Daily Gains Letter » inflation https://www.dailygainsletter.com Mon, 20 May 2013 05:57:27 +0000 en-US hourly 1 https://wordpress.org/?v=3.5.1 Why Knowing the Currency Risk Can Pay Off https://www.dailygainsletter.com/wealth-management/why-knowing-the-currency-risk-can-pay-off/884/ https://www.dailygainsletter.com/wealth-management/why-knowing-the-currency-risk-can-pay-off/884/#comments Thu, 16 May 2013 05:59:06 +0000 Moe Zulfiqar <![CDATA[Wealth Management]]> <![CDATA[currency risk]]> <![CDATA[ETF]]> <![CDATA[inflation]]> <![CDATA[risk management]]> https://www.dailygainsletter.com/?p=884 <![CDATA[

Knowing the Currency RiskPortfolio management is the key to growing savings over time. The implication behind this is that if an investor manages their portfolio regularly, adjusting asset classes based on market and economic conditions, they can reduce their risk and earn a ... Read More

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Knowing the Currency RiskPortfolio management is the key to growing savings over time. The implication behind this is that if an investor manages their portfolio regularly, adjusting asset classes based on market and economic conditions, they can reduce their risk and earn a decent rate of return, as well as peace of mind.

That said, investors need to look out for many different types of risks. To name a few, investors need to protect their portfolio from market fluctuations, reduce industry-specific risks, and keep in mind the rate of inflation.

While these risks may be known to investors—and they are very often quoted in the financial media—sometimes they may be exposed to currency fluctuation in hindsight. This type of risk is often referred to as “currency risk.”

Simply stated, currency risk is how the portfolio will react to the fluctuations in the exchange rates of currencies.

To say the very least, it can affect the rate of return investors earn on their portfolio, and without a doubt, investors need to be aware of this phenomenon.

For example, if an investor buys shares of a company that trades on a Canadian stock exchange, and their broker’s account is valued in U.S. dollars, upon buying the Canadian stock, investors will need to convert their U.S. dollars into Canadian dollars and buy the shares.

Now, let’s say if the stock goes up by five percent over a month and investors want to sell their position. But assume that, as the stock price appreciated, the value of the Canadian dollar went down by two percent compared to the U.S. dollar. As a result, investors’ actual gains would be smaller than they appear.

Investors need to know that they aren’t the only ones affected by currency risk. Big-cap companies have to deal with this risk, as well.

Consider Encana Corporation (NYSE/ECA, TSX/ECA), the biggest natural gas producers in Canada. In the first quarter of 2013, the company registered a loss of $431 million, compared to net income of $12.0 million in the same period a year earlier. One of the major contributors to this loss was Encana losing more than $100 million due to currency fluctuation. (Source: “Encana Sees Earnings Erased on Foreign-Currency Losses, Hedging,” Bloomberg, April 23, 2013.)

To avoid losses due to currency fluctuations, big-cap companies use hedging strategies; for example, they may set the prices of goods they will deliver in advance, so even if the currency value fluctuates, it doesn’t affect them in any manner.

Investors, on the other hand, can’t really do this, since they are not producing any goods. To protect their portfolio from exchange rate fluctuation, investors may want to look into buying an exchange-traded fund (ETF) that lets investors profit if a certain currency rises or falls in value, or an ETF that is hedged against currency fluctuation.

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Bulls vs. Bears: What’s the Best Strategy for Gold? https://www.dailygainsletter.com/precious-metals/bulls-vs-bears-whats-the-best-strategy-for-gold/860/ https://www.dailygainsletter.com/precious-metals/bulls-vs-bears-whats-the-best-strategy-for-gold/860/#comments Tue, 14 May 2013 06:14:56 +0000 Moe Zulfiqar <![CDATA[Precious Metals]]> <![CDATA[central banks]]> <![CDATA[gold bullion]]> <![CDATA[gold bullion prices]]> <![CDATA[inflation]]> https://www.dailygainsletter.com/?p=860 <![CDATA[

Bulls vs. Bears: What’s the Best Strategy for GoldGold bullion has attracted a lot of attention lately from both the bull side and the bear side. The main reasons: the continuous decline in the prices since the yellow metal reached its highs in 2011, and the recent sell-off, ... Read More

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Bulls vs. Bears: What’s the Best Strategy for GoldGold bullion has attracted a lot of attention lately from both the bull side and the bear side. The main reasons: the continuous decline in the prices since the yellow metal reached its highs in 2011, and the recent sell-off, which caused more pain to the investors. Will gold go down further? Or is it headed much higher?

The Bull’s Argument

The bulls argue that the sell-off in gold bullion was nothing but panic selling—that the decline was in the futures market or the paper market, but the demand by consumers and central banks remains the same. They argue fundamentals haven’t changed.

As the gold prices plummeted in April, retail investors rushed to buy gold bullion. Consider this: the U.S. Mint reported that in April, it sold 209,000 ounces of gold bullion in coins. (Source: U.S. Mint web site, last accessed May 10, 2013.) In April of 2012, when gold bullion prices were soaring higher, the U.S. Mint only sold 108,000 ounces of gold bullion in coins. (Source: Ibid.)

Similarly, central banks have been continuous buyers of gold bullion. As the bigger central banks around the world are busy printing more money out of thin air—look at the U.S. Federal Reserve and the Bank of Japan—others are looking at gold bullion as an alternative to holding currency in their reserves. Why? Because printing more money devalues the currency.

As a matter of fact, central banks have actually become net buyers of gold bullion, and in 2012; they bought the largest amount in many years.

The Bear’s Argument

The gold bears say that the yellow metal is a good investment when there is inflation. Currently, the situation is the opposite; despite rigorous printing, the inflation is just not there. For example, the producer price index (PPI), considered an early indicator of inflation in the U.S., turned out to be negative in March, registering a decline of 0.7%. (Source: “Producer Price Indexes – March 2013,” Bureau of Labor Statistics web site, April 12, 2013, last accessed May 13, 2013.)

On top of all this, economic conditions are getting better. If the reason not to hold gold bullion is uncertainty, then it’s not there, either. The financial system is much more stable now, corporations are showing profits, jobs are being added, and the stock markets are soaring higher.

Lastly, gold bullion was just a trade and nothing more—it’s over now, and investors should look elsewhere for opportunity.

Solution: look at it with an open mind

Yes, the price of gold bullion has come down—there’s no doubt about it. Investors need to follow the prices and act accordingly. Both bulls and bears have merit for their reasoning, but one of them will eventually be right and the other one will be wrong.

For example, it appears that there is a significant amount of resistance at the $1,550 level on gold bullion prices and support around the $1,320 area. Instead of having a bullish or bearish bias, investors should wait and see how it plays out. A move below the support or above the resistance may just indicate where gold bullion prices are headed next.

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Two Reasons Why Dividend Stocks Have Room to Run https://www.dailygainsletter.com/income/two-reasons-why-dividend-stocks-have-room-to-run/791/ https://www.dailygainsletter.com/income/two-reasons-why-dividend-stocks-have-room-to-run/791/#comments Fri, 03 May 2013 13:27:42 +0000 John Whitefoot <![CDATA[Income]]> <![CDATA[bonds]]> <![CDATA[dividends]]> <![CDATA[Dow Jones Industrial Average]]> <![CDATA[Federal Reserve]]> <![CDATA[inflation]]> <![CDATA[interest rates]]> <![CDATA[retirement]]> <![CDATA[S&P 500]]> https://www.dailygainsletter.com/?p=791 <![CDATA[

Dividend Stocks Have Room to RunThanks to artificially low interest rates, the Federal Reserve has taken the “income” out of “fixed income,” and made saving for retirement that much harder for the average American.

Back in the 1980s, the interest rate on a 10-year Treasury ... Read More

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Dividend Stocks Have Room to RunThanks to artificially low interest rates, the Federal Reserve has taken the “income” out of “fixed income,” and made saving for retirement that much harder for the average American.

Back in the 1980s, the interest rate on a 10-year Treasury was above 15%. Investors planning for retirement could rely on their fixed incomes providing them with solid, reliable profits; they knew what their annual returns would be, and could budget and spend accordingly.

Today, the 10-year Treasury interest rate is less than two percent. That’s not much for the average American to bank on when it comes to retirement investing. In fact, low interest rates have essentially eliminated the chance for Americans to earn a decent income from fixed equities.

