Is it an early Christmas present or a really early April Fools’ Day trick?
In a somewhat surprise move, the Federal Reserve decided the U.S. economy was doing well enough that it could start to cut back on its generous $85.0-billion-per-month quantitative easing (QE) strategy.
I say “surprise” because the Federal Reserve initially said it wouldn’t consider tapering until the U.S. economy was on solid, sustainable economic ground, which meant an unemployment rate of 6.5% and inflation of 2.5%. Today, unemployment sits at seven percent and inflation is near historic lows at below one percent.
Against a weak economic backdrop, the Federal Reserve made a brave and daring decision to slash its monthly QE policy by a paltry $10.0 billion. That means that instead of pumping more than $1.0 trillion into the U.S. economy next year, it is only going to inject $900 billion. In other words, the U.S. national debt is going to increase by $900 billion. (Source: Press release, Board of Governors of the Federal Reserve System web site, December 18, 2013.)
If the U.S. economy really was on solid footing, Fed Chairman Ben Bernanke would have made a bigger dent in his monthly bond-buying program. Instead, he made a token gesture as he gets ready to hand the baton to Janet Yellen early next year.
Yup, after injecting $4.0 trillion into the U.S. economy, the country is little (or no) better off than it was before the Fed initiated quantitative easing. U.S. unemployment is down from its Great Recession high of 10% in October 2009, but it has yet to break the seven-percent level. Meanwhile, the underemployment … Read More
By Sasha Cekerevac for Daily Gains Letter | Dec 17, 2013
As many of you already know, the gross domestic product (GDP) estimate for the third quarter came in above estimates at 3.6%, with most of the increase coming from higher inventory levels.
But I would like to look at something slightly different than the inventory buildup. I think we are all aware of what happens when inventory builds and consumers don’t buy—corporate profits get hit. However, looking at the data a bit closer, there are more worrisome signs aside from excess inventory that are also pointing to tough times ahead for corporate profits.
The S&P 500 has had a stellar run since its bottom in 2009. Part of the reason for this is that corporate profits have expanded tremendously as firms cut costs through massive layoffs, as well as lower financing payments through the cheap money provided by depressed interest rates. But this might be coming to a close, as corporate profits for S&P 500 companies appear to be peaking.
According to the latest data from the U.S. Department of Commerce, third-quarter corporate profits on an after-tax basis were a record 11.1% as a share of GDP. (Source: “National Income and Product Account, GDP 3rd Quarter 2013,” U.S. Department of Commerce, December 5, 2013.)
What this means is that the S&P 500 companies are generating extremely high profit margins. Obviously, this alone is not bad; however, business is always cyclical. We will always move from peaks to troughs, and corporate profits and margins are no exception.
Wall Street analysts continue to tell people that the S&P 500 is a buy, because they are taking the data from the past couple … Read More
A raft of positive economic news came in last week, suggesting that the U.S. economy may actually be getting stronger. On Friday, the Bureau of Labor Statistics reported that the unemployment rate fell from 7.3% to seven percent in November, the non-farm employment numbers improved by 203,000, and unemployment claims fell to 298,000. In addition, preliminary gross domestic product (GDP) growth climbed from 2.8% in October to 3.6%, soaring past the three percent forecast.
Normally, this kind of news would help shore up the stock market and send it rallying higher. But that’s not what happens in a Federal Reserve-fuelled market; in fact, the Dow Jones Industrial Average, S&P 500, and NASDAQ all responded with a losing streak.
Why the fear? Two words: quantitative easing. Since implementing the first round of quantitative easing in 2009, the Federal Reserve has flooded the market with over $3.0 trillion. Quantitative easing has translated into artificially low interest rates. The low-interest-rate environment has also been the primary fuel behind the stock markets’ unprecedented rally.
The Federal Reserve has said it will begin to taper (not discontinue) its quantitative easing strategy when the markets improve, which many believe means an unemployment rate of 6.5% and inflation at 2.5%.
