached 11.1%—that’s 3.26 million individuals who were out of work. In October, it declined to 10.9%, but that’s still higher than it was during the same period a year ago. In October of 2012, the unemployment rate in the second-biggest eurozone nation was 10.5%. (Source: “Euro area unemployment … 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
The central bank of Japan has taken center stage when it comes to using extraordinary measures to revive growth in an economy. In an effort to boost the Japanese economy, the central bank has resorted to quantitative easing. And unlike the U.S. Federal Reserve, Japan is also involved in buying exchange-traded funds (ETFs) and real estate investment trusts (REITs), not just government bonds and mortgage securities.
Unfortunately, the central bank is outright failing. One of the main goals of the Bank of Japan is to inject inflation into the Japanese economy through money printing, aiming for an inflation rate of two percent. Sadly, this isn’t happening; inflation in the Japanese economy is running far below the targeted level, and there may not even be light at the end of the tunnel.
“A 1 percent inflation rate may be possible, but that’s different to the Bank of Japan target,” said Takahiro Mitani, manager of the Government Pension Investment Fund of Japan (GPIF), the world’s largest pension fund. “We haven’t seen real demand to pull prices up yet. Whether inflation will be stable is questionable.” (Source: Winkler, M., “World’s Biggest Pension Fund Sees Japan Fail on 2% Inflation,” Bloomberg web site, December 4, 2013.)
Consumption is one of the factors that can help bring inflation into an economy. Sadly, the Japanese economy is seeing hardships here as well, as consumer confidence, one of the best indicators of where consumer spending will go, is declining. Between September and November, consumer confidence in the Japanese economy declined more than eight percent. The index tracking consumer confidence stood at 45.7 in September and 41.9 in … Read More
As each day passes, more and more evidence builds up against the housing market in the U.S. economy. A significant amount of data is suggesting that the housing sector is cooling and will not continue to increase like it did in 2012, when institutional investors came in and bought homes in bulk, causing prices to skyrocket in some areas.
When I am looking at the housing market, I want to see home buyers. If the number of home buyers in the market increases or there are indicators that suggest it will increase, then I see no problem in thinking the housing market in the U.S. economy is going to see an uptick. But as it stands, this is not the case; home buyers are shying away from the housing market.
The first evidence we’ve seen is through mortgage application activity tracked by the Mortgage Bankers Association. For the week ended November 28, applications for home loans in the U.S. economy declined 12.8% from the previous week. They have been declining for five consecutive weeks and now sit at their lowest level since September. If buyers were rushing into the U.S. housing market, we would see these numbers soar higher, not edge lower. (Source: “U.S. mortgage applications slide for fifth straight week: MBA,” Reuters web site, December 4, 2013.)
Secondly, existing home sales in the U.S. economy are suggesting a very similar phenomenon—buyers are not present. I look at first-time home buyers to see demand and, as I have said before, they are just not excited to buy. (See “More Evidence Housing Market Is Turning Cold.”)
Last but not the least, … Read More
Good news is not always what it seems. On the surface, October’s new U.S. housing market sales numbers came in well above the forecast. But dig a little into the foundation of the report, and you’ll find more than a few reasons to be skeptical.
But before we dig deeper, let’s first take a look at the overall numbers. In October, sales of new single-family houses came in at a seasonally adjusted rate of 444,000, a whopping 25.4% increase month-over-month above the revised September rate of 354,000 and a 21.6% increase year-over-year. (Source: “New Residential Sales in October 2013,” United State Census Bureau web site, December 4, 2013.)
Those are pretty solid numbers—at least, until you factor in the 20% margin of error on the numbers provided by the U.S. Census Bureau and Department of Housing and Urban Development.
On top of that, sales for June, July, August, and September were all revised lower. Sales were revised downward by 0.9% in June, 4.4% in July, 10% in August, and 6.6% in September.
It’s also all about perspective. On one hand, you could champion the U.S. housing market recovery by noting that the 25.4% increase from September was the biggest one-month gain in more than 30 years! On the other hand, October’s new U.S. housing market home starts number is tempered a little when you consider the September 2013 rate of 354,000 was the weakest reading since April 2012.
Still, you can’t ignore the fact that new starts in the U.S. housing market are up month-over-month—but what’s fueling the growth? It can’t be a result of sustained jobs growth, as the … Read More
A few days back, I got a call from my aunt, whom I haven’t spoken to in a while. It was shocking to me—no, not her calling, but rather what she asked me. Before I go into any detail, here’s some background information: as an investor, my aunt has a little experience with the stock market, but gave up because it didn’t suit her low risk tolerance.
“I have been saving money for some time now; it’s been sitting in my bank account and earning next to nothing,” she said to me. She heard on the news that the stock market in the U.S. is going higher and that the S&P 500 has reached its all-time high—she wanted to know what I thought she should buy. “I think it’s about time I take some risk,” she added.
My aunt hasn’t bought stocks in a while; in fact, she has missed out on all the gains made since the stock markets bottomed in 2009.
What does this tell me?
I find this a little scary, as should anyone who has been following the stock markets for a while. What my aunt said makes me skeptical; it shows that the notion of missing out is emerging. In the past, we have seen the stock markets reach their all-time highs, which gave investors the feeling they were missing out on gains. They bought, the key stock indices increased a little, and then the sell-off occurred; they got caught in it and lost a significant amount of their portfolio. Historically speaking, there are many examples of this.
As this is happening, I see the … 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
Major economic hubs in the global economy are in outright trouble, and each passing day there’s more economic data suggesting the slowdown is holding its own. Investors need to be wary about what’s happening, because it can affect their portfolio significantly.
The eurozone crisis, which sent ripple effects into the global economy, is rising again. In the early days of the eurozone crisis, we heard how the economies of such nations like Greece, Spain, and Portugal were suffering. Now, the bigger nations in the euro region are showing signs of stress. Consider France, the second-biggest economy in the eurozone, for example. This major economic hub in the global economy witnessed contraction in the third quarter. On top of this, France’s unemployment rate continues to increase.
Germany, the biggest economy in the eurozone and the fourth-biggest economic hub in the global economy, slowed in the third quarter. The gross domestic product (GDP) of the country increased just 0.3% in the third quarter. In the second quarter, Germany’s GDP increased by 0.7%. (Source: “Gross domestic product up 0.3% in 3rd quarter of 2013,” Destatis, November 14, 2013.)
