Eurozone Still Messy, but Economic Recovery Has Begun
Europe is open for business. Well, kind of. The region—namely the 19-country eurozone—has recently been in the news with the Greece fiasco and its potential exit.
Greece now has a four-month reprieve in the form of an extension to its current bailout loans and terms, but the distressed country still has to convince eurozone finance ministers that its revised bailout plan for austerity measures makes sense.
For the time being, we are seeing some progress in the eurozone that points to growth. I had been worried about the negative impact from the Russian mess, but so far, it appears to be a non-issue. In the end, Germany, the strongest member of the eurozone, remains on solid footing and that’s what really matters.
What’s Behind the Eurozone’s Economic Progress?
The region is also being driven by the flow of easy money after the previous decision by the European Central Bank (ECB) to maintain near-zero interest rates and buy back about US$70.0 billion in eurozone bonds monthly. Sound familiar? It’s just like what the Federal Reserve did for years. The ECB’s similar actions will likely mean gross domestic product (GDP) growth and higher stock market prices ahead in the region.
Now the eurozone is not as strong in its recovery as the U.S., but I sense there will continue to be good investment opportunities to come, especially given the cheaper relative valuation of the eurozone.
Depending on whom you listen to, the eurozone’s GDP is expected to expand anywhere from 1.2% to perhaps as high as 1.5% this year. Again, not great, but it’s … Read More
The Federal Reserve made it official on Wednesday, announcing it would be cutting the remaining $15.0 billion from its monthly bond-buying program, also known as QE3.
So with that, the period of easy money flowing into the pockets of investors is over. Remember, it was the Federal Reserve’s relaxed easy monetary policy that helped to drive the S&P 500 up nearly 200% since 2009—and now it’s over, folks.
The stock market reacted with stocks heading lower, as there was a slight sliver of hope the Federal Reserve would decide to hold back on eliminating QE3. Investors will now have to deal with bond yields that could begin to move higher on the Federal Reserve’s move.
The Federal Reserve didn’t give a timeframe for when interest rates will begin to move higher from their near-zero levels, but the consensus is calling for the rate increase to begin sometime in mid- to late 2015. As you know, higher rates by the Federal Reserve will drive up yields and carrying costs for both companies and personal debt. Just think about the more than $17.7 trillion in national debt and how the higher interest rates will impact the government’s out-of-control carrying costs.
We are at what I would call a crux.
Stocks want to go higher but need a fresh catalyst to do so. The advance reading of the third-quarter gross domestic product (GDP) growth came in at a healthy annualized growth rate of 3.5%, which while down from the booming 4.6% in the second quarter, is nonetheless indicative that the economy is expanding.
At the end of the day, a strong economy, continued … Read More
I’m not sure how many of my Daily Gains Letter readers realize that Chinese stocks, as reflected by the Shanghai Composite Index (SCI), have outperformed the S&P 500 so far this year. After offering up underwhelming performances since 2009, the SCI has rallied 9.98% this year, compared to 8.44% for the S&P 500 and 3.23% for the Dow Jones Industrial Average as of Monday.
We’re not talking about resurgence in Chinese stocks and a return to the glory days more than five years ago; instead, I’m simply saying there’s finally some buying in an oversold Chinese stock market.
Chart courtesy of www.StockCharts.com
Of course, there’s the high anticipation of China-based Alibaba (NYSE/BABA) joining the U.S. capital markets on September 19; this move will likely stroke the enthusiasm of investors here. The Internet services company is massive and will give U.S. companies a run for their money, further opening the U.S. market to consumers and businesses worldwide. You can wait and pick up shares of Alibaba or you can play the company via Yahoo! Inc. (NASDAQ/YHOO), which holds a 23% stake in Alibaba.
Now, if you’re a regular reader, you may know that I have been, and continue to be, bullish on the Chinese economy and China. Yes, the economy is stalling, but we are still talking about growth of around 7.5% this year, which is far greater than the rest of the G7 countries.