In an effort to eke out as much income as possible from their retirement portfolios, investors are turning their attention to high-yield investment stocks. On one level, it makes total sense—replacing one income-generating investment vehicle with another. At the same time, it’s important to remember that dividend stocks are still stocks—and a lot riskier than fixed-income investments.

The current challenge, some contend, is that income-starved investors have elevated dividend stocks to unsustainable levels. Once interest rates begin to rise, investors will pour out of dividend stocks and into the safety of government equities, at which point, dividend-yielding stocks—and their once reliable income—will tumble.

While it is true that dividend-yielding stocks are more popular than ever before, that does not mean they will fall out of favor once the economy rebounds.

Companies are sitting on cash. You need cash to pay out dividends, and companies have been hoarding cash. According to some estimates, cash balances with S&P 500 companies are on track to touch $1.5 trillion—a historic high. (Source: Cox, J., “Companies Are Sitting on More Cash Than Ever Before,” CNBC.com, October 23, 2012, last accessed May 2, 2013.)

Despite the Dow Jones Industrial Average and S&P 500’s record runs, many firms are reluctant to invest in their business or hire new workers, at least until the economic outlook clears. That could be some time away. In March, U.S. unemployment stood at a robust 7.6%; the gross domestic product (GDP) missed estimates, coming in at 2.5%; and first-quarter results were disappointing.

In lean times, a lot of cash is a reflection of good management. Right now, investors see money sitting on the sidelines as a sign of bad management. If businesses aren’t going to put it back into the company, investors want it returned to shareholders.

Pre-retirees (and those who are already enjoying retirement) need income. Born between 1946 and 1964, the baby boomer generation makes up more than one-quarter of the U.S. population and controls the largest portion of the country’s disposable income. And for the next 15-plus years, millions of baby boomers will be retiring, impacting the economy every step of the way.

That said, retirees tend to be more conservative investors who want a steady income stream—the kind that fixed income used to provide. Many dividend stocks do just that. There are hundreds of financially robust companies that have been reliably providing shareholders with quarterly dividends for 10, 20, even 30-plus years.

Unlike bonds and other guaranteed investments, many high-yield dividend stocks increase their payments annually, protecting against inflation. Also, unlike bonds and other fixed-income securities, many high-yield dividend stocks have a long history of appreciating in price, meaning some investors win on both fronts.

Yes, some investors will pull their money out of dividend stocks when the markets actually recover and sink them into government-backed fixed-income vehicles. But it might not always be in their best interest.

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Why Are Short Sellers Avoiding These Two Gold Stocks? https://www.dailygainsletter.com/precious-metals/why-are-short-sellers-avoiding-these-two-gold-stocks/777/ https://www.dailygainsletter.com/precious-metals/why-are-short-sellers-avoiding-these-two-gold-stocks/777/#comments Thu, 02 May 2013 06:14:11 +0000 John Whitefoot <![CDATA[Precious Metals]]> <![CDATA[ETFs]]> <![CDATA[global economy]]> <![CDATA[gold]]> <![CDATA[gold prices]]> <![CDATA[inflation]]> <![CDATA[short selling]]> <![CDATA[silver]]> https://www.dailygainsletter.com/?p=777 <![CDATA[

Avoiding These Two Gold StocksIs the global economy recovering? While the economic indicators aren’t exactly robust, that hasn’t stopped some investors from seeing the silver lining. Gold, held in exchange-traded funds (ETFs) and other gold-related equities, is primed for the biggest monthly drop ever ... Read More

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Avoiding These Two Gold StocksIs the global economy recovering? While the economic indicators aren’t exactly robust, that hasn’t stopped some investors from seeing the silver lining. Gold, held in exchange-traded funds (ETFs) and other gold-related equities, is primed for the biggest monthly drop ever as investors, sensing the global economy is in recovery, are selling off bullion.

And it’s selling fast. Gold slipped into bear-market territory in mid-April, on the heels of improving global growth and weakening fears of rampant inflation. On Friday, April 12 and Monday, April 15, gold prices sank 14%, the biggest decline in 20 years. And on Tuesday, April 15, gold hit an intraday low of $1,321.50 per ounce.

You can’t keep a hard asset like gold down, though. Over the last couple weeks, the price of gold has rebounded and is currently trading up more than 11%, near $1,472. That’s still 19% below the $1,559 per ounce gold was trading at on April 11, the day before it was trounced.

Gold still has a long way to go to make up for the mid-April rout. At depressed prices, though, many astute investors realize some gold companies are sitting in attractive ranges—the operative word being “some.”

The path to recovery is still fraught with challenges. With global production costs currently hovering around $1,200 an ounce, a further price depreciation could send some of the lesser financially stable gold producers into a tailspin.

One indicator investors like to consider when looking at stocks is the number of short sellers. Short sellers are those who are betting a company’s share price is going to fall.

While no single indicator can predict a company’s success or failure, a large number of short positions means there are a lot of investors hoping to profit from further declines.

At the same time, the amount of short selling spotlights which companies the investing community believes are financially sound enough to weather any further storms.

Pan American Silver Corp. (NASDAQ/PAAS; TSX/PAA) saw its share price tumble almost 25% in mid-April, from $15.50 on April 11 to a low of $11.78 on April 18. While the company’s share price has rebounded, it is still trading off 15% from the mid-April plunge, near $13.20. It has 151.5 million shares outstanding; just two percent are held by short sellers.

On Thursday, April 11, B2Gold Corp. (TSX/BTO) opened trading at $2.95; by April 17, the company hit an intraday low of $2.00, wiping 32% off its value. Currently trading near $2.50, the company has rebounded 26%, but it still has a ways to go. It has 646.1 million shares outstanding and short-selling interest of 772,993 shares, or just 0.1% interest.

In addition to the company’s strong financial position, its first-quarter results may have something to do with keeping the short sellers at bay. On April 23, B2Gold reported record first-quarter revenues and gold production, noting that in spite of the recent dip in gold prices, the company continues to advance its development and exploration projects. (Source: “B2Gold Corp. Reports Record First Quarter 2013 Gold Production and Revenue,” B2Gold Corp. web site, April 23, 2013.)

Granted, any further downturn in the price of gold would not be a boon to the companies listed here; they just have a better chance of still being around than the less financially established firms.

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Three Reasons Why Institutions Are Buying Stocks and Why Investors Need to Be Extremely Cautious https://www.dailygainsletter.com/stock-market/three-reasons-why-institutions-are-buying-stocks-and-why-investors-need-to-be-extremely-cautious/765/ https://www.dailygainsletter.com/stock-market/three-reasons-why-institutions-are-buying-stocks-and-why-investors-need-to-be-extremely-cautious/765/#comments Wed, 01 May 2013 06:25:52 +0000 Mitchell Clark <![CDATA[Stock Market]]> <![CDATA[blue chips]]> <![CDATA[corporate earnings]]> <![CDATA[corporations]]> <![CDATA[dividends]]> <![CDATA[earnings]]> <![CDATA[economic growth]]> <![CDATA[economic news]]> <![CDATA[inflation]]> <![CDATA[institutional investors]]> <![CDATA[interest rates]]> <![CDATA[stock market]]> <![CDATA[U.S. economy]]> <![CDATA[Wall Street]]> https://www.dailygainsletter.com/?p=765 <![CDATA[

Investors Need to Be Extremely CautiousVery soon, the stock market will be overbought. It’s time to be extremely cautious.

Even in the face of mixed earnings and economic news, institutional investors keep buying this market. And while fundamentals don’t particularly support a rising stock market, ... Read More

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Investors Need to Be Extremely CautiousVery soon, the stock market will be overbought. It’s time to be extremely cautious.

Even in the face of mixed earnings and economic news, institutional investors keep buying this market. And while fundamentals don’t particularly support a rising stock market, there are a number of reasons why institutions have to buy. Here are just three of the reasons:

1. They Have the Money

There is a tremendous amount of cash sitting on the sidelines. Both individual and institutional investors have been very frazzled over the last few years, and corporations have, as well.

Earnings results from large mutual funds and investment corporations recently revealed billions of dollars of new cash inflows allocated to equities. That money has to be put to work, because that’s what customers are paying for.