Similarly, Japan, the third-biggest nation in the global economy, continues to struggle, despite the extraordinary measures the central bank and Japanese government have taken to boost the economy. In the third quarter, the growth rate of the Japanese economy slowed down. The GDP grew 0.5% from the previous quarter. The annual GDP growth rate of the Japanese economy was 1.9% in the third quarter. (Source: “Gross Domestic Product: Third Quarter 2013,” Cabinet Office, Government of Japan web site, November 14, 2013.)
Adding more to the … Read More
The Federal Reserve has been very accommodative. Its goals are very simple: it wants economic growth in the U.S. economy. As a result, the Federal Reserve is taking extraordinary measures, printing $85.0 billion a month and using it to buy U.S. bonds and mortgage-backed securities (MBS). The hope is that the money will go to the banks, which will lend it to consumers who then spend it, leading to economic growth.
Sadly, the problems continue to persist in the U.S. economy, leaving economic growth still far from sight. The techniques used by the Federal Reserve aren’t working: the unemployment rate continues to be staggeringly high, troubling trends have formed, and the inflation continues to be low—threats of deflation loom.
Given all this, one would assume there might be something else that the Federal Reserve can do. Unfortunately, instead of using different measures to fight the problems in the U.S. economy, the Federal Reserve is planning to keep on doing what it has been doing for years now. I believe the techniques used by the Fed will continue on for some time.
Here’s my reasoning: in a testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, the newly nominated chairman of the Federal Reserve, Janet Yellen, said, “We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession. Unemployment is down from a peak of 10 percent, but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential. At the same time, inflation has been … Read More
Emerging market equities have taken center stage these days because, according to some, the key stock indices in the U.S. economy are reaching the overpriced mark. Investors’ returns aren’t going to be as robust going forward; there’s a significant amount of noise about them taking the shape of a bubble.
With all this happening, investors are asking which emerging market economy they should invest in. Should they buy companies operating in India? Or is China still the best emerging market economy in which to invest?
The answer to this question is not as easy as it may seem to some. Investors have to keep in mind that each emerging market is unique—it presents different opportunities, risks, and rewards.
Take China, for example. As key stock indices in the U.S. economy have increased this year—the S&P 500 is up more than 23% so far—the stock market in the Chinese economy hasn’t performed as well; in fact, the key stock indices there have declined. Please look at the chart below: the Shanghai Stock Exchange Composite Index has declined more than 6.4% between January and October.
Chart courtesy of www.StockCharts.com
Does this mean there’s room for growth? Don’t be too quick to judge. The Chinese economy is going through a bit of an economic slowdown. This year, the country’s gross domestic product is expected to increase much less than its historical average; the growth of the Chinese economy is projected to be lower next year as well. At the same time, there’s noise stating that there may be a credit crisis in the country.
If all of the trouble growing in the Chinese … Read More
Love them or hate them, fast food restaurants are an American institution. That’s not a huge surprise when you consider the hamburger was first created here around 1900 and the first fast food restaurant, A&W, opened its doors in 1919. For almost 100 years, our taste buds have been both regaled and assaulted by any number of fast food restaurants, now affectionately called “quick service.”
From its humble beginnings, the restaurant industry has become an economic juggernaut, generating around $1.8 billion in daily sales. In 2013 alone, restaurant industry sales are expected to generate $660.5 billion; that’s equal to roughly four percent of the U.S. gross domestic product. (Source: “2013 Restaurant Industry Pocket Factbook,” Restaurant.org, last accessed November 8, 2013.)
While the U.S. restaurant and quick service industry took a hit immediately following the Great Recession, the industry has bounced back. During the second quarter, trips to quick service restaurants—which account for 78% of industry traffic—were up by one percent, while consumer spending increased by three percent. (Source: “U.S. Restaurant Traffic Increases Modestly and Average Check Growth Drives Spending Gains in Q2, Reports NPD,” NPD Group web site, September 17, 2013.)
More specifically, traffic to fast casual restaurants, which is included under the quick service banner, increased by eight percent in the second quarter. After several consecutive quarters of decline, casual dining held steady. Things were not so good for midscale/family dining restaurants, however, which experienced a two-percent decline in traffic.
Even though the U.S. retail and food services sales results for the third quarter have not been released yet, the U.S. Census Bureau announced recently that advance estimates of … Read More
The Japanese economy has been in trouble for some time. The central bank of the country and the government of Japan have tried many different tactics to revive the economy. They have been struggling, with the interest rates in the Japanese economy being kept low to induce growth. Japan’s central bank has tried many different rounds of quantitative easing and failed, deflation became a problem, and growth isn’t there.
Not too long ago, a very aggressive quantitative easing policy was introduced into the Japanese economy. The goal was very simple: to increase both exports and inflation in the country. Exports would give a boost to the Japanese economy, and inflation would take the country from the deflationary rut it has been in for many years.
Now one must ask: what did Japan’s central bank and government anticipate actually happening in the Japanese economy? Is there inflation, and are they exporting to the global economy?
Well, it turns out they are failing at both.
Their goal of exporting more to the global economy isn’t panning out as they expected. According to the Japanese Ministry of Finance’s customs data, the trade deficit (more imports than exports) of the Japanese economy in September was 33% higher than the previous month, standing at 1.09 trillion yen, compared to 820 billion yen in August. (Source: “Seasonally adjusted Values for September 2013 [Provisional],” Ministry of Finance Japan web site, last accessed October 21, 2013.)
So what’s happening on the inflation front?
Not too long ago, the central bank of Japan stated that it wants inflation to be around two percent in the Japanese economy. In August, … Read More
Despite Congress miraculously pulling the U.S. back from the brink of destruction by temporarily raising the debt ceiling and ending the U.S. government shutdown, Americans continue to be a pessimistic bunch. But can you blame us?
According to Gallup’s U.S. Economic Confidence Index, consumer sentiment remains in negative territory. After falling to -39 during the recent standoff in Washington, U.S. economic confidence has improved to -36. To use the term “improved” is being generous; in late May, the index was at -3. (Source: “U.S. Economic Confidence Index [Weekly],” Gallup web site, October 14, 2013.)