Just like Facebook, Inc. (NASDAQ/FB) in the social media market with its more than one billion users and enormous potential, I feel the same towards China and its 1.3 billion people. When you have a market … Read More
The stock market appears anxious to move higher to new record highs.
In the past week, the Federal Reserve released its Federal Open Market Committee (FOMC) meeting minutes that suggested it wanted to see stronger, sustained growth before deciding on when to raise interest rates. This includes both economic growth and jobs creation.
On Thursday, the Bureau of Economic Analysis (BEA) will report the second reading of the second-quarter gross domestic product (GDP), which came in at a surprising annualized four percent for the advance reading.
The consensus is that the second reading will show the GDP growth holding at the same four-percent level. If it does, it would be excellent for the economy but at the same time, ironically, it would make investors and the stock market nervous about the status of interest rates.
The issue is that the Fed wants to see controlled and steady economic growth and a four-percent reading could raise red flags, pointing to inflation—which means higher interest rates. The inflation rate is benign at this time as consumers continue to hold back on spending.
The stock market will get anxious if the reading remains the same, but we would want to wait to see how the economy fares in the third and fourth quarters of the year before making any drastic moves.
Of course, the stock market is all about expectations going forward and clearly, a strong second reading of the 2Q14 GDP will send some to the exits.
The Fed also wants to see the jobs market continue to expand at its previous trend of generating an average of more than 200,000 monthly … Read More
On one hand, it’s great the economic growth is showing renewed progress as the advance reading of the second-quarter gross domestic product (GDP) growth came in at an annualized four percent, according to the Bureau of Economic Analysis. (Source: Bureau of Economic Analysis web site, July 30, 2014.)
Now I realize this is only the advance reading and things can change over the next few weeks as more credible estimates come into play, but I’m sure the Federal Reserve is keeping close tabs on the numbers. Investors are also likely quite nervous.
It appears that the weak showing in the first-quarter GDP was an aberration, driven by the extreme winter conditions. But the reality is that if the GDP continues to expand at this pace, we could see the Federal Reserve begin to increase interest rates quicker than expected in 2015.
The GDP reading saw gains across the board in consumption, investment, exports, imports, and government spending, which will catch the eye of the Federal Reserve.
We know the Federal Reserve doesn’t want to slow the economic renewal, but at the same time, it also wants to make sure inflation doesn’t rise too fast.
The report from the BEA pointed to the fact that the price index for gross domestic purchases used as a measure of inflation increased an annualized 1.9% in the second quarter, well above the 1.4% in the first quarter. Even when you take out the volatile food and energy components, the reading increased 1.7%, versus 1.3% in the first quarter.
And given that the jobs numbers continue to show progress with the unemployment rate standing at … Read More
The situation in Crimea should be closely monitored as it pertains to Europe and the eurozone. Russia is a major trading partner with the eurozone as well, supplying about 40% of the energy requirements in the area. That is why an escalation in Crimea could devastate the region, especially at a time when the economy is finally growing in the eurozone.
I’m carefully watching the stand-off in Crimea and, more importantly, what Russia is doing. Whether it’s simply geopolitical posturing or a plan to enter into Crimea is unclear. The Russians really don’t want a conflict, as it would likely push the country into a recession.
And a recession in Russia would also impact Europe and could drive the region’s economies down. Now, Russia is currently setting up meetings with the United States and United Nations (UN), so there’s some optimism that a peaceful resolution could emerge from the crisis.
The reality is that a healthy Russia also means better times for Eastern Europe, including some of the area’s strongest economic regions, such as Poland.
I view Europe and the eurozone as a potential investment opportunity if the Russia-Ukraine situation is resolved.
The market in Europe and the eurozone is massive and includes more than 800 million people who demand goods and services.
