While it’s well known that technology has led the broader stock market higher, there is a safer and more conservative play for investors at this time, according to my stock analysis. Where? Investors may want to take a glance at the banking sector.
Banks have dug themselves out of the financial crater that was imposed on the group by the sub-prime debt crisis back in 2007, which sent the global economy and banks into a massive tailspin, as is well represented in my stock analysis.
But that was then. As my stock analysis indicates, the banking sector has been rallying over the past seven years, beefing up their balance sheets, cutting risk, and creating a much stronger overall structure.
The chart of the Philadelphia Bank Index below shows the upward move of bank stocks from their 2009 and 2011 bottoms. Bank stocks staged a nice rally, but retrenched from March to May 2012 on the European bank concerns and Moody’s downgrade of the sector. However, the group has since staged a rally back to above the index’s 50- and 200-day moving averages (MAs), as my technical stock analysis indicates.
Chart courtesy of www.StockCharts.com
What has helped to drive the banks upward on the charts, based on my stock analysis, has been the recovering global economy and the rules set in place to help prevent excessive risk among bank stocks. At the core of the changes was the establishment of the “Volcker Rule,” which was economist and ex-Fed chairman Paul Volcker’s move to cap the speculative trades and risk banks are allowed to assume. Since these changes were put in place, … Read More
Not too long ago, the European Central Bank (ECB), to fight the economic slowdown in the eurozone, lowered its benchmark interest rates. The hope with this move was the same as it was in the U.S., England, Japan, or other countries that are facing economic scrutiny: lowering interest rates will eventually increase lending and eventually bring in economic growth. In addition to this, the ECB also announced that it will be taking part in an asset purchase program—something similar to what was implemented by the Federal Reserve.
When I look at all this, it creates a very interesting situation. The ECB is lowering its interest rates as the Federal Reserve and others, like the Bank of England, are building grounds to raise their benchmark interest rates.
For example, the Bank of England is hinting at raising interest rates by spring of 2015. The governor of the central bank, Mark Carney, recently said that if interest rates were to rise in the spring as the markets expect, this move would allow the bank to meet its mandate regarding inflation and jobs creation, according to its forecasts. Simply put, the bank is prepared to raise interest rates early next year. (Source: Hannon, P., “Bank of England Gov. Mark Carney Signals Spring Rate Rise,” The Wall Street Journal web site, September 9, 2014.)
And the Federal Reserve may do the very same.
With this in mind, I question where the next big trade is going to be.
Remember what happened during the financial crisis, when the Federal Reserve and other central banks lowered their interest rates? In search of yields, the easy money … Read More
The verdict is in…
The Federal Reserve will taper further. In its statement, the Federal Reserve said, “Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month.” (Source: Board of Governors of the Federal Reserve System web site, March 19, 2014.) The Federal Reserve has been tapering quantitative easing since January by $10.0 billion each month, coming down from $85.0 billion a month in December.
To us, it will not to be a surprise to see the Federal Reserve taper further. If this becomes the case, then in just five months, there will be no quantitative easing. The printing presses will stop.
This doesn’t bother me. It’s all too known and expected.
With this taper announcement, the central bank also provided its projections on where the federal funds rate—the rate at which the Federal Reserve lends to the banks—will go. It said the rate can increase to one percent by 2015. By 2016, this rate can go up to two percent. Mind you, the federal funds rate has been sitting at 0.25% for some time now—since the U.S. economy was in the midst of the financial crisis.
What happens next?
Economics 101 tells us that when interest rates increase, bond prices decline and bond yields increase.
Quantitative easing and low interest rates have caused more harm than good. These two phenomena caused the bond prices to rise and … Read More
There’s a significant amount of pessimism towards the Chinese economy these days, and the reasons behind this are very understandable. The economic data suggests the country is headed toward an economic slowdown.
In 2013, China’s gross domestic product (GDP) grew by 7.7%—barely better than the previous year and the estimates that were calling for the lowest growth rate since 1999. (Source: Yao, K. and Wang, A., “China’s 2013 economic growth dodges 14-year low but further slowing seen,” Reuters, January 20, 2014.) Keep in mind that despite beating the estimates, this GDP growth rate is much lower than the country’s historical average.
This isn’t all. A credit crunch is also in the making. We are now hearing how companies in China will have troubles paying their interest on the bonds they have issued. So far, we have seen one default on payment by Shanghai Chaori Solar Energy Science & Technology Co. This solar company, based in China, defaulted on a $14.7-million interest payment on bonds it issued two years ago. (Source: Wei, L., McMahon, D. and Ma, W., “Chinese Firm’s Bond Default May Not Be the Last,” The Wall Street Journal, March 9, 2014.)
Before this default, there was a slight hope that the government would come in and bail out the troubled companies—something that happened in the U.S. economy during the financial crisis in 2008. Now, with this default, there are speculations that we will see more of the same.
Furthermore, there are concerns that property values in the Chinese economy are going to see a correction. Over the past few years, there has been the mass development of ghost … Read More
When troubles first started in the eurozone years ago, they stemmed from the credit market. The amount of bad loans increased and as a result, banks needed to be bailed out. Greece and Ireland were the first in the eurozone to come under scrutiny, followed by Spain and Portugal; concerns later grew over whether Italy needed a bailout, as well. In 2012 and 2013, we saw a little calm in the eurozone. One of the main factors behind this was the European Central Bank (ECB). It said it will do whatever it takes to save the eurozone. This sent a wave of optimism through the global economy.