While the brinksmanship in Washington is (temporarily) over, our pessimism isn’t. According to another poll, 71% said economic conditions right now are poor, while just 29% said economic conditions are good—the lowest level of the year. Now granted, it takes time for economic confidence to return; following the debt negotiations in 2011, it took economic confidence five months to recover. (Source: Steinhauser, P., “CNN Poll: After shutdown, America is less optimistic about economy,” CNN web site, October 22, 2013.)
Unfortunately, it could be worse this time, thanks in large part to high unemployment and stagnant income and wages. And there’s also the fact that Washington only agreed to fund the government through to January 15, 2014 and extend the debt ceiling through February 7, 2014. Americans can’t get too optimistic about the economy knowing the government is just taking time to reload.
Fortunately, there are economic lands where optimism is blooming in light of real economic change. Economic optimism in the eurozone improved for the fifth straight month and hit a two-year high in September. The … Read More
If you listen to mainstream media, the power struggle in Washington is over. The left and right came together valiantly, raising the debt ceiling and ending the U.S. government shutdown. At least, they temporarily did; they basically just put a glow-in-the-dark “SpongeBob SquarePants” band-aid on a compound fracture.
Washington voted to temporarily fund the government through January 15, 2014, and extend the $16.7-trillion debt ceiling through February 7. Then it starts all over again—and if it’s a repeat of the last three weeks, it isn’t going to be pretty.
The self-inflicted U.S. government shutdown, according to one estimate, took at least $24.0 billion out of the U.S. economy; this is after the Federal Reserve reported modest growth in September. (Source: Johnson, L., “Government Shutdown Cost $24 Billion, Standard & Poor’s Says,” Huffington Post web site, October 16, 2013.)
How the January/February deadlines will impact the U.S. and global economy is anyone’s guess in 2014. Or rather, it depends on who you ask; according to the Canadian Imperial Bank of Commerce (CIBC), the global economy is expected to turn a corner in 2014, thanks to economic improvements in the U.S. and Europe. World growth could accelerate more than four percent in 2014, while U.S. growth will climb to 3.2% in 2014 from 1.5% this year. (Source: Quinn, G., “Global economy set to ‘turn a corner’ in 2014, CIBC’s Shenfeld says,” Financial Post web site, October 17, 2013.)
This, of course, is in sharp contrast to the International Monetary Fund (IMF), which said that, as a result of the U.S. government shutdown and slow international expansion, the global economy will grow at … Read More
There’s more to the Bakken in North Dakota and Montana and the tar sands in Alberta than oil. Oil may be the primary opportunity for most investors, but there are a number of interesting secondary and tertiary investing platforms to consider. And when it comes to oil and petroleum products, one of the biggest growth areas has to be North American railroad stocks.
Despite the fact that a new pipeline in the booming Bakken fields in North Dakota was recently completed, more ways to transfer oil are needed to keep up with production. That’s because North American production is outpacing pipeline capacity.
On top of that, continued resistance to pipeline infrastructure expansion in North America is putting pressure on rail systems to pick up the slack. And two of North America’s biggest railway companies have only been more than willing to do so.
In fact, the amount of oil and petroleum products being shipped by rail has soared. In 2008, just 9,500 carloads of crude oil and 220,000 carloads of ethanol moved throughout the United States by rail; in 2012, the combined figure for crude oil and petroleum products was 600,000 cars. (Source: “Moving Crude Petroleum by Rail,” Association of American Railroads web site, December 2012.)
Roughly 70% of North Dakota’s oil and 70% of America’s ethanol is transported by rail. Why does so much Bakken oil rely on railroads? Whereas oil sand development can be in production for several decades, wells in the Bakken are in production for a much shorter time span—around 10 to 12 years—meaning that it’s not always economical to connect Bakken oil fields to existing … Read More
We’re less than a week away from the perfect economic storm in the U.S., and, based on what others are predicting, just a few short months away from a major 15% stock market correction.
At the beginning of October, almost a million federal employees were furloughed after the U.S. government shut down because it failed to ratify its annual budget. Should the government fail to raise the debt ceiling and therefore default on its loans, that issue will be exacerbated when the debt ceiling deadline arrives.
Failing to raise the debt ceiling will just add to America’s economic woes and put a major dent in the global economy while also undermining America’s credibility on the world stage. While some think a short-term default on the debt ceiling will not cause a major ripple, history is not on their side.
In 1979, the U.S. breached the debt ceiling on about $122 million in bills, but that was blamed on a technical issue related to a new-fangled word processing failure. The glitch caused yields to increase by half a percentage point, where they stayed elevated for months. A default on the debt ceiling this time around couldn’t be blamed on a technical difficulty due to new technology (having a disproportionate ego, however, could be a valid excuse).
Even after the U.S. government shutdown is resolved and the debt ceiling is raised, the U.S. will have suffered a major blow to its credibility. After that, it could go from bad to worse.
According to French banking giant Societe Generale, the S&P 500 will go through a tumultuous correction, even after the debt ceiling … Read More
The U.S. government shutdown has turned some federal agencies into ghost towns, like NASA (with 97% of its workforce furloughed), the Department of Housing and Urban Development (96%), and the Department of Education (94%). Still, some agencies, like the Departments of Defense and Homeland Security—with just 18% and 14% of their staff on furlough, respectively—are considered more essential than others.
That said, those Department of Defense numbers may be a little misleading; military and contractor personnel were not affected by the U.S. government shutdown. Half of the Department of Defense’s civilian population of roughly 400,000 were furloughed without pay on October 1.
As a result, companies doing business with the Department of Defense will feel an immediate pinch to their bottom line. That’s in part because of civilian Department of Defense personnel performing audits and certifying military products and services—which they can’t do if they’re not working. An extended furlough also means government acquisition personnel cannot keep the military lifecycle going.
In light of the fact that roughly 10% of the manufacturing workforce in the U.S. is engaged in some form of defense production, the U.S. government shutdown could impact the U.S. economy on a larger scale than some imagine.
That said, the impact of the U.S. government shutdown on defense stocks will vary from company to company, depending on funding and other regulations. While smaller defense stocks tend to rely on government contracts for a larger percentage of their revenue than the biggest defense contractors, that doesn’t mean either will escape the U.S. government shutdown unscathed.