2. There Is Nowhere Else to Go

Because interest rates are so artificially low, there is no other asset class, other than real estate, where investors can allocate their capital and expect to get a return that is greater than the rate of inflation.

Even if the stock market doesn’t do anything and corporations don’t show any growth in earnings, dividend payments and share buybacks are very well assured.

Institutional investors need to invest in this stock market, because bonds, currencies, and commodities no longer offer the right combination of income, safety, and prospective capital gains. This is why so many blue chips have been outperforming—they offer what the rest of the world does not.

3. They Have to Keep Up with the Joneses

Without a doubt, a herd mentality exists on Wall Street. Investment companies have been chasing the safest names in the stock market, and because of this, the positive trading action is actually feeding itself.

Portfolio managers do not want to look bad—they are paid based on performance. With such little real economic growth available, those companies that provide a combination of earnings growth and rising dividends are coveted by all. Therefore, the share price action becomes even more pronounced.

This is why it is so extremely important to be highly cautious right now. The stock market is still ticking higher, but we know from first-quarter earnings results that revenue growth is elusive.

While paper gains are useful, it is a dangerous environment that cannot last unless earnings suddenly take off.

The stock market is almost always a leading indicator, especially over Main Street. Clearly, institutional investors are making a bet that the U.S. economy and corporate earnings will get better.

The current environment is a time to reap profits from the stock market, not sow new positions. A healthy dose of caution is very much appropriate.

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Protect Your Portfolio from the Consequences of Inflation—Without Gold https://www.dailygainsletter.com/wealth-management/protect-your-portfolio-from-the-consequences-of-inflation-without-gold/716/ https://www.dailygainsletter.com/wealth-management/protect-your-portfolio-from-the-consequences-of-inflation-without-gold/716/#comments Fri, 26 Apr 2013 14:28:33 +0000 Moe Zulfiqar <![CDATA[Wealth Management]]> <![CDATA[central banks]]> <![CDATA[Federal Reserve]]> <![CDATA[global economy]]> <![CDATA[gold prices]]> <![CDATA[inflation]]> <![CDATA[retirement]]> https://www.dailygainsletter.com/?p=716 <![CDATA[

Protect Your Portfolio from the Consequences of Inflation—Without GoldInflation is when the general price level increases. As a result, purchasing power diminishes; simply stated, every dollar buys less than it did before. Central banks around the world, including the Federal Reserve, continuously try to tame inflation so that ... Read More

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Protect Your Portfolio from the Consequences of Inflation—Without GoldInflation is when the general price level increases. As a result, purchasing power diminishes; simply stated, every dollar buys less than it did before. Central banks around the world, including the Federal Reserve, continuously try to tame inflation so that it doesn’t get out of control, usually targeting for an inflation rate of anywhere from one to three percent.

One of the main causes of inflation is an increase in money supply. The reason behind this is very simple: as more currency is printed, its value diminishes; hence, more money is needed to buy things. For example, in the U.S., what $1.00 could buy you in the year 2000 now costs $1.35—inflation has increased 35% in just a matter of a few years. (Source: “CPI Inflation Calculator,” Bureau of Labor Statistics web site, last accessed April 24, 2013.)

Please look at the chart below of the Consumer Price Index (CPI), a measure used by the Bureau of Labor Statistics (BLS) to record inflation. The CPI has increased significantly over time.

 

 CCPI-Consumer-Price-Index-chart

Chart courtesy of www.StockCharts.com

The impacts of inflation are immense. While inflation affects the daily expenses of families, it can certainly take a toll on the portfolios of long-term investors as well.

Using the earlier example, just to maintain the same buying power, an investor’s portfolio must have earned 35% at the very minimum, or their portfolio would be at a loss.

To say the very least, a portfolio must beat the inflation rate for an investor to have at least the same buying power when it’s time to use their funds for whatever they were saving for, be it retirement, their child’s education, or traveling.

Keeping all this in mind, what should an investor do to at least beat the rate of inflation? Buy gold? Unfortunately, the recent plunge in gold prices has left some investors confused about its future and its ability to be a hedge against inflation, as it’s known to humankind—even when the fundamentals are still in place.

Another way investors can protect their portfolio against inflation is by buying Treasury Inflation-Protected Securities (TIPS). Simply stated, TIPS are similar to bonds—they’re marketable securities that can be bought or sold before maturity and whose performance is tied to the CPI. (Source: “TIPS In Depth,” TreasuryDirect web site, last accessed April 24, 2013.)

These kinds of securities behave just like a bond; the investor receives a monthly payment and, at maturity, a sum. But interest payments and the sum at maturity are based on inflation; if inflation goes up, the interest payment does too, and the amount the investor receives is higher, as well.

One of the biggest advantages of owning TIPS is that investors are exempt from state and local income taxes, meaning they only have to pay federal taxes. (Source: “Tax Advantages of Treasury Securities,” TreasuryDirect web site, last accessed April 24, 2013.)

Investors who are in the world of investing for the long term should definitely consider the affects of inflation on their portfolio. As the global economy is becoming a little fragile now, central banks are taking measures to cure it by printing money. This will eventually have consequences, and inflation may just be much higher than it looks in the future.

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Time to Add Commodities to Your Retirement Portfolio? https://www.dailygainsletter.com/economy/time-to-add-commodities-to-your-retirement-portfolio/647/ https://www.dailygainsletter.com/economy/time-to-add-commodities-to-your-retirement-portfolio/647/#comments Wed, 17 Apr 2013 12:24:52 +0000 John Whitefoot <![CDATA[Economy]]> <![CDATA[China]]> <![CDATA[commodities]]> <![CDATA[economic news]]> <![CDATA[gold]]> <![CDATA[inflation]]> <![CDATA[retirement]]> <![CDATA[silver]]> https://www.dailygainsletter.com/?p=647 <![CDATA[

170413_DL_whitefootIn an effort to reduce volatility and protect their investments against the rising cost of living, many investors add commodities to their retirement portfolios. That’s because a large number of commodities are influenced by inflation well before it impacts the ... Read More

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170413_DL_whitefootIn an effort to reduce volatility and protect their investments against the rising cost of living, many investors add commodities to their retirement portfolios. That’s because a large number of commodities are influenced by inflation well before it impacts the overall economy.

The perfect reflection of supply and demand, commodity prices climb when there is strong demand and taper off when the economy is doing poorly; in the latter case, the future looks bleak.

Gold prices collapsed earlier this week, suffering their sharpest fall in 30 years. Silver is also down; so, too, is copper, oil, lead, aluminum, corn, wheat, soybeans—simply put, commodities are getting hammered.

It’s not as if there isn’t news to support the decline in commodities. The U.S. has seen a raft of negative economic news trickle in. April consumer confidence levels fell from 78.6 in March to 72.3—its lowest level in seven months. (Source: Smialek, J., “Consumer Sentiment in U.S. Declines to a Nine-Month Low,” Bloomberg, April 12, 2013.) U.S. retail sales fell 0.4% in March—the largest drop in nine months. (Source: Kowalski, A., “Retail Sales in U.S. Decline by Most in Nine Months,” Bloomberg, April 13, 2013.)

Weaker-than-expected growth in China, Asia’s largest economy, is weighing on global sentiment. China’s economy expanded just 7.7% during the first quarter, below the forecasted eight percent. Industrial output was expected to expand by 10%, but it only climbed 8.9%. (Source: “Market Buzz: Negative outlook on weak data from China,” RT web site, April 15, 2013.)

And conditions in the 17-member eurozone are still dismal. Joachim Starbatty, one of Germany’s pre-eminent economists, said he wants to see the dissolution of the eurozone, arguing that Europe is being dragged under by debt-ridden countries. Instead of giving countries like Greece, Ireland, Spain, and Italy the boot, it would be better for Germany to leave. (Source: Connolly, K., “Leading German economist calls for dissolution of eurozone to save EU,” The Guardian April 14, 2013.)

Another, lesser-known indicator of economic instability is the rise in the number of analysts who are saying that this time is different; the reason, according to UBS analysts, is that “commodities are not a leading indicator in the current context.” (Source: “Commodities are usually good economic indicators—just not right now, says UBS,” MarketWatch April 5, 2013.)

If you’re looking to hedge against inflation, you have to be wondering if now is the time to add copper, silver, oil, corn, or another commodity to your retirement portfolio.