Now, we are starting to hear the problems—bad loans—remain in the common currency region…and they’re increasing.
The Bank of Spain’s data showed that bad loans in the country grew to a record-high in November. They stood at 13.08% then, compared to 12.99% just a month earlier. Month-over-month, bad loans in the fourth-biggest eurozone economy grew by 1.5 billion euros. (Source: “CORRECTED-Spain’s bad loans ratio reaches new record high at 13.08 pct in Nov,” Reuters, January 17, 2014.)
This isn’t all for Spain. Recently, after posting a loss in its fourth quarter, the Banco Popular S.A.—the biggest bank in Spain—said that at the end of 2013, 6.8% of all loans at the bank were 90 days overdue. In 2012, this rate was 5.1%. (Source: Neumann, J., “Spanish Banks Still Battling Bad Loans,” Wall Street Journal, January 31, 2014.)
Banks in Italy—the third-biggest economy in the eurozone—are going through something similar. Standard & Poor’s expects bad loans at the Italian banks to increase to 310 … Read More
After years of easy money and a failure to secure a well-executed exit plan, it looks as though the emerging markets are getting a taste of the Federal Reserve’s economic tapering. Over the last five years, the emerging markets have benefited from low interest rates and listless growth in developed countries.
But, with the U.S., Japan, and Europe—the three biggest economies globally—all expanding for the first time in four years, the tables are turning and the sheen is beginning to wear on the emerging markets.
In an effort to help kick start the U.S. economy after the financial crisis in 2008, the Federal Reserve enacted it’s overly generous bond buying program (quantitative easing). All told, the Federal Reserve dumped more than $3.0 trillion (and counting) into the markets and has kept interest rates artificially low.
The ultra-low interest rates might have been great for home buyers, but income-starved investors had to look elsewhere to pad their retirement portfolio. Many retail and institutional investors went to the emerging markets, where the interest rates were higher and there was a real opportunity for growth.
In December, the Federal Reserve said it was going to begin tapering its $85.0-billion-per-month quantitative easing strategy to $75.0 billion a month in January. Just yesterday, the Fed announced it will be reducing that number to $65.0 billion a month in February. While the amount is negligible, it signals the eventual end of artificially low interest rates. The cheap money that propped up asset prices in emerging markets, like India, China, and Indonesia, is beginning to crumble.
The Argentinean peso, Indian rupee, South African rand, and Turkish lira … Read More
By Sasha Cekerevac for Daily Gains Letter | Jan 29, 2014
Just the other day, I was talking to a friend of mine who seemed extremely cheerful. I asked why, and he said that his investments have performed well over the past few months and he saw no reasons to worry.
This is a common problem with investor sentiment; people tend to become complacent and only look to the recent past as an indication of what tomorrow will bring.
This is quite dangerous. Investor sentiment is often wrong and can be used as a contrary indicator, buying when others are dumping their stocks and taking profits when others are blissfully unaware of the changing landscape around them.
Americans need to be careful of becoming too complacent in their bullish investor sentiment, because the U.S. is not isolated from the rest of the world.
When the real estate bust and financial crash occurred here in America several years ago, the effects spread to many nations around the world, including the emerging markets.
With the Federal Reserve pushing the gas pedal on money printing here in the U.S., it has created a shock absorber to some extent, temporarily keeping global pressures at bay, especially in relation to the emerging markets.
However, investors do need to be aware that there is much uncertainty around the world. Investor sentiment for global institutions has been aware of these potential issues and is now running for the exits.
Last week this began in Asia, as economic growth appears to be slowing and reports of a financial crisis in China are beginning to grow. With the Chinese shadow-banking sector showing signs of cracking, this is creating negative investor … Read More
Not too long ago, I wrote about an economic slowdown in the Canadian economy and how it could take the value of the Canadian dollar even lower. (Read “How American Investors Can Profit from the Canadian Economy’s Demise.”) By no surprise, the Canadian dollar (also referred to as the “loonie”) looks to be in a freefall. Take a look at the following chart.
The Canadian dollar is currently trading at its lowest level since September of 2009. Since the beginning of the year, the loonie has declined more than four percent compared to other major global currencies.
Considering all that is currently happening, can the Canadian dollar go down any further?
Chart courtesy of www.StockCharts.com
Simply put, yes, the Canadian dollar may still see some more downside. After the U.S. economy showed a significant amount of stress during the financial crisis, investors flocked to buy the Canadian currency. This may not be the case anymore.
Since the last time I wrote on this topic, some more information on how the Canadian economy is doing has been released. This new information reaffirms my suspicions. It seems the economic slowdown in the Canadian economy is gaining some momentum; even the central bank of Canada looks slightly worried. This could be very bearish for the Canadian dollar.
First of all, wholesale sales in Canada in the month of November remained unchanged from the previous month. Out of the 10 provinces in the country, only four reported an increase in their wholesale sales. (Source: “Wholesale trade, November 2013,” Statistics Canada web site, January 21, 2014.) Wholesale sales can provide an idea about the retail … Read More
“Just give up being so negative; there’s economic growth in the U.S. economy.”
These were the exact words of my good old friend, Mr. Speculator. Over the weekend, when I received a call from him, he added, “You see the average American is better off than before. There are jobs; and no matter where you look, you won’t find much negativity. Look at the stock markets; they probably will show a 30% increase for 2013.”