For example, The Boeing Company (NYSE/BA) warned that deliveries of some of its … Read More
While quantitative easing (QE) may have been put in place to kick-start the economy, it also had the added benefit of kicking income investors to the curb. Since implementing QE1 in November 2008, the Federal Reserve has printed over $3.0 trillion to snap up government bonds.
This has translated into artificially low interest rates, which are supposed to spur borrowing. A low-interest-rate environment has also helped fuel the stock market and put a smoldering spark in the housing market and auto industry. Those same record-low interest rates have also sucked the income out of America’s retirement portfolio.
In a high-interest environment, fixed income assets like Treasuries, bonds, and certificates of deposit are an important part of most retirement portfolios. In theory, they provide regular investors with a stable place to park their retirement money and a means to anticipate a reliable income stream.
In 1980, Treasury bonds peaked at an eye-watering 14%. Today, a 30-year Treasury bond provides a yield of just 3.67%, a far cry from 1980 and a long way from the 5.3% yield in late 2007—before the financial crisis began.
In order to diversify risk, invest in multiple asset classes, and take advantage of growing dividend yields, many investors have turned to exchange-traded funds (ETFs). ETFs are a great option for broad-based investing, especially for those who do not have deep pockets. In fact, with a simple ETF strategy, investors can build a well-diversified portfolio made up of small-, medium-, and large-cap stocks.
While ETFs continue to grow in popularity, investors looking for more options might want to consider exchange-traded notes (ETNs). On the surface, ETNs are … Read More
At 2:00 p.m. on Wednesday, Federal Reserve chairman Ben Bernanke said the central bank would, in the eternal quest for job creation and economic growth, continue to buy $85.0 billion a month in bonds. In other words, its third round of quantitative easing (QE III) is charging ahead unabated.
A few minutes later, The New York Times declared, “In Surprise, Fed Decides Not to Curtail Stimulus Effort.” USA Today proclaimed, “Fed delays taper, surprising markets,” while The Guardian said, “Federal Reserve maintains bond-buying stimulus in surprise move.”
Are economic analysts looking at different data than the rest of us? Back on August 29, I predicted the Federal Reserve wouldn’t begin to taper its quantitative easing until early 2014 at the earliest. That was because all of the economic indicators steering the data dependent on quantitative easing policies were nowhere close to being achieved.
For starters, the Federal Reserve said the unemployment rate “remains elevated.” For the Federal Reserve to begin tapering its QE policy, unemployment would have to fall to 6.5%. In August, the unemployment rate held stubbornly high at 7.3%.
The Federal Reserve also wants the U.S. rate of inflation to rise to two percent; after eight months, it’s stuck at one percent. For the Fed to consider tapering, the rate needs to at least double in just a few months—which isn’t going to happen, especially when you look at stagnant wages. Lastly, a new Federal Reserve chairman will be taking the helm in early 2014; Bernanke isn’t going to want to tarnish his reputation or disrupt the U.S. economy before then.
If the Federal Reserve is as good … Read More
To put it mildly, natural gas simply doesn’t get as much attention as crude oil, or even gold. Mr. Speculator, my good old friend, once said, “Why would you want to even bother looking at it? The prices have collapsed and have been ranging for years.” It’s certainly true that natural gas prices have come down from where they used to be. Just take a look at the chart below to see what has happened to the price of natural gas in the past few years.
Not very long ago, natural gas prices were trading above $13.00 in 2008. Now, they are below $4.00; that’s a decline of almost 70%. With this, one should really wonder if natural gas has any future. Is this commodity even worth paying any attention to?
As I dig further into the details, I see natural gas prices going higher in the future. When this will happen is very hard to predict, but all the cases are pointing towards that conclusion.
When it comes to evaluating the prices and their direction, the most important factor I look at is the supply and demand, be it for gold, silver, oil, or any other commodity, for that matter. The basic rule of economics suggests when the demand goes up and the supply stays the same or declines, the price increases.
Chart Courtesy of www.StockCharts.com
This is exactly what is happening when it comes to natural gas.
Let’s backtrack a little. In the first half of 2013, 39% of electricity in the U.S. economy was created using coal-fired plants. This is troublesome, because the U.S. government is actively … Read More
As consumers, we don’t always do what we say we do. Consumer confidence is, by all accounts, down, but spending in some areas is up. According to the Michigan Index, U.S. consumer confidence slipped in August from a six-year high. The Bloomberg Consumer Comfort Index, meanwhile, plummeted for four straight weeks to its lowest reading since April.
Yet interestingly, August auto sales were the strongest in over six years—proof, on some level, that low consumer confidence and optimism don’t portend weak consumer spending. But that doesn’t mean that we’re necessarily spending smartly—after all, lots of people spend money when they’re depressed—and with wages stagnant, high unemployment, and a record number of Americans on food stamps, we have plenty of reason to spend.
According to some, consumer confidence is unrelated to spending and is more closely aligned to our political affiliation. In fact, self-proclaimed Democrats and Republicans are showing the weakest correlation on the direction of the economy since 1990. (Source: Jamrisko, M., “Confidence Measures Show It’s the Politics, Stupid,” Bloomberg web site, September 10, 2013.)
Where zero indicates no trend and one shows them moving in step, the correlation between the confidence of Republicans and Democrats is 0.25 since Obama started his first term. During George W. Bush’s two terms, it was 0.55, and Americans of every political persuasion were in virtual agreement on the direction of the U.S. economy during the Clinton era at 0.95.
Up until the beginning of September, Democratic voters had been more confident overall than Republicans for 75 straight weeks. Their rose-colored glasses, on the other hand, couldn’t find the same disciplined focus when it … Read More
While the S&P 500 continues to perform well, the markets have been skittish since May 22, when the Federal Reserve hinted it might consider tapering its $85.0-billion-per-month bond-buying program. If Ben Bernanke begins to curtail Wall Street’s monthly allowance, there are fears the markets will not be able to stand on their own economic merit.
Granted, many don’t think the Fed will begin tapering in 2013; this may account for the S&P 500’s solid, yet volatile run. The same can’t be said for emerging markets.
Investors have pulled over $22.0 billion from emerging-market bond funds since the end of April. This has lifted emerging-market bond yields by 1.4 percentage points, almost the most in five years.