The eurozone’s gross domestic product (GDP) expanded at a rate of 0.3% in the fourth quarter, according to Eurostat. The eurozone is estimated to report GDP growth of 1.2% this year and 1.5% in 2015, according to the International Monetary Fund (IMF). Of course, these numbers could decline if a conflict surfaces in Ukraine.
A look at … 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
I hate to harp on the U.S. housing market so much, but it is a major indicator of the health of the U.S. economy. Following previous recessions, investment in the U.S. housing market increased early on and helped drive the recovery. In fact, the U.S. housing market was a major factor that helped lift the U.S. economy out of past recessions in 1981, 1990, and 2001. But it isn’t happening this time around.
According to the National Association of Home Builders, the U.S. housing market contributes to the country’s gross domestic product (GDP) in two ways: private residential investment and consumption spending on housing services. Historically, residential investment, which includes construction of new single-family and multi-family structures, residential remodeling, the production of manufactured homes, and brokers’ fees, has averaged around five percent of U.S. GDP. (Source: “Housing’s Contribution to Gross Domestic Product (GDP),” National Association of Home Builders web site, last accessed March 3, 2014.)
Housing services, which includes gross rent, utility payments, and imputed rent (an estimate of how much it would cost to rent owner-occupied units), averages between 12% and 13%. That leads to a combined total of 17%–18%.
But the U.S. housing market has been falling short as an engine of economic growth. In 2005, residential investment accounted for 6.1% of U.S. GDP. In 2012, it accounted for just 2.8%, and it has averaged just three percent since then—meaning that two percent of the national GDP is missing from private residential investment.
More broadly, since the U.S. housing market collapsed in 2008, the industry has made less than half its normal contribution to U.S. economic growth. According … Read More
If the stock market is only as strong as the companies that go into making up the index and their earnings are contingent upon consumer spending, then the durable goods numbers don’t really look all that great.
New orders for manufactured durable goods slipped by one percent, or $2.2 billion, to $225.0 billion—the third decrease in the last four months. Analysts had forecasted a January drop of 0.7%. The one-percent drop in January comes on the heels of a 5.3% decrease in December. (Source: “Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders January 2014,” United States Census Bureau web site, February 27, 2014.)
In January, shipments of manufactured durable goods, which have been down for two consecutive months, decreased $0.9 billion, or 0.4%, to $232.3 billion. This followed a 1.8% decrease in December.
Inventories—the number of products sitting on a shelf—increased by 0.3% ($1.0 billion) in January to $389.1 billion. This represents the highest level ever recorded and follows a 0.9% increase in December.
Non-defense orders for capital goods in January slipped by 3.9% ($3.2 billion) to $78.3 billion. Shipments decreased by one percent, or $0.8 billion, to $75.1 billion, while unfilled orders increased by 0.5%, or $3.2 billion, to $644.7 billion. Inventories increased $0.5 billion, or 0.3%, to $177.5 billion.
Even the less volatile core durable goods numbers fail to really impress. Orders for long-lasting U.S. durable manufactured goods, minus the more volatile transportation industry, climbed 1.1% in January, the biggest jump since May. This sort of balances out the higher-than-expected 1.9% drop in December. Analysts had forecasted a 0.1% decline in January core durable goods.
Still, … Read More
While the U.S. economy is hardly on solid footing, the fact remains that as the world’s biggest and most influential economy, the U.S. doesn’t have to be running optimally to keep the global economy chugging along. Though, it would be nice if the U.S. economy would gain sustainable traction. Until then, we will have to be content with its glacial pace of recovery.
And it is slow. In 2012, gross domestic product (GDP) growth was 2.8% and in 2013, it slowed to just 1.9%. Things are expected to get better over the next two years. U.S. GDP growth is forecast to hit 2.8% in 2014 and an even three percent in 2015.
The rest of the world will be playing catch-up. Well, save for the Chinese economy, which has a 2014 growth forecast of 7.5%. GDP growth in the eurozone picked up 0.3% in the fourth quarter of 2013—the third quarter of growth since the end of an 18-month recession. (Source: “Eurozone GDP growth gathers speed,” BBC News web site, February 14, 2014.)