Sadly, Mr. Speculator has become a victim of the false assumptions that seem to prevail in the markets these days. He’s basing his conclusion on just a few indicators that he looked at from just the surface, not looking much into the details. For example, the stock market doesn’t really portray the real image of the U.S. economy, but it’s used as one of the indicators.
Here’s what is really happening in the U.S. economy that keeps me skeptical.
First of all, jobs growth in the U.S. economy has been center stage for some time. I agree that the unemployment rate has gone down, but I ask where the jobs were created. In November, for example, we saw the unemployment rate in the U.S. economy reach seven percent, and it sent a wave of optimism across the mainstream. Sadly, a major portion of the jobs created for that month were in the low-wage-paying industries. Mind you; this has been the trend for some time now. (Source: “Employment Situation Summary,” Bureau of Labor Statistics web site, December 6, 2013.) In periods of real economic growth, you want equal jobs creation, which we are clearly missing in … Read More
One of the questions being asked by investors these days is “where’s the inflation?” After the financial crisis and the fall of Lehman Brothers, the Federal Reserve and the U.S. government stepped in to help the financial system. As a result, they promised to print money, and thus quantitative easing was born. Banks received billions of dollars in bailout money.
With this, there was a significant amount of speculation that the increased money supply in the U.S. economy would lead to a period of out-of-control inflation, or hyperinflation.
Fast-forwarding to now, it’s been more than five years since the collapse of Lehman Brothers, but out-of-control inflation has yet to occur. Were those who said there will be hyperinflation wrong? What’s the inflation situation right now?
In August, the Bureau of Labor Statistics reported that the prices in the U.S. economy increased by 0.1%. From January to August, prices increased in the U.S. economy by only one percent. (Source: “Consumer Price Index – All Urban Consumers,” Bureau of Labor Statistics web site, last accessed October 29, 2013.)
Other indicators of inflation ahead signal it’s going to remain dismal as well. For example, I look at the producer price index (PPI) as one of the key indicators of inflation.
In September, the PPI showed that producers in the U.S. economy experienced a deflation of 0.1%. Since the beginning of the year, the inflation in producer prices has only increased by 1.1%. (Source: “Producer Price Index-Commodities,” Bureau of Labor Statistics web site, last accessed October 29, 2013.)
With all this in mind, I stand little different from those who say there will be … Read More
As the U.S. government shutdown was prolonged, not only was there noise about getting away from the U.S. dollar, but also about what happens to the U.S. economy next. On one hand, there was a consensus that the U.S. government shutdown was actually a good thing, serving as a cost-cutting measure that allowed the government to save money. On the other hand, there were those who said it was impacting the U.S. economy’s recovery process and would wipe a certain percentage off the U.S. economy’s gross domestic product (GDP).
Both sides had a solid argument to prove their point about the impact of the U.S. government shutdown on the U.S. economy, but my stance differs from that of both groups. Before going into the details, be aware that we don’t know the exact impact of the shutdown just yet, because the economic data has not been released, but time will eventually draw a better picture.
So what’s my take on the U.S. government shutdown that happened for 16 days? Forget the shutdown; it didn’t matter. What I am concerned about is the other dismal trends that continue to remain in the U.S. economy. If they are not fixed or their direction doesn’t change, then economic growth in the U.S. economy becomes very doubtful.
One of the trends I have been closely following is the unemployment in the U.S. economy. I agree that the number on the surface, the unemployment rate, looks much better than what it was during the financial crisis. However, when I assess and analyze the details, it’s not looking very good.
What you want to see are … Read More
As Congress has come to a decision about the debt ceiling and kicked the can a few months down the road, I hear a significant amount of noise about the U.S. dollar losing its reserve currency status.
With this, I ask: could this really happen anytime soon?
Before coming to any conclusions, let’s dive into the basics. A reserve currency is the currency that is commonly used in the global economy; central banks keep it in their foreign exchange reserves and businesses do international transactions with it. One of the other characteristics of the reserve currency is that it is thought to be able to remain strong and stable over time. Currently, the U.S. dollar holds reserve currency status.
So what’s next?
You see, over the past few years, and especially since the financial crisis, the fundamentals of the U.S. dollar have gone downhill. The U.S. dollar is losing its stability and strength; for example, look at the long-term chart below of the U.S. dollar compared to other currencies in the global economy. You will see there’s a clear downtrend.
Chart courtesy of www.StockCharts.com
But this is just the picture of what has happened in the past. Going forward, the fundamentals are deteriorating further, and the speed at which it’s happening is picking up the pace as well.
To begin with, we have increasing national debt. It’s not very commonly said in the mainstream, but the U.S. government has the most debt, in nominal terms, than any other country in the global economy. And after Congress came to a consensus, it pretty much promised it would increase further—we will probably … Read More
The global economy looks to be in trouble, with the problems brewing quickly. Major economic hubs in the global economy are struggling for growth, but are failing—a fact that is largely ignored by the mainstream.
Long-term investors need to know that an economic slowdown in the global economy can deeply affect the key stock indices here in the U.S. economy. The reason for this is very simple: American-based companies operate throughout the global economy. As a matter of fact, in 2012, for the S&P 500 companies that provide data about sales in the global economy, 46.6% of all sales came from outside of the U.S. (Source: “S&P 500 2012: Global Sales – Year In Review,” S&P Dow Jones Indices web site, August 2013.)