Borrowing costs have been on the rise from record lows as speculation swirls around when the Federal Reserve will begin to cut back its quantitative easing measures—this also means the end of artificially low interest rates. This matters to emerging markets, because it signals the end of cheap money that’s been propping up asset prices in countries like India, China, and Indonesia.
Those investors who diversified their retirement fund with emerging-market exchange-traded funds (ETFs) have been in for a rough ride. The MSCI Emerging Markets Index (NYSE/EEM) is down eight percent year-to-date.
One of the few places where the Federal Reserve’s sphere of quantitative easing influence is muted is in the world of frontier markets. Frontier markets refer to countries such as Argentina, Kenya, Qatar, and Vietnam—those markets that are in the early stages of development. Frontier markets are an attractive opportunity for investors, because they represent a long-term economic growth possibility. And there … Read More
When it comes to the stock market, September is supposed to be the cruelest month. However, it might be hard-pressed to beat this past August. After starting the month on a record-high note, the S&P 500 closed out August down roughly four percent, recording its steepest drop since May 2012.
Whether it had to do with uncertainties in Syria, the long weekend, threats of tapering quantitative easing, or weak consumer spending numbers is anyone’s guess. Will tomorrow’s U.S. unemployment rate figures add to the despair? For risk-averse investors unsure about the future direction of the stock market, consumer defensive exchange-traded funds (ETFs) and money market funds may be two of the best options out there.
August started out promisingly. On August 2, the United States Department of Labor announced that the U.S. unemployment rate improved slightly to 7.4%, the lowest level in more than four years. Unfortunately, the bulk of the jobs (retail trade, food services, and drinking places) were mainly in low-paying areas. Still, news that the U.S. unemployment rate came in at 7.4 % and not 7.5% was enough to lift the S&P 500 to a record high of 1,709.67.
But not for long. Against the backdrop of so-called “encouraging” U.S. unemployment rate numbers, the markets cratered on August 15, suffering their biggest loss in almost two months, after Wal-Mart Stores, Inc. (NYSE/WMT) reported lower-than-expected second-quarter results. That same day, Cisco Systems, Inc. (NASDAQ/CSCO) reported disappointing earnings and, citing difficult economic conditions, said it plans to slash 4,000 jobs.
The markets slid further on August 27, as tensions over a possible U.S. strike on Syria rattled global markets. … Read More
Consumers like to purchase stuff, whether they need it or not. In the United States, this tendency to buy is our economic engine, driving 70% of all U.S. economic growth. In 2012, $11.119 trillion of the $15.685 trillion produced in the U.S. went towards household purchases. (Source: Amadeo, K., “What Are the Components of GDP?” About.com, April 25, 2013.)
With that much at stake, it’s easy to see why consumer confidence levels are one of the best economic indicators we have. If consumers are optimistic, they’ll spend more, and the economy expands; if they’re pessimistic, they rein in their discretionary spending, and the economy grinds down.
While Wall Street may be riding high, most of Main Street isn’t, and you can see that reflected in the consumer confidence numbers. High unemployment, high debt levels, and the idea of higher interest rates and slower economic growth have put a damper on America’s desire to spend the country out of its recession.
U.S. consumer confidence levels fell in August, just one month after reporting a six-year high. According to the Thomson Reuters/University of Michigan’s preliminary reading, consumer sentiment slipped to 80.0 from 85.1 in July, the highest since July 2007. Wall Street economists, who clearly have their pulse on the heartbeat of the average American, were expecting August consumer confidence levels to actually increase to 85.5. (Source: “U.S. consumer sentiment weakens in August,” Reuters web site, August 16, 2013.)
It was a different story in the eurozone: consumer confidence levels there rose in August to their highest level in more than two years. During the second quarter, it was reported that the … Read More
“I think it’s all about taking risk; you have to take more of it—get out of your comfort zone. You can’t just keep doing the same thing and expect different results—it’s that simple.” These were the exact words from my friend, Mr. Speculator, on portfolio management. “I am not looking for just a menial 10% return,” he added. “I am in it for a much bigger gain. To gain more, you have to risk more.”
Mr. Speculator is right about one thing: to gain more you have to risk more.
However, long-term investors who are saving for retirement, their kids’ education, or anything else for that matter, should not follow the lead of Mr. Speculator. Taking high risks can be dangerous, and at times, it’s no different than gambling. Being willing to risk it all is not a good investment management technique.
When it comes to retirement, investors need to have a very strong focus on one four-letter word—“risk”—or else one move in the wrong direction could make a dent in their portfolio—which may cause them to push back their retirement or give up on their plans altogether.
Take a look at the current bond market, for example; clearly, the risks are increasing. Look at the chart of the yield on 10-year U.S. Treasury notes below:
Chart courtesy of www.StockCharts.com
The yields have increased roughly 75% since the beginning of May.
Bond investors are fleeing. According to the Investment Company Institute, in June, U.S. long-term bond mutual funds had a net outflow of 60.4 billion—this was the first since August of 2011. In July, they continued to flock to the … Read More
After a strong July, the S&P 500 is looking like it is in correction mode, trading down more than three percent since the beginning of the month and effectively erasing the last two months’ gains. It’s quite possible that the corrective phase could last until early October—that is, if history, looming economic news, and geopolitical issues have anything to say about it.
And that could present a number of interesting opportunities for investors who like to bet against the stock market.
Since 1940, the stock markets have generally performed the worst in September; that doesn’t just include the U.S., but also Germany, Japan, and the U.K. In fact, for the S&P 500, September has posted the worst monthly returns going all the way back to the 1920s. September is even crueler on the Dow Jones Industrial Average, showing a negative bias going back to 1896.
Historical metrics aside, there is a lot of economic news coming out, and a number of looming global events that could add insult to injury. The Federal Reserve could begin tapering its $85.0-billion-a-month quantitative easing policy sooner than later, especially in light of last Thursday’s encouraging economic news that saw U.S. jobless claims drop to their lowest level in six years.
Negative overarching economic news continues to plague the U.S., but chances are that the Federal Reserve will focus on the positive to justify the pullback—it’s what they do. Since many believe the quantitative easing has been fuelling the U.S. bull market, too much good economic news could put a damper on things. That could translate into a further correction on the S&P 500 and … Read More
Not too long ago, the per-barrel price of oil was hovering close to $85.00. Now, a few months later, it trades above $107.00; this is an increase of roughly 25% in a fairly short period of time.