The S&P GSCI Commodity Index is one of the most widely recognized global broad-based benchmarks. The index has slipped seven percent since the beginning of January and is down 11.5% since September 2012. It’s also down 21% over the last two years and is still down more than 53% since hitting record highs in 2007.

PowerShares DB Commodity Index Tracking (NYSEArca/DBC) has $6.8 billion under management, with an expense ratio of 0.93% (or $93.00 for every $10,000 invested). It is also trading down 5.2% since last year.

iPath DJ-UBS Commodity Index TR ETN (NYSEArca/DJP) has nearly $1.9 billion under management, with an expense ratio of 0.75% (or $75.00 for every $10,000 invested). Over the last 12 months, it has slipped by four percent.

With negative economic news streaming in, it’s tough to say how much further commodities can fall, and what a commodities rebound will look like.

Regardless, it’s important to remember that commodities perform well during periods of inflation. While we aren’t experiencing sky-high inflation right now, government debt and quantitative easing are setting the stage.

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Why Plunging Commodity Prices Are Great for the Stock Market https://www.dailygainsletter.com/stock-market/why-plunging-commodity-prices-are-great-for-the-stock-market/642/ https://www.dailygainsletter.com/stock-market/why-plunging-commodity-prices-are-great-for-the-stock-market/642/#comments Wed, 17 Apr 2013 12:20:54 +0000 Mitchell Clark <![CDATA[Stock Market]]> <![CDATA[China]]> <![CDATA[corporations]]> <![CDATA[earnings]]> <![CDATA[economic growth]]> <![CDATA[global economy]]> <![CDATA[gold]]> <![CDATA[inflation]]> <![CDATA[old economy]]> <![CDATA[stock market]]> <![CDATA[U.S. economy]]> https://www.dailygainsletter.com/?p=642 <![CDATA[

170413_DL_clarkThe big drop in the value of many commodities is very good news for this stock market.

All of a sudden, raw materials are cheaper in price. This is going to translate right to the bottom line of many corporations.... Read More

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170413_DL_clarkThe big drop in the value of many commodities is very good news for this stock market.

All of a sudden, raw materials are cheaper in price. This is going to translate right to the bottom line of many corporations.

And one of the best developments is the weaker price of oil. Big oil stocks have done consistently well in the stock market, but smaller corporations have struggled due to the fact that the spot price has not been able to move much past the $95.00-per-barrel level. Now that spot oil is below $90.00 a barrel, transportation stocks are really going to benefit.

Of course, it takes time for big oil corporations to reduce gasoline prices. It’s common knowledge that when the spot price of oil spikes, gasoline prices immediately go higher. But when oil drops, it always takes much longer for gasoline prices to reflect reality. This is the nature of big oil, and there’s nothing that can be done about that.

The stock market is currently digesting a slew of earnings from corporations, as well as economic news that continues to show economic struggle.

But with gold, silver, and oil all trending lower, this is an absolute gift to the majority of old economy corporations.

It never used to be this way until recently, but the U.S. stock market now trades off of China’s economic data. And while China is still growing significantly, it’s all about expectations for high growth, not the degree to which the economy may be contracting.

The plunging spot price of gold is partially a reflection of the sentiment that investors have regarding risk. The demonstrated lack of inflation in posted numbers (not even close to reality) is being used by traders to justify selling in gold.

For the fourth quarter of 2012, gross domestic product (GDP) numbers were terrible for the U.S. economy. And while the stock market has been hitting new record highs, it is absolutely unreasonable to assume that first-quarter GDP numbers are going to be rosy.

Corporations have actually been doing very well, considering the lack of real economic growth in the global economy. Additionally, corporations have been extremely conservative with their economic forecasting, trying to make sure that they don’t report earnings below expectations.

My view is that the pronounced drop in the value of many commodities will be helpful to corporations and their earnings reports going forward.

The stock market is currently digesting weaker economic news, but I still feel that the overall trend for higher share prices remains intact.

This is a stock market that is desperately in need of a major correction. Given the current information, it’s probable that this will be an opportune entry point for new positions.

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Mountains of Cash Growing; Will Corporations Stop Hoarding and Pay Out? https://www.dailygainsletter.com/economy/mountains-of-cash-growing-will-corporations-stop-hoarding-and-pay-out/621/ https://www.dailygainsletter.com/economy/mountains-of-cash-growing-will-corporations-stop-hoarding-and-pay-out/621/#comments Fri, 12 Apr 2013 12:38:28 +0000 Mitchell Clark <![CDATA[Economy]]> <![CDATA[blue chip]]> <![CDATA[corporations]]> <![CDATA[dividends]]> <![CDATA[financial crisis]]> <![CDATA[inflation]]> <![CDATA[institutional investors]]> <![CDATA[risk]]> <![CDATA[stock market]]> <![CDATA[U.S. economy]]> https://www.dailygainsletter.com/?p=621 <![CDATA[

120413_DL_clark

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 ... Read More

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120413_DL_clark

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 ahead, but my read is that this will be an attractive buying opportunity for the vast majority of investors. And if this occurs, without question, investors should be looking at the safer names—those blue-chip companies with increasing dividend rates.

Investment risk around the world is still high, but a lot has been learned after the financial crisis and the latest recession. This doesn’t mean that governments will act in a manner that they are not accustomed to, but corporations and individuals have learned to be more careful with their money. This is why I feel that dividends will continue to increase this year.

Even though it seems pretty unbelievable, the stock market will move higher for the simple reason that there is a tremendous amount of cash sitting on the sidelines. Institutional investors are paid to buy stocks. If you invest in a mutual fund, you don’t want to pay that investment manager to have your money in cash; you want him or her to invest that money and earn a rate of return that beats the main stock market averages.

The investing landscape is improving. This doesn’t mean that the Main Street U.S. economy is getting better, only that Wall Street feels more confident about buying stocks.

Dividends are going to have another good quarter. It’s an investment theme that, in my view, has real staying power, regardless of what happens to the stock market this year.

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Worried About Inflation? Profit from It Instead https://www.dailygainsletter.com/precious-metals/worried-about-inflation-profit-from-it-instead/596/ https://www.dailygainsletter.com/precious-metals/worried-about-inflation-profit-from-it-instead/596/#comments Tue, 09 Apr 2013 12:25:40 +0000 Moe Zulfiqar <![CDATA[Precious Metals]]> <![CDATA[gold]]> <![CDATA[gold prices]]> <![CDATA[inflation]]> <![CDATA[U.S. economy]]> https://www.dailygainsletter.com/?p=596 <![CDATA[

Dictionary Series - Economics: inflation

Central banks around the world are printing in overdrive mode. Their goal is to bring economic prosperity to their countries. For example, the Federal Reserve is printing $85.0 billon a month—buying mortgage-backed securities and government bonds. The Federal Reserve wants ... Read More

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Dictionary Series - Economics: inflation

Central banks around the world are printing in overdrive mode. Their goal is to bring economic prosperity to their countries. For example, the Federal Reserve is printing $85.0 billon a month—buying mortgage-backed securities and government bonds. The Federal Reserve wants to improve the U.S. economy by lowering the unemployment rate.

The Japanese central bank is taking similar actions—its goal is to boost economic growth by lowering the value of its currency, the yen. Japan is an export-based country, and with higher currency value, it’s hard to sell to other currencies. Japan is in recession and the slump in its exports has been taking a heavy toll.

Regardless, what holds true is that a number of central banks printing their currency to spur growth in their respective countries is increasing. As a result of all this, many are worried these actions will trigger inflation to rise in the future—some are even calling for hyperinflation and the prices will skyrocket.

Keeping all this in mind, one question comes to mind: how does an investor actually make money with high inflation?

 

Gold and Inflation

Gold is known as one of the best hedges against inflation. The idea behind this is very simple; as central banks print money, the value of the currency declines. This phenomenon causes the value of gold to increase.

If inflation rises quickly, then gold prices will see a similar effect. Investors concerned about inflation in the future can buy gold to protect their wealth from deteriorating from rising prices.

Consider this: what $1.00 could buy in 1975, costs $4.35 now. (Source: Bureau of Labor Statistics, last accessed April 5, 2013.) A Simple calculation would show that prices have increased 335%.