Clearly, if there is an economic slowdown, the demand will decrease and the U.S.-based companies will sell less and earn less profit. As a result, their stock prices will decline.
So what is really happening?
In the beginning of the year, there was a significant amount of noise about how the global economy will experience growth. This did not happen.
The International Monetary Fund (IMF) expects the global economy to grow by 2.9% this year after seeing growth of 3.9% in 2011 and 3.2% in 2012. In 2014, the IMF expects the global economy to increase by 3.6%. (Source: Duttagupta, R. and Helbling, T., “Global Growth Patterns Shifting, Says IMF WEO,” International Monetary Fund web site, October 8, 2013.) Mind you, these estimates were much higher in July, but they have since been revised lower.
We all know how anemic the rate of growth of the U.S. … Read More
The financial crisis struck the U.S. economy five years ago. Those who remember the collapse of Lehman Brothers know how much uncertainty was actually there. It seemed the U.S. economy was going to halt and the financial system would collapse. Ripples across the global economy were felt. Nothing looked safe—it was a total bloodbath. Investors had many questions, including if they would be able to protect their nest eggs.
As a result of all this, to fight the uncertainty and handle the issues at hand, the U.S. government and the central bank jumped in and started to spend. They bailed out the big banks in the U.S. economy to make sure everything would continue to run smoothly. We passed through that successfully, and the worst didn’t come upon us.
Sadly, as all this happened, we saw troubling trends starting to form in the U.S. economy.
Look at the national debt.
As the government started to rev up its spending spree, it posted a budget deficit and eventually borrowed money. To give you some idea, in January of 2008, when the behemoth was starting to awaken, the national debt of the U.S. economy stood at $9.2 trillion. Fast-forwarding to now, it stands at $16.7 trillion. Simple math suggests this is an increase of more than 81%. (Source: “The Daily History of the Debt Results,” Treasury Direct web site, last accessed September 20, 2013.)
Unfortunately, it doesn’t end here. Not too long ago, Treasury secretary Jack Lew sent a letter to the U.S. government saying that if they don’t increase the national debt limit currently in place by October, the U.S. economy … Read More
Key stock indices are showing robust performance—especially following the Federal Reserve’s announcement that it will not be tapering its bond buying program at this time. The S&P 500 and Dow Jones Industrial Average reached new record highs last Wednesday; that means the U.S. economy is doing great, right? I mean, just look at the chart below; everything seems to be heading smoothly upward in what is supposed to be the most volatile month of the year, according to The Stock Trader’s Almanac. It’s a fact: the key stock indices like the S&P 500 continue to make successive highs!
Sadly, this seems to be the only notion going around these days, and I completely disagree with this blind optimism and faulty logic. You can’t look at the key stock indices and conclude that there’s economic growth in the U.S. economy; you need to look at other indicators as well.
Chart courtesy of www.StockCharts.com
As it stands, there seems to be a significant amount of disparity.
Looking at the unemployment rate, the situation is dismal. In the August jobs report of the U.S. economy, we found that there were jobs created and that the unemployment rate actually declined slightly. That’s great, but these jobs were created in the low-wage-paying sectors. On top of that, the jobs added in June and July were revised significantly lower; mind you, the unemployment rate remains very high in the U.S. economy compared to the pre-financial crisis period.
In the U.S. economy, the gap between the rich and the poor continues to increase in the war on the middle class. The income gap among the rich and … Read More
Simplicity still prevails when it comes to investing for the long term—namely, saving for retirement. My good long-time friend, Mr. Speculator, disagreed with me on this statement while we were having a debate about simple versus complex investment management.
“You see, gone are the days when it worked,” he said. “Markets have changed. To manage their retirement savings and portfolio, investors really need to start using advance portfolio management techniques, or else they won’t have enough by the time they need the funds.”
Mr. Speculator may be right: some aspects of the markets have certainly changed. For example, the introduction of computerized trading (high-frequency trading) has made markets prone to wild swings. Remember the flash crash in 2010? The Dow Jones Industrial Average plunged about 1,000 points, and then recovered a few minutes later.
Sadly, Mr. Speculator is forgetting that when you are saving for retirement, you are looking at a long-term horizon. Investors shouldn’t be focused on day-to-day fluctuation when they are investing for the long term.
Simple investment management, such as buying good companies for a long period of time, works.
Consider a person saving and investing for retirement in 20 years. Instead of looking for quick profits and worrying about wild swings in the markets, they can just look at companies like The Procter & Gamble Company (NYSE/PG).
Look at the chart below of the company’s stock price in the last 30 years. As you can clearly see, it has risen in spite of all the wild swings we have seen in the overall markets over the last decade, such as the tech boom and the subprime … Read More
American investors are sitting on a lot of money. According to the Investment Company Institute, total U.S. money market mutual fund assets for the week ended July 31 came in at $2.612 trillion. Of that total, 65%, or $1.69336 trillion, is attributed to institutional investors, while $918.93 billion belongs to retail investors. (Source: “Money Market Mutual Fund Assets,” ICI.org, August 1, 2013.)
Even though the stock market has been bullish since early 2009, with the S&P 500 advancing around 140%, investors sitting on the sideline remain skeptical. And on one hand, it’s not hard to see why: the financial crisis that led to the Great Recession may have started back in 2007, but the ripple effects are still being felt today.