The International Monetary Fund (IMF) forecasts that India’s GDP growth will hit 4.6% this year and climb to 5.4% in 2015. Brazil recently revised its 2014 GDP growth rate from 3.8% to 2.5%—which is still higher than analysts’ GDP growth forecasts of 1.79%. (Sources: Mishra, A.R., “IMF says India needs more rate hikes to bring inflation down,” Livemint.com, The Wall Street Journal, February 20, 2014; “Brazil cuts 2014 budget, GDP estimate,” Buenos Aires Herald web site, February 21, 2014.)
For investors who have been waiting for a broadly based global recovery, these are encouraging signs. It also … Read More
The theme since 2010 has been very simple: the U.S. economy is witnessing economic growth. As a result of this, the stock market increased and broke above its previous highs made in 2007. Investor optimism soared, and those who were bearish saw their stock portfolio disappear.
As the new year, 2014, began, the theme became a little more complex: the U.S. economy is going through a period of economic growth, but it’s becoming questionable. The question asked by investors these days: is the U.S. economy headed for economic slowdown, and is the stock market—which has provided investors with great returns—about to see another downturn?
The economic data that suggested the U.S. economy is growing has started to suggest this may not be the case anymore. For example, after the financial crisis, the unemployment rate in the U.S. economy declined. It meant more people were getting jobs and they had money to spend—the kind of jobs created and if they made any impact is still up for debate. In December, we heard that only 75,000 jobs were added to the U.S. economy, and in January, this number was only 113,000. (Source: “The Employment Situation,” Bureau of Labor Statistics, February 7, 2014.) The number of jobs added to the U.S. economy has missed the market estimate by a huge margin for two months in a row, and the growth compared to the early part of 2013 isn’t very impressive.
The gross domestic product (GDP) growth rate of the U.S. economy doesn’t look so impressive, either. We have created a table to show how it has been declining. Look below:… Read More
The global economy looks to be in trouble, as there may be an economic contraction on the horizon. If all the pieces of the puzzle fall into place, companies on key stock indices might face issues in delivering corporate earnings.
Major economic hubs in the global economy are witnessing an economic slowdown. Those economies aren’t marching ahead, and their growth rates seem to be stagnant. If this continues, then it wouldn’t be a surprise to eventually see the global economy cave in, resulting in a global economic slowdown.
The eurozone, one of the biggest economic hubs in the global economy, remains under severe scrutiny. In the third quarter, the gross domestic product (GDP) growth rate for the common currency region declined to 0.1%, while in the second quarter, the GDP growth rate was 0.3%. (Source: “Second estimate for the third quarter of 2013,” Eurostat web site, December 4, 2013.)
The troubled countries in the eurozone, including Greece, Spain, and Portugal, are stuck in depression-like conditions, but major countries in the region also face economic pressures. For example, Germany’s third-quarter GDP growth rate came in at 0.3% compared to the second quarter, which saw 0.7% GDP growth from the previous quarter. (Source: Ibid.)
Australia, another major economic hub in the global economy, is facing headwinds as well. In the third quarter, the Australian economy grew by only 0.6% from the previous quarter. The annual GDP growth rate of Australia registered at 2.3%. In the second quarter, the Australian economy grew 0.7% and the annual growth rate was 2.4%. (Source: Kewk, G., “Australia’s economic growth falling short,” The Sydney Morning Herald web … Read More
Consumer spending is very critical to the U.S. economy, as it makes up a significant portion of the gross domestic product (GDP). If consumer spending declines, then U.S. GDP growth becomes very questionable; when it increases, it can provide an idea about where the U.S. economy is heading.
I look at consumer confidence as one of the indicators of consumer spending. The logic behind this is that if consumers are confident, they will most likely spend more, compared to when they are pessimistic.