In the same period, gold has risen from just above $160.00 an ounce to about $1,550 now—an increase of more than 868%. (Source: National Mining Association web site, last accessed April 5, 2013.) Look at the chart of gold prices from the last 30 years—they have appreciated substantially.

dl_0409_graph1

Chart courtesy of www.StockCharts.com

Note: the inflation number is only from the U.S. When you look at the price change from around the world and bring in the amount of fiat currency that has been printed, the rise in gold prices is justified.

On top of all this, gold is also considered to be a safe haven during times of economic uncertainty. The belief behind this is that gold has kept its value for thousands of years—before paper currencies were made. So if anything happens to the currency, gold can help investors preserve their capital.

Those who are investing for the long term must know that inflation can take a heavy toll on one’s portfolio. Investors must make sure to protect their portfolio from rising prices, which reduces their return. If inflation is running at three percent per year and an investor is only earning five percent on their investments, then their actual or real return would be only two percent, accounting for price changes. This, in turn, can cause a delay in an investor achieving his or her portfolio goal(s). Investors should focus on investing in securities that at least beat inflation over time, or their actual returns will be negative.

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What Cyprus Taught Me About Retirement Savings https://www.dailygainsletter.com/economy/what-cyprus-taught-me-about-retirement-savings/557/ https://www.dailygainsletter.com/economy/what-cyprus-taught-me-about-retirement-savings/557/#comments Tue, 02 Apr 2013 12:34:39 +0000 John Whitefoot <![CDATA[Economy]]> <![CDATA[gold]]> <![CDATA[inflation]]> <![CDATA[interest rate]]> <![CDATA[retirement]]> <![CDATA[Retirement savings]]> https://www.dailygainsletter.com/?p=557 <![CDATA[

020413_DL_whitefoot

In light of the events that occurred in Cyprus over the last couple weeks, many investors may be wondering if it’s safer to hide your retirement savings under a mattress. After all, what’s to say it couldn’t happen here?

In ... Read More

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020413_DL_whitefoot

In light of the events that occurred in Cyprus over the last couple weeks, many investors may be wondering if it’s safer to hide your retirement savings under a mattress. After all, what’s to say it couldn’t happen here?

In June 2012, Cyprus, like many members of the European Union (EU), sought a bailout after suffering heavy losses. The company’s banking sector was hit by the economic crisis that crippled Greece. Cypriot banks had made loans to Greek borrowers that were worth 160% of the country’s gross domestic product (GDP).

In mid-March, the EU and the International Monetary Fund (IMF) agreed on a bailout for Cyprus, which included Cyprus raising billions of euros of its own money by taxing bank deposits—essentially seizing money. The government said it would impose a one-time tax of 6.75% on savings of $26,000–$130,000, and would tax higher savings at 9.9%. Not surprisingly, this didn’t sit well with wealthy Russians who shelter their money in Cyprus. It also didn’t sit well with the rest of country.

As one would expect, Cyprus managed to cobble together an 11th-hour deal with the EU and IMF, taxing only those accounts with deposits over $130,000.

Could it happen here? What couldn’t? Since 2008, the U.S. and much of the Western world have experienced an economic implosion no one would have otherwise thought possible. In response, governments around the world have taken unprecedented action to “remedy” the situation.

Cyprus aside, there are many reasons why we shouldn’t stash our retirement savings under the mattress.

First, cold-hard cash provides little protection against inflation and increases in the cost of living. While the markets experienced deflation after crashing in 2008, there is the fear of inflation in the long run.

Since 2008, the Federal Reserve has printed roughly $3.0 trillion in an effort to stimulate growth. The extra dollars also have the reverse effect, shrinking the buying power of each dollar—which is the driving force of inflation.

Sitting on cash right now probably isn’t the wisest choice if you’re looking to increase your wealth. Keeping it in a bank with a 0.05% interest rate isn’t either. To hedge against inflation, you might want to consider gold—one of the world’s oldest, borderless currencies.

Before September 11, 2001, gold was trading below $300.00 an ounce. While gold is trading off its August 2011 highs, it’s still trading up over 435% since 2001. Thanks to continued uncertainty in Cyprus and the EU as a whole, gold continues to look good long-term.

Investors looking to add gold to a diversified retirement portfolio might want to consider these securities.

iShares Gold Trust (NYSEArca/IAU) is a trust that generally corresponds to the day-to-day movement of the price of gold bullion. The company has 6.8 million ounces of gold, or $10.99 billion in assets under management.

Goldcorp Inc. (NYSE/GG; TSX/G) is the fastest-growing, lowest-cost senior gold producer, with operations and development projects in politically stable jurisdictions throughout the Americas. It produces more than 2.5 million ounces of gold annually and has more than 60 million ounces in proved and probable reserves. It also owns 1.3 billion ounces of proved and probable silver reserves and 5.4 billion pounds of copper reserves.

It could be argued that a government that is willing to seize its citizens’ cash could also conspire to take its gold. It’s happened before. In 1933, Franklin D. Roosevelt, signed into effect Executive Order 6102, making it a criminal offense for U.S. citizens to own or trade gold anywhere in the world. While the law was obviously relaxed, it does illustrate that the government can do whatever it wants, whenever it wants.

Still, in this day and age, it would be easier to take money sitting in a bank than stock certificates or hard assets tucked away at home.

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The Inflation Apocalypse: Here Comes the Next Super Cycle https://www.dailygainsletter.com/stock-market/the-inflation-apocalypse-here-comes-the-next-super-cycle/500/ https://www.dailygainsletter.com/stock-market/the-inflation-apocalypse-here-comes-the-next-super-cycle/500/#comments Fri, 22 Mar 2013 17:36:21 +0000 Mitchell Clark <![CDATA[Stock Market]]> <![CDATA[agriculture]]> <![CDATA[bull market]]> <![CDATA[commodity price cycle]]> <![CDATA[earnings season]]> <![CDATA[eurozone]]> <![CDATA[gold]]> <![CDATA[inflation]]> <![CDATA[silver]]> <![CDATA[sovereign debt]]> <![CDATA[stock market]]> https://www.dailygainsletter.com/?p=500 <![CDATA[

220313_DL_clarkTwo big trends are about to collide: global warming and global re-inflation. And the result is going to create a lot of shocks and opportunity. I’ve heard people refer to the recent tsunamis, rising temperatures, floods, and droughts as the ... Read More

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220313_DL_clarkTwo big trends are about to collide: global warming and global re-inflation. And the result is going to create a lot of shocks and opportunity. I’ve heard people refer to the recent tsunamis, rising temperatures, floods, and droughts as the “weather apocalypse.” Whatever you call it, the re-inflation in prices combined with global warming is going to create a new super cycle in agriculture and agribusiness.

The business cycle is changing in financial markets. Currencies are being devalued. The bull market in bonds is over. Central banks are repatriating their gold. There’s massive monetary stimulus, and now there are rising prices, which should help boost earnings initially. The stock market could go a lot higher this year.

The re-inflation cycle has staying power, even through the next U.S. recession. An inflationary business cycle, product scarcity, increasing demand, and the weather represent a fundamental, long-term uptrend for agriculture—the final leg of the commodity price cycle.

The stock market’s recent breakout was very powerful. Wall Street is now ahead of first-quarter earnings season. Before the next big crash, I think the stock market will have one final push higher—a lot higher than current levels.

I absolutely agree with Jim Rogers’ view about agriculture. But hey, even Jim has something to sell you. The re-inflation definitely has consequences, but global monetary stimulus is on a tear. And as an investor, it doesn’t pay to fight it.

The stock market is holding firm ahead of first-quarter earnings season. Its performance is very similar to the strength experienced during the first four months of last year. “Sell in May, and go away?” I think it’s a very good possibility again. But the re-inflation/agriculture cycle is a multiyear trend.

The most important thing to note as an investor is what corporations say about their businesses. Gold, silver, oil, and natural gas are all taking a break, but the prices for agriculture crops, like corn, canola, oats, and soybeans, remain lofty. The price for live cattle futures just bounced off a multiyear high.

On top of social and financial unrest in the eurozone, due to its sovereign debt crisis, price inflation is about to be added to the mix. This will be helpful, initially, for stocks, earnings, and Wall Street. But there is a dangerous side effect, and central banks around the world will be caught between a rock and a hard place. Withdrawing monetary stimulus is going to be difficult.