U.S. unemployment has been above seven percent for over four years, underemployment has been at least 14% since 2009, and the minimum wage hasn’t budged from $7.25 an hour since July 2009. On top of that, personal debt is up, disposable income is a myth, and consumer confidence is down.
Hints that the Federal Reserve could begin tapering its $85.0-billion-per-month bond-buying program have also made global investors jittery, resulting in markets that are increasingly volatile—and for good reason.
On May 22, the Federal Reserve hinted it might scale back its quantitative easing policy. Over the following weeks, the S&P 500 lost 6.5% of its value. After clawing back the losses throughout July, the S&P 500 took another hit in early August after two Federal Reserve Bank presidents said it was possible the bond-buying program could end in September.
For many Americans, risk in the stock and bond markets is … 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
The Bureau of Labor Statistics (BLS) reported that 162,000 jobs were added to the U.S. economy in July. The unemployment rate registered at 7.4%; in June, it was 7.6%. (Source: “Employment Situation Summary,” Bureau of Labor Statistics web site, last accessed August 2013.)
Looking at this, one must ask the question: is this a good sign for growth ahead in the U.S. economy?
On the surface, the picture does look rosy. The unemployment rate decreasing is actually a good sign, but sadly, there are some fundamental issues with the jobs market in the U.S. economy that need to be fixed before economic growth can fully take place.
First of all, the rate of decline in unemployment isn’t as impressive, having been above seven percent since December of 2008. Prior to the financial crisis in the earlier part of 2007, the unemployment rate in the U.S. economy was below five percent. There are still 11.5 million individuals unemployed in the U.S. economy, while 8.2 million Americans are working part-time because they are unable to find a full-time position. (Source: “Databases, Tables & Calculators by Subject,” Bureau of Labor Statistics web site, last accessed August 2, 2013.)
The second and most critical problem is that low-wage-paying sectors are witnessing robust jobs growth in the U.S. economy; for others, not so much. Jobs that pay better wages and provide employees with benefits are few in number.
In July, we experienced the same problem, as 47,000 jobs were added in the retail trade sector—this includes places like general merchandise stores, personal care stores, and building and garden supply stores. Meanwhile, 38,000 jobs were added … 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
Companies like ManpowerGroup Inc. (NYSE/MAN) and others in the staffing and outsourcing industry are set to earn big profits as the emerging trend of temporary workers continues to grow in the U.S. economy.
In the aftermath of the financial crisis, a significant number of people in the U.S. economy were let go from their jobs. The reason was simply because companies didn’t have customer orders to fill, so they had no other options than to reduce their labor force to cut expenses. The unemployment rate in the U.S. economy reached 10%, and there were worries that it wouldn’t ever get back to its historical normal range.
But now we are seeing the jobs market in the U.S. economy slightly improve. The unemployment rate has come down a little—though it’s still high—to 7.6% in June.
In the midst of all this, a new phenomenon has emerged: the rise of temporary jobs. And it has not really been discussed in the mainstream media.
Consider that in June, there were 2.68 million individuals in the U.S. economy working in the temporary help services sector. You may know temporary help services by their more common names: placement agencies, employment agencies, or temp agencies. (Source: “Professional and Business Services: Temporary Help Services,” Federal Reserve Bank of St. Louis web site, July 5, 2013, last accessed July 10, 2013.)
The number of individuals in the U.S. economy working through a temp agency has been increasing, and in June it reached its highest level since 1990. In the first half of this year alone, the number of Americans working for temp agencies has increased almost four percent, … 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
Investors who love technical analysis must be having a sense of déjà vu. Whenever the Federal Reserve announces it’s ending its quantitative easing policy, the markets respond by cratering.
In March 2010, when the Federal Reserve announced it was ending its first round of quantitative easing (QE1), the Dow Jones Industrial Average and S&P 500 both fell 14% over the next three months. To help prop up the economy, the Federal Reserve initiated QE2 in November 2010 and concluded it seven months later. By early October, the Dow and S&P 500 had lost close to 15% in value.
In September 2012, the Federal Reserve initiated QE3—investors’ nerves were calmed when they discovered it was open-ended. Today, the Federal Reserve spends $85.0 billion a month on Treasury bonds and mortgage-backed securities to help prop up the American economy.
As I have been reading, that massive monthly cash injection doesn’t even begin to give the full picture of how much liquidity the Federal Reserve’s quantitative easing policies, and those of other central banks, are flooding the financial markets with.
Since the financial crisis began in 2007, the five biggest central banks have purchased roughly $12.0 trillion in assets. Coupled with the near-record-low interest rates, that accounts for about $33.0 trillion of fiscal and monetary stimulus spending—that’s about 46% of the global economy.
Suffice it to say, the Federal Reserve’s artificially low interest rates have made it easier than ever to borrow money, sending many international stock markets to new heights. And it’s from these dizzying heights that the markets are pondering the future of QE3.
While the Federal Reserve hasn’t said equivocally … Read More
During the financial crisis, investors saving for retirement were punished for staying in the stock markets. The key stock indices plummeted and took many investors’ wealth.
After seeing the crash taking a heavy toll on their portfolios, investors moved into safer asset classes. They rushed to bonds, gold, and gold miners because they thought that’s where the value was—and where they could make some of their lost savings back.