Sadly, the consumer confidence in the U.S. economy seems to be deteriorating these days. This is definitely not a good sign if we want the U.S. economy to improve going forward.
Look at the Conference Board Consumer Confidence Index, for example; in October, it witnessed a slide of more than 11%, having stood at 71.2 in October from 80.2 in September. The Consumer Expectations Index declined 15.5% in the same period. (Source: “Consumer Confidence Decreases Sharply in October,” The Conference Board web site, October 29, 2013.)
Some will blame the decline in consumer confidence on the U.S. government shutdown. This may not be completely true, however, as we have been seeing continuous deterioration in consumer confidence. Please look at the chart of the University of Michigan Consumer Sentiment Index below.
Chart courtesy of www.StockCharts.com
The University of Michigan Consumer Sentiment Index stands at the lowest level of 2013 in October. It has been declining since July.
Currently, we are seeing too much attention being paid to the key stock indices making new highs each day, but not to the underlying factors that affect them.
Consumer confidence declining … 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
I’m not sure if it’s indicative of something darker or symptomatic of what we think is important, but on a day when tensions in Syria are at a boiling point and the U.S. releases solid second-quarter gross domestic product (GDP) growth numbers, the most popular search on Google is Michael Jackson’s 55th birthday.
On Thursday, August 29, the Bureau of Economic Analysis announced it revised its second reading on U.S. GDP growth analysis up to 2.5% from an initial forecast of 1.7%. Exports in the second quarter grew faster than previously expected, increasing 8.6%, versus a 1.3% decrease in the first quarter. (Source: “National Income and Product Accounts,” Bureau of Economic Analysis web site, August 29, 2013.)
The data show that exports in the second quarter climbed at their fastest pace in more than two years. Going forward, economists expect growth in the second half of the year to be somewhat more robust.
On one hand, some maintain the strong GDP growth numbers suggest the U.S. is more prosperous and productive than previously thought. Maybe, but it’s going to be pretty tough for Americans to continue to drive 70% of all GDP growth when unemployment and personal consumer debt levels remain high, a record number of Americans are on food stamps, wages are stagnant, and more and more Americans are landing part-time jobs instead of full-time jobs.
On the other hand, I contend the strong GDP growth numbers mean we aren’t quite as healthy as we think. In fact, because of our weak economic footing, our rising GDP growth numbers are a result of U.S. firms selling their products to … Read More
It was just a week ago that the Federal Reserve, pointing to an improving economy, said it would continue its quantitative easing program—at least until America’s job market improves substantially. We weren’t, however, told what “substantially” looks like.
Many think that means an unemployment rate of 6.5%. And to get there, the U.S. would have to create somewhere in the neighborhood of two million jobs. That’s assuming all things remain equal—but, of course, they never do.
The Federal Reserve also said that, thanks to the economic rebound, it would consider tapering its monthly $85.0-billion purchase of Treasuries and mortgage-backed securities by the end of the year.
On top of that, the Federal Reserve said it could end its quantitative easing policies altogether in 2014.
Federal Reserve Chairman Ben Bernanke’s celebratory remarks may have been a little premature.
The Department of Commerce reported on June 26 that gross domestic product (GDP) in the first quarter of 2013 grew 1.8% over the fourth quarter of 2012. Previously, the Bureau of Economic Analysis (BEA) forecast first-quarter 2013 GDP growth of 2.4%. (Source: “National Income and Product Accounts Gross Domestic Product, 1st quarter 2013 [third estimate]; Corporate Profits, 1st quarter 2013 [revised estimate],” Bureau of Economic Analysis web site, June 26, 2013.)
Aside from home construction and government, the final 2013 first-quarter GDP report from the Commerce Department showed downward revisions. For example, consumer spending—which accounts for almost 70% of U.S. economic activity—increased by just 2.6%, much less than the forecasted 3.4%. That may not sound like much, but it means spending was 23% below forecast.
Granted, the numbers reflect the U.S. economy as … Read More