It’s already time to add the entire agriculture group to your radar. It’s still not in the mainstream spotlight, but agriculture prices are holding firm. Population growth, rising incomes in emerging markets, product scarcity, monetary stimulus, and weather all put the re-inflation business cycle firmly into this investment theme.

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Agriculture; the Next Black Gold? https://www.dailygainsletter.com/stock-market/agriculture-the-next-black-gold/481/ https://www.dailygainsletter.com/stock-market/agriculture-the-next-black-gold/481/#comments Wed, 20 Mar 2013 12:12:30 +0000 Mitchell Clark <![CDATA[Stock Market]]> <![CDATA[agriculture]]> <![CDATA[China]]> <![CDATA[commodity price cycle]]> <![CDATA[corporations]]> <![CDATA[dividends]]> <![CDATA[emerging markets]]> <![CDATA[gold prices]]> <![CDATA[inflation]]> <![CDATA[stock market]]> <![CDATA[U.S. economy]]> https://www.dailygainsletter.com/?p=481 <![CDATA[

200313_DL_clarkWhen the stock market experiences its next major pullback, it should be an attractive entry point to consider select large-caps that pay dividends. On the cusp of another earnings season, most large U.S. corporations are in excellent financial health.

There ... Read More

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200313_DL_clarkWhen the stock market experiences its next major pullback, it should be an attractive entry point to consider select large-caps that pay dividends. On the cusp of another earnings season, most large U.S. corporations are in excellent financial health.

There are a number of investment themes playing out in the current business cycle. When gold prices were lofty, stocks like Caterpillar Inc. (NYSE/CAT) and Joy Global Inc. (NYSE/JOY) were really doing well.

Stock markets in China, the world’s second-largest economy, have been drifting for several years, but emerging markets, like the Philippines and Malaysia, are growing like mad. And Japan’s stock market recently turned significantly higher. Many Japanese companies are expecting strong revenue gains this year on the back of a weaker yen.

The ebb and flow of the global business cycle is always changing; and with inflation creeping into the U.S. economy, the next big play will be in real assets, as the commodity price cycle makes its final migration into the agriculture sector.

Deere & Company (NYSE/DE) has the biggest market share of any large equipment manufacturer related to agriculture in the U.S. Currently, the stock is not expensively priced, with a price-to-earnings (P/E) ratio around 11.5. Deere’s stock chart is featured below:

dl_0320_image001Chart courtesy of www.StockCharts.com

On the stock market, Deere has proven to be cyclical and a very good long-term wealth creator for shareholders. Since 1963, the company has split its stock two-for-one on four occasions, the last one being in November 2007. Deere also split its stock three-for-one in November 2005, and the company has been increasing its annual dividends consistently for the last 10 years.

The company’s largest single shareholder is Cascade Investment, L.L.C., which is the investment holding company controlled by Bill Gates.

Deere’s stock market performance has been in a consolidation pattern since 2008, and I think it’s ready for a breakout this year.

Investing in agriculture-related assets is more difficult than in other sectors. Firstly, these businesses are related to commodities and smart resource investing is as much about good timing as anything else. Second, there isn’t a lot of variety in the marketplace for agriculture-specific plays. Many businesses related to agriculture are privately owned, and buying a ranch isn’t an option for most people.

The availability of investable assets in agriculture will improve as the sector trends upward in value. There are several options available in the stock market. Companies like Monsanto Company (NYSE/MON), Archer-Daniels-Midland Company (NYSE/ADM) and CF Industries Holdings, Inc. (NYSE/CF) are direct stock market plays.

I think capital markets on the whole are about to experience massive change. A new business cycle is almost here, and one of the investment themes worth playing is agriculture. Even if the sector takes a few more years to become popular, agriculture is a good way to play re-inflation, scarcity, global warming and changing demographics.

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No Place Left to Go, Institutions Buying https://www.dailygainsletter.com/stock-market/no-place-left-to-go-institutions-buying/464/ https://www.dailygainsletter.com/stock-market/no-place-left-to-go-institutions-buying/464/#comments Tue, 19 Mar 2013 09:58:01 +0000 Mitchell Clark <![CDATA[Stock Market]]> <![CDATA[corporate earnings]]> <![CDATA[earnings]]> <![CDATA[earnings season]]> <![CDATA[Federal Reserve]]> <![CDATA[inflation]]> <![CDATA[institutional investors]]> <![CDATA[investment strategy]]> <![CDATA[stock market]]> https://www.dailygainsletter.com/?p=464 <![CDATA[

190313_DL_clarkWhat goes up will come down. But the action is the action, and if you own the stock market, you should be making good money these days.

The price action in the stock market and most blue chips has been ... Read More

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190313_DL_clarkWhat goes up will come down. But the action is the action, and if you own the stock market, you should be making good money these days.

The price action in the stock market and most blue chips has been very strong, obviously. But trading volume hasn’t spiked with prices; it’s been consistently flat during the recent run-up. There is tremendous pressure now on first-quarter earnings season to deliver the goods. If it doesn’t, this will be the catalyst for a stock market correction.

The recent breakout in the stock market is reminiscent of the action at the beginning of 2012 when stocks crossed their 200-day moving average on the upside. The market advanced strongly for the first three months of 2012, then retreated on first-quarter earnings news. This year, a similar scenario seems likely, as the stock market is absolutely due for a break. The stock chart for the Wilshire 5000 total market index is featured below:

dl_0319_chart1Chart courtesy of www.StockCharts.com

While a great number of companies are expected to report flat comparable earnings in the first quarter, many of the current stock market leaders have seen strong increases in estimates over the last 30 days. Countless Dow stocks are seeing a significant increase from Wall Street in their earnings estimates, for this year and next. Some include United Technologies Corporation (NYSE/UTX), The Home Depot, Inc. (NYSE/HD), The Walt Disney Company (NYSE/DIS), Pfizer Inc. (NYSE/PFE), General Electric Company (NYSE/GE), and Wal-Mart Stores, Inc. (NYSE/WMT).

Increased earnings estimates are a bullish indicator, but it is just one of many. The stock market is really charged up on slightly better economic news, pent-up demand to buy, and the fact that there is no other asset class for institutional investors to put their money to beat the rate of inflation. It is a supercharged quandary.

In terms of investment strategy, I expect the stock market to actually trade off of revenues, more so than bottom-line earnings. To keep buying, all institutional investors want to see is quantifiable growth.

The previous earnings season was pretty underwhelming. Plenty of corporations, large and small, did not meet consensus in at least one financial metric. Right now, there is a lot of cheerleading going on, and Wall Street investment banks are publicly becoming more bullish. Sustainability of the current stock market rally is highly suspect. The numbers from corporations have to come in solid for any of this to have staying power. In fact, they really need to convincingly beat the Street.

Recent data proves that there is price inflation in the Main Street economy, but the Federal Reserve views it as tame. To some degree, just like in the recent data on retail sales (which doesn’t adjust for inflation), first-quarter corporate earnings could be padded a bit by these rising prices.

The stock market, regardless of its past, is still likely to keep ticking higher with the interest rate cycle and monetary policies favoring this asset class. And institutional investors have nowhere else to go. How it all ends is going to be messy.

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Breakout in Transportation Stocks Gains Strength—How to Play the Disconnect https://www.dailygainsletter.com/economy/breakout-in-transportation-stocks-gains-strength-how-to-play-the-disconnect/433/ https://www.dailygainsletter.com/economy/breakout-in-transportation-stocks-gains-strength-how-to-play-the-disconnect/433/#comments Wed, 13 Mar 2013 14:00:18 +0000 Mitchell Clark <![CDATA[Economy]]> <![CDATA[dividends]]> <![CDATA[Dow Jones]]> <![CDATA[earnings]]> <![CDATA[earnings season]]> <![CDATA[Federal Reserve]]> <![CDATA[inflation]]> <![CDATA[institutional investors]]> <![CDATA[old economy]]> <![CDATA[S&P 500]]> <![CDATA[stock market]]> <![CDATA[technology stocks]]> <![CDATA[U.S. economy]]> https://www.dailygainsletter.com/?p=433 <![CDATA[

130313_DL_clarkThe Dow Jones Transportation Average experienced a powerful breakout this past December. And it’s been a stealth rally ever since, with an expansion in valuations, not earnings.