Things are different now. If investors are still tied to those asset classes, chances are they are feeling a pinch. Gold prices are down significantly from their peaks and bond prices appear to be in a freefall. Since the beginning of the year, gold has fallen nearly 30% in value, and bond yields—those of 30-year U.S. bonds—have soared more than 20%.
Sadly, even with all the financial innovation, there isn’t an investment instrument that protects an investor’s portfolio completely from market fluctuations. However, investors can minimize their downside risks significantly by managing their risk properly.
Managing risk may sound like an easy concept at first, but it’s far from it. It ultimately consists of three steps and requires a significant amount of research. The three risk-management steps are risk identification, risk evaluation, and risk reduction.
Risk Identification: This is the most important part in risk management. Investors need to find what kind of risks will affect their portfolio. For example, imagine a person heavily invested in one sector; even if he or she is diversified across different companies, troubles can take a chunk out of their portfolio. Take gold as it stands now: even if investors bought different gold miners when … Read More
The U.S. bond market seems to be the topic of discussion among investors these days. The pundits of the financial media are constantly screaming out their stance on where it’s headed next and how it will play out for the investors who are involved.
While the majority seems to be favoring a possible downturn in the U.S. bond market, others are saying we might stay at these levels for some time, and are even suggesting buying on the dips. No matter what their opinion may be, they all seem to have solid reasons for their take.
Aside from this, what we already know is that bond yields are on the rise. I mentioned in these pages not too long ago that May wasn’t a great month for the bond market—the momentum was more towards selling. Yields on 10-year and 30-year U.S. Treasuries have surged significantly over the course of the month.
Remember, rising yields of 10-year and 30-year U.S. Treasuries are important for the entire U.S. bond market, because they act as a benchmark for other types of bonds, such as corporate bonds.
Looking at the selling in the U.S. bond market and the increased talks of downturn, I question how big of an impact a collapse in the bond market could really have on the overall wealth of investors and how much money is on the line.
According to the Securities Industry and Financial Markets Association, the outstanding U.S. bond market debt stood at $38.13 trillion at the end of the fourth quarter of 2012. (Source: “Statistics,” Securities and Financial Markets Association web site, last accessed June 6, 2013.) … Read More
Despite the raft of negative economic news we’ve been seeing over the last umpteen months, additional sour news that backs up the prevailing negative winds on Wall Street still manages to shock even the most seasoned of analysts.
According to an article headline published by Dow Jones Newswires, “U.S. Factories Show Surprising Contraction.” I’m not sure why the editors at Dow Jones Newswires would be surprised—disappointed, perhaps, but not surprised—but apparently, they are. (Source: “U.S. Factories Show Surprising Contraction,” NASDAQ web site, June 3, 2013.)
They are surprised, in spite of high unemployment, falling median incomes, an increasing number of Americans receiving food stamps, high personal and student loan debt, and stagnant wages. Even Wall Street seems a little tepid. Of the S&P 500 companies that have issued corporate earnings guidance for the second quarter of 2013, almost 80% have issued a negative outlook.
So I’m not sure why anyone would be surprised that U.S. factories showed a contraction.
The Institute for Supply Management (ISM) said its index of economic activity in the U.S. manufacturing sector contracted in May for the first time since November 2012, and only the second time since July of 2009. After flirting with the 50.0 level, the Purchasing Managers’ Index (PMI) fell to 49.0 in May from 50.7 in April. A reading below 50.0 indicates a contraction in the manufacturing sector and, usually, ebbs and flows in step with the health of the economy. (Source: “May 2013 Manufacturing ISM Report On Business,” Institute for Supply Management web site, June 3, 2013.)
And it’s not as if the United States is an economic island. China, the … Read More
The stock market rally that began in March of 2009 is gaining attention once again. The key stock indices have surpassed the highs they registered before the U.S. economy was hit with a financial crisis and the ones made at the peak of the tech boom.
With all this, the direction in which the key stock indices are headed next has become a topic of discussion among investors: can they go any higher? Or we are bound to see another market sell-off, like the one we saw in 2008 and early 2009?
When looking at the state of the global economy, things are turning bleak. We have major economies outright worried about their future economic growth. For example, the Chinese economy is expected to grow at a slower rate compared to its historical average; the Japanese economy is still struggling with a recession, and efforts by the Bank of Japan to boost the economy haven’t really showed much success; and the eurozone is witnessing its longest economic contraction, with major nations falling prey to economic slowdown.
But looking at the U.S. economy, it portrays a different image; it appears things have improved. Unemployment is lower and consumer spending has increased since it edged lower in the financial crisis—both possible good signs of a stock market rally.
To no surprise, the noise is getting louder and louder as the key stock indices are moving higher. The bears are calling for the end of the bull market, while the bulls are cheering for the key stock indices and believe that they are bound to go much higher. Estimates are being thrown out; … Read More
When the financial crisis took grip on the U.S. economy, investors fled the stock market and ran towards bonds—more specifically, high-quality U.S. government bonds. The reason behind this was very simple: they would rather invest their money in something where they knew their capital was safe than in the stock market, which was uncertain at the very best.
As a result, bond prices soared and the yields collapsed. To give you some idea: near the end of July 2012, 30-year U.S. bonds had a yield of less than 2.5%. Prior to the financial crisis, these same U.S. bonds provided investors with a yield above 4.5%.