One may ask why this matters, and what it means for the overall U.S. economy.
At the most basic level, the price of oil has a very deep impact on consumer spending, which makes up 70% of the gross domestic product (GDP) of the U.S. economy. It impacts consumers in two ways.
First, let this be clear: while the average American Joe doesn’t use crude oil in raw form, he does use it in the form of gasoline in his car. Oil and gasoline prices have a direct relationship; together, they shrink the size of consumers’ pockets. When oil prices increase, consumers end up spending more at the pump and less on goods they want to buy. Note the black line in the chart below: it shows gasoline prices per gallon, and their movement along with oil prices.Take a look at the chart below to get a better idea about surging oil prices:
Chart courtesy of www.StockCharts.com
Second, when oil prices increase, they cause the transportation costs to go higher as well. Eventually, the increased costs are transferred to customers; this makes goods and services more expensive, and their dollar buys less than what it did before.
So how can investors profit from increasing oil prices?
When oil prices go up, different sectors react in different manners. This means some are highly affected, while others, not so much.
Consider the airline industry: what … Read More
Let’s face it: investing isn’t easy, and it becomes even more discouraging when investors face losses in their portfolio. To avoid a drawdown in their portfolio, investors should avoid the following five mistakes.
1. Not having an investment plan
Investors should have some sort of plan put together before they even jump into the world of investing and start allocating their portfolio to different investments. Having a plan guides them in what kind of investments they should be making and the risks they should take. An investment plan doesn’t have to be very lengthy; it just needs to explain the investor’s risk appetite, investment horizon, and purpose for investing their funds. Without a plan, an investor may turn into a speculator and take risks that can impact their portfolio significantly.
2. Investing in what you don’t understand
This is a very critical error. Investors need to know how the company operates before they purchase its shares. Keep in mind that this isn’t limited to stocks alone; investors should understand how any investment works before they decide to hold it in their portfolio.
For instance, long-term bonds are more sensitive to interest rates compared to short-term bonds. Investors saving for the long term must consider interest rates before buying bonds.
3. Getting emotionally attached to investments
After the crash in the stock market in 2008 and 2009 and the prior tech boom, one observation should be very apparent: markets tend to swing up and down. Investments that are good for the portfolio now may not be so great in two years. Investors need to realize this and not get emotionally attached … Read More
Investors beware: the bond market is treading in dangerous waters. The risks are increasing, and if all the pieces of the puzzle fall into place, it can make a significant dent in your portfolio.
Look at the chart below of yields on long-term U.S. bonds. It shows the yields continuing to increase, while bond prices are falling.
Since the beginning of May, the bond market has seen a massive sell-off. Going by the chart above, yields on the 30-year U.S. bonds have increased more than 30%. This is significant and shouldn’t go unnoticed, because long-term U.S. bonds are used as a benchmark for rates on other bonds in the bond market. If the U.S. bonds decline in value, their yields increase, and the bond market usually moves in the same direction.
We are seeing that investors have started to flee the bond market already.
According to the data from Investment Company Institute, in June, the U.S. long-term bond mutual funds witnessed their first outflow since August 2011, with outflows amounting to more than $60.4 billion. In May, there were inflows of $12.2 billion. (Source: “Historical Flow Data,” Investment Company Institute web site, last accessed August 8, 2013.)
Why is this happening? The Federal Reserve, which has kept the bond yields lower by becoming a major purchaser of U.S. bonds, is contemplating when it should decrease the amount of its monthly bond purchases. There is fear that a cut in the Fed’s bond buying could further escalate the sell-off in the bond market.
On top of this, there’s a notion that the U.S. economy is getting better. Investors usually run towards … Read More
When it comes to diversifying your retirement portfolio and investing in as many companies and industries as possible, nothing beats an exchange-traded fund (ETF). Similar to a mutual fund, ETFs are investments that (attempt to) mirror the return of a particular index. Unlike mutual funds, investors can buy and sell ETFs on the open market like a regular stock.
Both retail and institutional investors like ETFs because they give them the chance to add a basket of equities to their retirement portfolio that they could not otherwise afford to purchase individually. And with more than 1,400 ETFs available, covering every corner of the market (currency, oil, gold, livestock, grain, precious metals, etc.), and more hitting the markets all the time, it can be tough for investors to know where to begin.
But now, it might be getting even tougher.
On August 1, LocalShares launched the Nashville Area ETF (NYSEArca/NASH), the first city-specific ETF. With an initial unit price of $25.00 per share and an annual expense ratio of 0.49%, the Nashville Area ETF invests in a basket of Nashville area publicly traded companies.
But not just any old Nashville company gets included on this ETF. Not only do the companies have to be listed on the major U.S. exchanges, they also have to have their corporate headquarters in the Nashville region, a market capitalization of $100 million, and a daily volume of at least 50,000 shares. (Source: “Nashville Area ETF,” U.S. Securities and Exchange Commission, July 26, 2013.)
The Nashville Area ETF is made up of roughly 25 companies that collectively had more than $94.0 billion in revenue in 2012. … Read More
As consumer spending in the U.S. economy improves, investors may be able to profit from exchange-traded funds (ETFs) like the Consumer Discretionary Select Sector SPDR (NYSEArca/ XLY) and consumer discretionary companies.
In the aftermath of the financial crisis, consumer spending in the U.S. economy stalled. The reasons behind it were obvious: there was a surge in foreclosures and rampant job cuts.
But consumers in the U.S. economy seem to be spending once again.
In June, retail and food services sales increased 0.4% over May to $422.8 billion. While this may sound minute, it makes the big picture clearer: consumer spending on retail and food services has increased 4.6% in the second quarter of this year compared to last year, and is up 5.7% from June of 2012. (Source: U.S. Census Bureau, July 15, 2013.)
Consumers are also buying cars again. In June, 1.4 million cars and light trucks were sold in the U.S. economy. At an annual pace of 15.96 million vehicles, June was the best month for car sales since November of 2007. Auto sales in the U.S. economy have increased nine percent from a year ago. (Source: Klayman, B. and Woodall, B., “U.S. auto industry posts best sales month since 2007,” The Globe and Mail, July 2, 2013.)