The stock market’s strongest sector over the past few months has been transportation ... Read More

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130313_DL_clarkThe Dow Jones Transportation Average experienced a powerful breakout this past December. And it’s been a stealth rally ever since, with an expansion in valuations, not earnings.

The stock market’s strongest sector over the past few months has been transportation stocks, which have been much stronger than technology stocks or the S&P 500 companies. Even though it doesn’t seem real, leadership in the Dow Jones Transportation Average is a classic stock market sign.

Helping the cause are lower oil prices. Countless names among large-cap transportation stocks are soaring. And at new 52-week highs, they still aren’t expensively priced on the stock market, which means they can go higher.

The stock market likes betting on the future. Institutional investors are not fighting the Federal Reserve; they are buying in anticipation of first-quarter earnings season. Fourth-quarter earnings season wasn’t that bad for corporations, but for individuals, it’s another story. This is why the stock market and the Dow Jones Transportation Average can still tick higher—valuations and oil prices. The stock chart for the index is featured below:

dl_031313-image001Chart courtesy of www.StockCharts.com

The stock market will use first-quarter earnings season as its new catalyst for action. My expectation is that we’re in for a meaningful correction, even if first-quarter numbers are decent.

There is a real disconnect in the U.S. economy between the stock market and the Main Street economy. Corporations have all the money, and any modest uptick in economic activity will amplify the bottom line. Corporations, being lean and mean with dividends and share buybacks, are way better than individual incomes.

This is a very difficult market to play. Risk for new long positions is high because the stock market has already gone up. The Dow Jones Industrials are lagging the Dow Jones Transportation average, but the strength in blue chips is undeniable.

Any uptick in economic statistics won’t translate to disposable incomes anytime soon; but an uptick will translate to corporate earnings, and that’s the only play for stock market investors.

Whether you agree with the Federal Reserve’s policies or not, it doesn’t pay to fight the Fed or the ticker tape. Components in the Dow Jones Industrials are not expensively priced by any means, and dividends are increasing. The disconnect between Wall Street and Main Street will continue this year.

Institutional investors, for the most part, get paid to buy stocks. They have to worry a lot less than the vast majority. Right now we’re seeing a lot more price inflation—real inflation in the form of higher taxes, food, and energy costs, and real inflation in services.

I would not be buying this market or any component within the Dow Jones Industrials right now. According to the numbers, there has been improvement in the industrial, old economy businesses in the last two quarters. And I expect this trend to continue through the near term. Current strength in the Dow Jones Transportation Average is real and meaningful, but this doesn’t help individuals or the employment situation.

A little more upside followed by correction—that’s what’s in store for the U.S. economy. Whether the correction will be a buying opportunity is a total crapshoot.

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Protect Yourself—Dow Jones Industrials Very Vulnerable https://www.dailygainsletter.com/stock-market/protect-yourself-dow-jones-industrials-very-vulnerable/422/ https://www.dailygainsletter.com/stock-market/protect-yourself-dow-jones-industrials-very-vulnerable/422/#comments Tue, 12 Mar 2013 18:27:30 +0000 Mitchell Clark <![CDATA[Stock Market]]> <![CDATA[dividend paying stocks]]> <![CDATA[earnings]]> <![CDATA[inflation]]> <![CDATA[institutional investors]]> <![CDATA[interest rates]]> <![CDATA[mutual funds]]> <![CDATA[S&P 500]]> <![CDATA[stock market]]> <![CDATA[U.S. economy]]> https://www.dailygainsletter.com/?p=422 <![CDATA[

120313_DL_clarkA lot of good news is priced into the stock market right now. Fourth-quarter earnings season is on the horizon, and it will have to be a good one for stocks to keep appreciating.

There still aren’t a lot of ... Read More

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120313_DL_clarkA lot of good news is priced into the stock market right now. Fourth-quarter earnings season is on the horizon, and it will have to be a good one for stocks to keep appreciating.

There still aren’t a lot of reasons to be a buyer in this stock market. Even just looking at a five-year chart of the S&P 500, the market seems pretty stretched and is due for a correction.

Ben Bernanke and Alan Greenspan have been so accommodative to Wall Street and the stock market. But it’s true that it does not pay to fight the Federal Reserve, even if you don’t agree with the central bank’s policy actions. I just don’t see an end to the cycle of money supply growth.

Price inflation already exists in this economy, though I’d say it’s really more like four percent compared to what is reported. Everything is going up in price, so it is absolutely critical that after-tax incomes go up as well—and that’s going to be a continuing problem going forward.

I think we have the makings of a substantial stock market correction that could happen very soon, even if we don’t get any particularly negative data. The market has been ticking higher fairly consistently for four years now, and we’re due for some downside.

First-quarter earnings expectations have flattened right out, and that makes sense; but large corporations are still being highly cautious with their outlooks, and they’ve been very good at beating consensus, typically on either revenues or earnings—though not both in most cases. Some consensus data collectors are now reporting increased earnings expectations for the bottom half of 2013 and going into 2014. Of course, a lot can change between now and then, so it’s important to take it all with a grain of salt.

Stocks in the Dow Jones Industrial Average have been particularly strong lately, and it reflects the strength that many large, old economy companies have been reporting in their earnings results. It also reveals fragility in investor sentiment, with investors sticking to safer, higher dividend paying stocks.

The stock market’s breakout since the beginning of this year, particularly among the Dow Jones Industrials, is very similar to the action at the beginning of 2011 and 2012. In both years, the stock market started strong, and then experienced an extended consolidation, beginning in the spring. A similar scenario is in the cards this year, with corporate revenues (not earnings) now being what buyers are worrying over.

From my perspective, all eventualities are on the table for the stock market this year. We know the Fed is onside in terms of short-term interest rates, but its third round of quantitative easing (QE3) is on the chopping block with further improvements to the U.S. economy. Still, fragility of sentiment and uncertainty among individual investors remain high.

Institutional investors worry less because most mutual funds get paid to buy stocks. Valuations are fair, given current earnings, and corporations have all the cash they need to maintain their businesses through continued economic mediocrity. Even if this upcoming earnings season turns out to be solid, the stock market should correct right after.

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The Next Big Risk to Investors https://www.dailygainsletter.com/economy/the-next-big-risk-to-investors/405/ https://www.dailygainsletter.com/economy/the-next-big-risk-to-investors/405/#comments Fri, 08 Mar 2013 13:41:03 +0000 Mitchell Clark <![CDATA[Economy]]> <![CDATA[gold]]> <![CDATA[inflation]]> <![CDATA[Oil]]> <![CDATA[stock market]]> <![CDATA[U.S. economy]]> https://www.dailygainsletter.com/?p=405 <![CDATA[

DL_Mar_8_2013_MitchellThe commodity price cycle still exists but many raw materials remain in correction. Gold, silver, and oil prices are all taking a break for their own reasons. Although I wouldn’t be buying them now, I still believe that gold should ... Read More

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DL_Mar_8_2013_MitchellThe commodity price cycle still exists but many raw materials remain in correction. Gold, silver, and oil prices are all taking a break for their own reasons. Although I wouldn’t be buying them now, I still believe that gold should be a part of a well-balanced portfolio, especially as we enter a period of rising inflation.

In terms of gold-related investments, there are only a handful of gold miners even worth considering in this market. Costs for gold mining companies have being going up significantly, accelerating the decline of many gold stocks.

Oil prices aren’t going anywhere, with very slow growth in the U.S. economy and stable economic growth in China. In addition, the production boom in domestic oil and natural gas is holding these commodities down and should continue to do so for quite some time.

There is not a lot of new action for investors to be taking on right now. Those with large-cap equities should be benefitting from the rising stock market, which by the numbers, is not expensively priced. It is difficult to be a new buyer in an environment like this. Nobody likes buying stocks at their highs.

We should get a meaningful correction in the stock market soon and, if we do, I hope it’s a big one in that it will be an opportunity to buy dividend-paying blue-chip stocks.

Gold is likely to remain in a consolidation mode for quite some time. The better bet on its upside is the commodity itself, not gold stocks. Oil prices recently dipped below $90.00 a barrel, and while that’s good for consumers, it still represents the market’s view that the U.S. economy is stuck in a period of very slow growth. Recent private-sector jobs growth was encouraging, but oil prices (and natural gas) have a lot of fundamental reasons why they shouldn’t be going up, at least over the near term.