That was the past. Now, the effects of the financial crisis are going away: the U.S. economy actually seems to be improving, the financial system is in better health, and the employment situation appears much better.
With all these changes occurring in the U.S. economy, investors are asking whether the U.S. bonds market is still a safe place to be.
According to Bill Gross, also referred to as “The Bond King” by the mainstream, the bull market in the U.S. 30-year bond probably ended on April 29. The reason: the yields reached lows and the prices peaked. (Source: Cox, P. and Leondis, A., “Gross Says Bond Bull Market Probably Ended April 29,” Bloomberg, May 10, 2013.)
Keeping this in mind, take a look at the chart below of the yields on U.S. 30-year bonds, paying close attention to the circled area:
Chart courtesy of www.StockCharts.com
Looking at this chart through technical analysis, the yields of 30-year bonds show an interesting development. Since the beginning of … Read More
In its most recent statement, the Federal Open Market Committee (FOMC) said it will continue to print $85.0 billion a month. With this money, it will buy $45.0 billion worth of long-term government debt and $40.0 billion worth of mortgage-backed securities (MBS) each month.
How long will it continue to do this? As the statement suggests, “The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.” (Source: “FRB: Press Release–Federal Reserve issues FOMC statement–May 1, 2013,” Board of Governors of the Federal Reserve System web site, May 1, 2013.)
At the very core, what this essentially means is that there will be an increased supply of U.S. dollars. The Federal Reserve has printed a significant amount of money since the financial crisis to bring liquidity into the U.S. financial system. Its balance sheet has grown over $3.0 trillion, and as it continues to do the same for an unspecified amount of time, it will only increase. For example, even if the Federal Reserve stops printing (quantitative easing) at the end of 2013, its balance sheet will grow by $1.0 trillion regardless.
In the short run, the printing may work, the unemployment may decrease, and the inflation may stay tamed, but eventually, with what the Federal Reserve has accumulated over the years—the mortgage-backed securities and government bonds—it will have to sell them back into the bond market.
For investors in the bonds market, this may not be good news, because it poses a significant threat … Read More
Saving for a comfortable retirement is what motivates many people to start their wealth management planning regimen. Whether you’ve been planning for retirement since you were 25 or 50, saving is only half the battle; after retirement, the real work begins. With your primary source of income gone, you have to figure out how to make your retirement fund last. That’s not as easy as it sounds.
In 2008, at the beginning of the financial crisis, Metropolitan Life conducted a survey asking people who were about to retire on their 401(k) plans what they thought a safe withdrawal amount would be. The answer, on average, was about 10% annually.
That number might have made sense years ago, when interest rates were high and retirees could bank on making money on fixed-income investments like Treasuries. But today, 30-year Treasuries are paying just 2.8% annually, and 10-year Treasuries offer a lowly 1.66%.
Interestingly, not even the financial crisis got people thinking more seriously about retirement withdrawal rates. In a 2011 Fidelity Investments survey, the mean annual withdrawal rate came in at a solid 8.4%; but the answers were all over the place, ranging from a conservative one percent to a no-holds-barred 25%.
In lieu of a one-percent, 10%, or 25% annual withdrawal rate, many advisors have been telling their clients that four percent is a safer number (adjusted for inflation). But is that sustainable? One study showed that an inflation-adjusted withdrawal rate of more than five percent significantly increased one’s risk of wiping out their retirement savings.
The following chart shows how long a hypothetical $500,000 retirement portfolio (containing 50% stocks, 40% … Read More
Revenues are coming in light, but earnings are holding up.
Now that it’s the heart of earnings season, it’s a good time to reevaluate portfolios for risk.
There is still a lot that could go wrong in this market, and there is no help from the rest of the world in terms of economic growth.
Also evidenced by this earnings season is the continuing buildup corporations have in terms of cash. What this signals to me is that corporations are still very nervous about making major new investments, which is holding the U.S. economy back.
Getting corporations to invest in new businesses, plant and equipment, and new employees requires certainty. And this is the one thing that is lacking in so many important markets for the simple reason that there is too much debt.
There are actually a lot of fundamentals that are positive for corporations. Interest rates are very low, so borrowing costs have never been more favorable for big companies.
There is some price inflation in the economy, which translates to higher earnings, and because of the weakness in commodity prices, the cost of raw materials is going down.
But large corporations are not going to invest in major new operations in markets where there is the potential for massive instability—currency instability, for sure.
So the result is just the status quo for many corporations in terms of their business operations. This is why cash balances continue to build and share buybacks are so common.
I would say that given the earnings results so far, the stock market is not overvalued. If there isn’t any meaningful revenue growth … Read More
One of the main reasons a stock market rally occurs is due to a general consensus among market participants regarding future expectations. Market participants currently believe that companies will be showing better earnings and the overall economic conditions will improve from where they stand now.
Similarly, for certain stocks to go higher, companies should be expected to perform well in the future and grow their business—consistency in sales and profit is expected.
With this said, after profiting significantly from an investment, you might believe that you will be able to profit from it all the time, and that the prices will continue to soar higher, regardless of economic conditions or other factors. Remember the housing market boom in the U.S.? It wasn’t uncommon to hear someone say, “Home prices always go up,” or, “The housing market is always a great place to invest in.” But a few years down the road, we can all see what has happened—home prices in the U.S. economy are still depressed from their highs in 2006.