Consumer confidence is also increasing in the U.S. economy. Consider the chart below of The University of Michigan Consumer Sentiment Index. In June, consumer sentiment registered at 84.1—one of the best levels since late 2008.
Chart courtesy of www.StockCharts.com
Consumer confidence is one of the best indicators of consumer spending. Once the consumer feels confident, they think the economy is … Read More
Switzerland is at a crossroads. On one hand, the country, long celebrated for its economic growth, saw its exports
hit hard in May. That’s not a good long-term indicator for a country whose exports account for 50% of the gross domestic product (GDP).
On the other hand, Switzerland recently signed a free trade deal with China. For investors looking to diversify their portfolio, all the pieces are in place for an excellent trading opportunity. (Source: “Switzerland Exports,” TradingEconomics.com, last accessed July 12, 2013.)
When most people think of Switzerland, they think of banking.
That tradition came from Switzerland’s political neutrality (it avoided both World Wars), which has translated into long-term political stability, strong monetary policies, and economic growth, making it an attractive safe haven for investors. In fact, it is estimated that almost 30% of all funds held outside their country of origin are kept in Switzerland.
More recently, Switzerland’s political neutrality meant that it has been able to enjoy economic growth while the rest of Europe was embroiled in economic turmoil. Switzerland is not a member of the European Union (EU), and only became a member of the United Nations (UN) in 2002.
As a result, trade is the foundation of Switzerland’s prosperity. Switzerland’s economic growth hinges on its main exports, including watches and clocks (TAG Heuer, Hublot, Zenith), medicinal and pharmaceutical products (Novartis, Roche), food processing (Nestle), and electronics and machinery (ABB Ltd., Sika AG).
For years, Switzerland’s economic growth has been helped, in large part, by Germany and the United States, its two largest trade partners. In 2012, Germany accounted for about 25% of Switzerland’s foreign trade. … Read More
Right now, the S&P 500 is just two percent from its all-time high and the Dow Jones Industrial Average is just half a percentage point away from its own record. That’s why I think it’s the perfect time to short both.
The stock market indices have gotten ahead of themselves. In fact, they might be the only spot in the entire U.S. economy showing signs of growth—the markets are running counter to every economic indicator they are supposed to reflect.
The International Monetary Fund (IMF) cut its growth forecast for both the U.S. and global economics. The downward revisions come on the heels of the Federal Reserve saying it would most likely start to taper its $85.0 billion-per-month quantitative easing policy this year. This action will, of course, lead to an increase in interest rates.
After initially predicting U.S. 2013 growth of 2.2%, the IMF revised it downward to 1.9% in April, then modified it downward again this week to just 1.7%. (Source: “Emerging Market Slowdown Adds to Global Economy Pains,” International Monetary Fund web site, July 9, 2013.)
That means that the IMF has revised its 2013 economic growth projections for the U.S. downward by almost 25%. It also altered its projections for the U.S. economy in 2014, from 2.9% down to 2.7%.
The downward revisions shouldn’t come as a big surprise. Unemployment remains high, S&P 500 companies continue to sit on record sums of cash, and gold prices have tumbled. Japanese government bonds have tanked and China’s economy is cooling; so, too, are interest rate–sensitive sectors, like utilities and homebuilders.
Here at home, the writing has been on … Read More
Investors who have allocated significant portions of their portfolio towards the key stock indices should look into reducing their exposure, as they appear to be heading lower.
While the key stock indices soar and the most prominent stock advisors remain bullish, the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), often referred to as the “fear index,” is indicating that they need to be very careful. The key stock indices may be entering a period of turbulence ahead.
Recently, a technical indicator called the “golden crossover” occurred on the VIX’s chart, indicated by the black circles in the chart above. This happens when the short-term or faster 50-day moving average crosses above the long-term or slower 200-day moving average. This is considered a bullish signal among technical analysts.
Please look at the chart below:
Chart courtesy of www.StockCharts.com
What’s even more interesting is that this crossover is the first since July 2011 and fourth since key stock indices like the S&P 500 started to tumble in late 2008. Whenever this type of crossover occurred, the S&P 500 declined, as shown by the green line below the chart above.
But the case for a decline in key stock indices goes beyond this one statistical phenomenon.
Consider this: according to FactSet, 87 companies on the S&P 500 have each issued a negative guidance regarding their corporate earnings for the second quarter so far, while only 21 have issued a positive guidance.
If the number of S&P 500 companies issuing a negative corporate earnings guidance remains at 87, then it will be the highest number since FactSet started to track companies’ corporate earnings … Read More
When the financial crisis struck the U.S. economy, banks struggled. Giants like Lehman Brothers went into bankruptcy, while others were forced to merge. No matter where you looked, the financial system appeared to be in very poor shape. This phenomenon not only created havoc in the U.S. economy, but sent ripple effects into the global economy, as well.
In the midst of all this, when the financial systems in the U.S. economy were on the verge of collapse, our neighbor to the north, Canada, didn’t really experience anywhere near as much of a financial crisis.
The banking system in the country remained strong because the Canadian banks were not as exposed to the “bad assets” that were at the root of the U.S. banks’ problems.
During the financial crisis in the U.S. economy, Canada was one of the few G7 countries that were actually able to prosper. The Canadian dollar, compared to other major currencies in the world, increased in value. Take a look at the chart below:
Chart courtesy of www.StockCharts.com
In early 2009, the Canadian dollar was hovering around US$0.77; now, it trades at US$0.95—23.3% higher. In early 2011, and again later in the year, the Canadian dollar actually surpassed US$1.05.
But it appears that the Canadian dollar now faces some headwinds, which could drive it lower and hurt the trend it has been following since the financial crisis.
To begin with, the Canadian economy is slowing. This year, the Bank of Canada expects the country’s economy to grow at a slower pace than the previous year, expecting growth of 1.5%, compared to 1.8% in 2012. (Source: “Clouds … Read More
Starting near the end of 2012 and then going into 2013, there was a significant amount of noise around the concept of the “Great Rotation.”
The idea behind this concept is that low yields on U.S. bonds would cause investors to sell their bonds positions, which would eventually bring bond prices down, driving investors toward stocks. That would send the key stock indices higher.
Now, since the Federal Reserve announced that it might be pulling back on its quantitative easing, the concept of the Great Rotation seems to be gaining some traction once again. And investors are asking if it’s really going to happen.