The consolidation in resources is healthy, but virtually all gold stocks are down. Small- and mid-cap oil producers are also down, but the large-cap integrated companies are trading right near their highs due to refinery margins and gasoline prices.

Near term, I don’t see any breakouts in most commodities. My expectation is that gold prices have almost hit a bottom, along with most gold stocks. Unless we see surprising data regarding the U.S. economy, the production boom should keep oil prices subdued for the near future.

The commodity price cycle is probably two-thirds of the way complete. What we know as consumers is that there is plenty of inflation in the economy, even if government statistics say there isn’t. The real inflation that’s in the Main Street economy will actually be tempered by weaker spot prices for many raw materials, and we should see this in the data over the next several months.

But when the cycle turns for many commodities, especially oil, then the fans of inflation will really be blowing. It’s not here yet, but I firmly believe it is on the horizon.

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Dow Hits Record High; Is There Still Value in Small-Caps? https://www.dailygainsletter.com/investment-strategy/dow-hits-record-high-is-there-still-value-in-small-caps/396/ https://www.dailygainsletter.com/investment-strategy/dow-hits-record-high-is-there-still-value-in-small-caps/396/#comments Thu, 07 Mar 2013 15:02:45 +0000 John Whitefoot <![CDATA[Investment Strategy]]> <![CDATA[dividends]]> <![CDATA[Dow Jones Industrial Average]]> <![CDATA[inflation]]> <![CDATA[retirement]]> <![CDATA[retirement fund]]> <![CDATA[stock market]]> https://www.dailygainsletter.com/?p=396 <![CDATA[

070313_DL_whitefootDuring the financial crisis, millions of American investors pulled their money out of the stock market and funneled their retirement funds into low-yield, low-risk Treasuries, even into the bank. Unfortunately, with most banks dolling out just 0.5% interest and 30-year ... Read More

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070313_DL_whitefootDuring the financial crisis, millions of American investors pulled their money out of the stock market and funneled their retirement funds into low-yield, low-risk Treasuries, even into the bank. Unfortunately, with most banks dolling out just 0.5% interest and 30-year Treasuries offering just 3.1%, investors hoping to maintain a comfortable life in retirement are going to have to find better places to park their retirement funds.

With the Dow Jones Industrial Average sailing into uncharted territory, many investors that were sitting on the sidelines are turning their attention back to the stock market. And for good reason.

On March 6, 2009, the Dow Jones Industrial Average touched a low of 6,469.95; on March 6, 2013, it hit an all-time high of 14,320.68—for a four-year gain of 121.3%. During the same period of time, the S&P 500 climbed 121.9%. (Source: StockCharts.com, last accessed March 6, 2013.)

After lying dormant for years in banks and low-yielding bonds, some small investors are thinking about bringing their money off the sidelines and back into stocks. With the Dow reaching record heights, is it really the best time for investors to be jumping back in?

Yes, but with some qualifications.

Historical wisdom holds that small-cap stocks outpace large-cap stocks. As a result, some investors may be considering jumping on the small-cap bandwagon. And why not? Since touching a low of 355.05 on March 9, 2009, the Russell 2000 index, a measure of small-cap stocks, has climbed 165.5%—hitting a record 932.00 on February 19, 2013. (Source: Ibid.)

While the Russell 2000 has solidly outperformed the Dow Jones since 2009, investors have to consider whether the bull market is getting a little long in the tooth and whether small-cap stocks are overvalued or undervalued.

Over shorter periods of time, small-cap stocks tend to do better when the economy is recovering from a recession. As a harbinger of economic change, they react quickly to fluctuations in economic conditions. This is also why earnings can be more volatile.

During the 1990s, large-cap stocks outperformed small-cap stocks; since 2000, small-caps have taken center stage—for an unprecedented 14-year stretch. Like the greater stock market, though, that trend will eventually reverse.

Which begs the question? Are small-cap stocks still the best value for investors looking to get back into the market? Or should new investors be looking at large-cap stocks? While it’s still possible to find undervalued small-cap stocks, it’s getting tougher.

And just like the stock market crash of 2008, it’s hard to forecast what unpredictable investors will do to excellent stocks when the overarching market sentiment changes. Wall Street doesn’t have a great history of sticking it out when the going gets tough. When it comes to ‘fight or flight’ we tend to flee.

If risk-averse investors want to wade back into stocks, perhaps they should consider high-yield dividend paying stocks. It’s definitely not uncommon to find bank, utility, and consumer goods stocks that provide annual dividends that are significantly higher than bond interest rates. Some examples: United Bankshares, Inc. (NASDAQ/UBSI), Black Hills Corporation (NYSE/BKH), and Altria Group, Inc. (NYSE/MO).

If you have a higher risk tolerance and are considering putting your retirement fund back into stocks, make sure you look at those companies that have a long history of paying dependable dividends that increase to keep pace with inflation.

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America’s Middle Class on the Chopping Block https://www.dailygainsletter.com/stock-market/americas-middle-class-on-the-chopping-block/389/ https://www.dailygainsletter.com/stock-market/americas-middle-class-on-the-chopping-block/389/#comments Tue, 05 Mar 2013 16:26:53 +0000 Mitchell Clark <![CDATA[Stock Market]]> <![CDATA[corporate earnings]]> <![CDATA[eurozone]]> <![CDATA[Federal Reserve]]> <![CDATA[GDP]]> <![CDATA[government spending]]> <![CDATA[inflation]]> <![CDATA[Keywords: U.S. economy]]> https://www.dailygainsletter.com/?p=389 <![CDATA[

050313_DL_clarkThe U.S. economy is going to be low and slow for quite a long time. Cuts to government spending, persistent unemployment, and stagnant incomes all make for a real age of austerity at both the sovereign and individual levels. And ... Read More

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050313_DL_clarkThe U.S. economy is going to be low and slow for quite a long time. Cuts to government spending, persistent unemployment, and stagnant incomes all make for a real age of austerity at both the sovereign and individual levels. And there is inflation in this economy, and it’s keeping disposable incomes down. In an economy that is about 70% based on consumer spending, this is not good.

I’ve never been bearish on the U.S. economy, because no other country on the planet is able to pull up its bootstraps and move forward as quickly. But times have changed and after experiencing persistent financial crises (savings and loan, tech bubble, subprime mortgage crisis) and unreasonable government spending, I fear the system can no longer recover from these shocks like it used to. The reason for this is the lack of financial flexibility caused by too much government spending and a lack of will on the part of policymakers to enact ongoing, practical solutions to keep the ship sailing.

And the lack of financial flexibility is present in all the levels of government, particularly following the troubles in the real estate market after the subprime mortgage bubble had burst. I hate to say this, but government spending is a large part of gross domestic product (GDP) in all Western countries. This is why the eurozone is in such trouble, and it’s also why that region is destined for economic mediocrity for years to come.

I fear that the U.S. economy is going down the same path, and breaking out of this cycle is going to be extremely difficult. The single greatest strength the U.S. economy created was a burgeoning middle class, with decent jobs that made it possible for a family to live in their own home, own a decent car, and take a regular vacation. But somehow, the middle class in the U.S. economy have been getting squeezed over the years, while at the same time, government spending has gotten out of control.

I wonder about the reasons why this has happened and the only thing I can come up with is that special interests have slowly (perhaps unintentionally) pulled the U.S. economy and government spending away from reasonableness. Maybe it has always been like this, but the U.S. economy is now in a real pickle—stuck in a cycle of debt. Breaking this cycle of money creation and debt servicing is going to be painful. For the unemployed and underemployed, it’s already painful.

Just like in Europe, government spending in the U.S. is going to be under pressure for a number of years. This will be a big drag on the U.S. economy. Corporate earnings have actually been holding up well, as the Federal Reserve keeps borrowing costs artificially low, and continues to prop up the consumer with massive money creation. So with these fundamentals in place, investor expectations have to be low.

Right now, with government spending on the chopping block, investors need to be extremely cautious about taking on new positions in the stock market. With the U.S. economy growing at a slower rate than inflation, dividend income is your only friend. Currently, I have zero expectations for the stock market this year. If it can stay where it is right now, this will be a major accomplishment. I’m not bearish yet, but the fear factor is going up.

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