When it comes to the wider stock market, the situation is very similar—things don’t stay the same forever. A certain stock may be doing great at some point in time, but it may not be the greatest investment to own at another time. Investors must focus on the future outlook of a company and how it will perform, rather than what it has done in past.
Consider Caterpillar Inc. (NYSE/CAT), for example. After the financial crisis and the broad market sell-off in the key stock indices, this company was a great buy. Just take a look at the chart … Read More
Corporations, like investors everywhere, are very reticent about current business conditions. They have been this way for years. And they have way too much cash, which is why dividends have been increasing.
The financial crisis really was the catalyst for a huge change in the way corporations allocate their capital. Corporations hunkered down on costs and became extremely tight with their money.
It is highly likely that large corporations will increase their dividends this earnings season. Of course, this will be great news for those investors who seek out dividends from blue chips.
This market is at a high, but it is fairly valued and has a lot of potential to increase further—if corporations can produce growth and there is no major new shock from an event, like a currency default in Europe, for example.
There is still tremendous reticence on the part of corporations to invest in new business operations, new plant and equipment, and new full-time employees. And while this is not a positive for the Main Street economy, it is a positive for shareholders collecting dividends.
Corporations are sitting on a mountain of cash. In many of the earnings results so far, large corporations are reporting too much free cash flow. And they need to do something with all this money, because cash does not earn a rate of return greater than the rate of inflation.
One of the easiest ways to do this is to return the money in the form of dividends to stockholders. I still firmly believe that blue chip investing will do well over the long term.
There may be some spectacular downside … Read More
Farmers really are the best customers.
Monsanto Company (NYSE/MON) has become more than a 10-bagger since listing on the stock market. Its performance over the last year has been good, and the company just beat the Street with its quarterly earnings results.
I suspect that many farmers have a kind of love/hate relationship with Monsanto. The company’s “Roundup Ready” products work, but it’s the way the company has litigated some farmers that has probably turned off a number of customers.
The company’s earnings results were good. Revenues in its latest quarter grew 15% to $5.5 billion. Global corn sales were particularly strong. Earnings came in at $1.5 billion, up 22% from comparable earnings of $1.2 billion.
Monsanto’s 10-year stock market performance has been outstanding, and I think investors can attribute a lot of weight to this—especially those who might be considering investments related to agriculture. Monsanto’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
Wall Street has been consistently increasing Monsanto’s fiscal 2013 and fiscal 2014 earnings estimates.
Imagine this business if you have the loyalty of a farmer. The vast majority of farmers are in business for the very long term. They’re not going away tomorrow.
Barriers to entry are high because of seed development and the years it takes to develop proprietary technologies.
Monsanto is in a very good position right now, as the commodity price cycle favors agriculture. The prospect for continued strength in both revenues and earnings growth this year is very good, as the U.S. corn crop should reach an all-time record high.
Monsanto’s stock market performance has been pretty darn solid, especially considering … Read More
The housing slump in 2007 and the financial crisis following it left the U.S. economy in sorrow. Millions of Americans lost their savings due to the stock market collapsing to the lowest levels experienced in a while. Key stock indices in the U.S. have shed more than half of their value, and some of the well-known companies went underwater.
Having said that, the key stock indices in the U.S. are back to where they were before the financial crisis began. But while the stock markets have recovered, many investors have lost courage to get back into the markets. What should investors do if they are unsure about investing in the stock market again?
The most important thing investors need to keep in mind is that fluctuations in the stock market are very normal—they shouldn’t discourage investors from investing and growing the value of their portfolios.
There have been many instances in the past when the key stock indices in the U.S. plummeted, leaving investors in misery.
Furthermore, investors need to know that investing in the stock market isn’t easy either. No matter how much information an investor might have about a stock, there is still some risk associated with it—sometimes, losses are imminent no matter how good the company may be. Losses can occur as a result of poor overall market conditions or many other factors.
However, if investors master two techniques—taking profits and learning from mistakes—they can minimize their losses, and at the end of the day, they can become better investors.
1. Taking Profits
As I mentioned earlier, key stock indices are trading at the same levels they … Read More
During the financial crisis, when the banking system was on the verge of collapse, the Federal Reserve came to the rescue. As a result, the central bank ended up reducing interest rates in the U.S. economy to the historical low level.
The reasoning behind this was very simple: the financial system needed liquidity—and the banks weren’t lending to anyone.
On one hand, the argument for these actions by the Federal Reserve was that when interest rates go down, businesses and consumers alike will be more prone to borrowing, because it simply costs them less to owe money. This phenomenon has its own implication—when businesses and consumers borrow, they spend money, and from there, economic growth kicks in and so on and so forth.
On the other hand, these activities by the Federal Reserve were not well received. Those who opposed the Fed’s policies reasoned that it was a short-term fix, which doesn’t do much in the long haul. In addition, they argued that the banks were the only ones who took advantage of this.
While both arguments have their backing, in the midst of it all, these actions had—and, as a matter of fact, they still have—a silver lining for those who are planning for retirement or simply looking for ways to save more money or cut expenses. One way you can take advantage of the Federal Reserve policy is to refinance your mortgage.
Refinancing Your Mortgage
As the Federal Reserve slashed interest rates to boost economic growth, the mortgage rates offered by the banks also decreased. In January of 2013, the conventional 30-year fixed-rate mortgage in the U.S. economy … Read More