Looking at the chart below of 10-year U.S. bond yields, it’s very clear that investors don’t like the U.S. bonds—they are selling. The yields on 10-year U.S. bonds have skyrocketed; they are now more than 44% higher than they were at their lowest level in August 2012.
Chart courtesy of www.StockCharts.com
According to TrimTabs, an investment research company, through to June 24, investors sold $61.7 billion worth of bond mutual funds and exchange-traded funds (ETFs). While this may not sound big, this is the highest sell-off since October 2008, when investors sold $41.8 billion worth of mutual funds and ETFs. (Source: Bhaktavatsalam, S.V., “U.S. Bond Funds Have Record $61.7 Billion in Redemptions,” Bloomberg, June 26, 2013.)
Now that we see investors fleeing the bonds market, shouldn’t they go to the stock market, thereby causing the markets to climb higher?
Yes, according to the concept of the Great Rotation, the key stock indices should be climbing higher. Sadly, the reality is the opposite: as the bond prices … Read More
The housing market in the U.S. economy has gained a significant amount of attention. Even my old friend, Mr. Speculator, who likes to make big bets for bigger gains, told me it’s a good time to buy a house, saying “the prices are cheap, and they are only going higher from here.”
What’s certain is that the U.S. housing market has seen an uptick since the home prices hit bottom in early 2012; but is it on the path to real recovery, or is what we are seeing just a minor bounce?
Consider the chart below of the S&P/Case-Shiller Home Price Index:
Chart courtesy of www.StockCharts.com
Looking at home prices alone, they are nowhere close to being at the same level they were in 2006 and 2007. The S&P/Case-Shiller Home Price Index suggests the U.S. housing market is still down roughly 26% from its peak.
Going forward, the very factors that can drive the housing market higher are under stress, and may just divert its path to the undesired direction.
The number of first-time home buyers in the housing market has been decreasing. This shouldn’t be taken lightly, because they essentially provide liquidity to the housing market. In May 2012, they accounted for 34% of all existing home sales in the U.S. housing market; by May 2013, they had declined almost 28%. (Source: “Existing-Home Sales Rise in May with Strong Price Increases,” National Association of Realtors web site, June 20, 2013.)
Unemployment in the country is staggering. Almost 12 million Americans are out of work, and a significant portion—37.3% of them to be exact—have been unemployed for more than six … Read More
While the majority of Americans might not have passports, that doesn’t mean we should avoid investing in foreign countries—especially in this market. Since rebounding in 2009, the S&P 500 has climbed around 145%, peaking on May 22 at 1,687.18. And that’s when it all started to go wrong.
On May 22, the Federal Reserve hinted that since the U.S. economy seemed to be on the right track, it might begin to ease its $85.0 billion-per-month quantitative easing policy. Just the idea of losing out on free money sent the markets into a frenzy—over the following two weeks, the S&P 500 lost more than four percent of its value.
While the S&P 500 regained some ground, it continued to be volatile leading up to the Federal Reserve’s June 19 meeting. During that meeting, the Federal Reserve announced that while it would continue with its quantitative easing policy, it would still ease the $85.0 billion-per-month program by the end of the year, and could end it altogether in 2014. Over the following two days, the S&P 500 slipped almost four percent.
While many investors are worried the U.S. economy will not be able to sustain itself without the Federal Reserve’s bond-buying program, there are other markets that investors can turn to if they’re looking for protection and wealth creation.
But bigger is not always better in this economic climate. On June 19, the Hong Kong and Shanghai Banking Corporation (HSBC) said its preliminary monthly Purchasing Managers’ Index (PMI) for China fell to a nine-month low in June of 48.3; a reading under 50 indicates a contraction.
Since May 22, the iShares MSCI … Read More
It’s no secret: the Federal Reserve has kept U.S. bond prices higher and yields historically low by keeping interest rates low with multiple rounds of quantitative easing.
But now things have taken a minor turn, after the Federal Open Market Committee (FOMC) meeting minutes were released on June 19. “The committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year,” said Fed chairman Ben Bernanke. “And if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.” (Source: “Bernanke says Fed likely to reduce bond buying this year,” Reuters, June 19, 2013.)
Simply put, the Federal Reserve will slow the pace of its current quantitative easing. With its most recent quantitative easing, the Federal Reserve is buying $45.0 billion worth of long-term U.S. bonds and $40.0 billion worth of mortgage-backed securities.
But it may end the whole program by next year, depending on the performance of the U.S. economy.
As a result of this, market participants panicked, quickly sold their positions in U.S. bonds, and ran through the exit door.
Please look at the intraday chart below of the 30-year U.S. bond yield (marked by the black and red line) and the 10-year U.S. notes yield (the green line). Pay close attention to the circled area, because this is the general area that shows what happened when the press conference was happening and the FOMC meeting minutes were released.
Chart courtesy of www.StockCharts.com
While this is … Read More
The world’s two biggest economies seem to be competing against one another to see which can be a bigger drag on the global economy.
In the U.S., the problem is the regulators. As the old saying goes, you can’t fight the Fed.
On Wednesday, June 19, the Federal Reserve announced it would continue its quantitative easing program—at least until America’s jobs market improves substantially. At the same time, the Federal Reserve also said it would ease the $85.0 billion-per-month program by the end of the year, and could end it altogether in 2014.
For a bull market rooted more in the Federal Reserve’s monthly alimony payment than sound economic numbers, this is bad news. After five years, the world’s largest economy might have to stand on its own legs in 2014; that’s not something it’s prepared to do.
The U.S. markets reacted to the news the following day in a sea of red. In fact, less than two percent of S&P 500 companies were trading up.
And in China, the problem is disappointing manufacturing news, and it suggests the global economy is in worse shape than anyone thought.
The HSBC Flash China Purchasing Managers’ Index hit a nine-month low of 48.3 (49.2 in May). The Flash China Manufacturing Output Index came in at 48.8 (50.7 in May), a new eight-month low. A measure below 50 indicates contraction. (Source: “HSBC Flash China Manufacturing PMI,” Markit Economics, June 20, 2013.)
Here’s a quick summary of the China Flash Manufacturing Index: output is decreasing at a faster rate, new orders are decreasing at a faster rate, new export orders are decreasing at a … Read More