Not surprisingly, the sharp decrease in unemployment has made the markets jittery. Tapering quantitative easing bond purchases means interest rates will increase, which could put a wet blanket on the U.S. economy. Back in May, the Federal Reserve hinted it was thinking about tapering quantitative easing; Wall Street responded by sending the markets lower, and banks responded by sending mortgage rates higher.
So you can see why … Read More
Good news is not always what it seems. On the surface, October’s new U.S. housing market sales numbers came in well above the forecast. But dig a little into the foundation of the report, and you’ll find more than a few reasons to be skeptical.
But before we dig deeper, let’s first take a look at the overall numbers. In October, sales of new single-family houses came in at a seasonally adjusted rate of 444,000, a whopping 25.4% increase month-over-month above the revised September rate of 354,000 and a 21.6% increase year-over-year. (Source: “New Residential Sales in October 2013,” United State Census Bureau web site, December 4, 2013.)
Those are pretty solid numbers—at least, until you factor in the 20% margin of error on the numbers provided by the U.S. Census Bureau and Department of Housing and Urban Development.
On top of that, sales for June, July, August, and September were all revised lower. Sales were revised downward by 0.9% in June, 4.4% in July, 10% in August, and 6.6% in September.
It’s also all about perspective. On one hand, you could champion the U.S. housing market recovery by noting that the 25.4% increase from September was the biggest one-month gain in more than 30 years! On the other hand, October’s new U.S. housing market home starts number is tempered a little when you consider the September 2013 rate of 354,000 was the weakest reading since April 2012.
Still, you can’t ignore the fact that new starts in the U.S. housing market are up month-over-month—but what’s fueling the growth? It can’t be a result of sustained jobs growth, as the … Read More
Maybe I’m reading into the economy too much, but the current state of the U.S. economy and Wall Street isn’t adding up. The vast majority of people don’t think we’re in a bubble, including Federal Reserve chair nominee Janet Yellen. Granted, you can only really point to a bubble in retrospect, but still, it certainly looks and feels like we are in one.
Talking before the Senate Banking Committee during her first public appearance as Federal Reserve chair nominee, Janet Yellen said she plans to keep printing $85.0 billion a month and set no timetable for when the Fed will begin to taper.
Truth be told, the Federal Reserve has been, for the most part, pretty straightforward about when it will taper its quantitative easing policy: when the U.S. economy improves. For most, that means an unemployment rate of 6.5% and inflation at 2.5%.
At the same time, other scenarios have been floated about, including no tapering until the unemployment rate hits 5.5%, or better yet, the Federal Reserve begins to taper in early 2014, but continues to keep interest rates artificially low until, by some estimates, 2020. Really, what’s the rush?
And why should they? Since early 2009, the S&P 500 has climbed more than 160% and is up more than 25% year-to-date. The Dow Jones Industrial Average, on the other hand, is up 132% since early 2009 and is up 21.5% year-to-date. And it looks like the good times are going to continue to roll, because, in the words of Janet Yellen, “It could be costly to fail to provide accommodation [to the market].”
Take a few steps … Read More
Are the recent U.S. job numbers a tale of two economies? The Labor Department announced last Friday that U.S. employers added 204,000 jobs in October, beating even the most optimistic estimates.
The U.S. unemployment rate, which is based on a separate survey and counted furloughed federal employees as out of work, rose from 7.2% in September to 7.3% in October.
In a world where good news is bad for investors, stocks fell after the opening bell. Why? Because investors are afraid that better job numbers will prompt the Federal Reserve to start tapering its $85.0-billion-per-month quantitative easing (QE) policy sooner than expected.
But that pessimism may be short-lived. The Federal Reserve has been pretty open about what it will take to start raising interest rates: a strong economy, namely a U.S. unemployment rate near 6.5% and inflation at 2.5%.
There’s no arguing that adding more than 200,000 jobs to the U.S. economy is good news; however, a U.S. unemployment rate of 7.3% is nothing to cheer about, regardless of whether the U.S. unemployment numbers were skewed by the U.S. government shutdown or not. The fact of the matter is that U.S. unemployment needs to drop a lot further before the Federal Reserve reins in its easy money policy and congratulates itself.
Mind you, if the Federal Reserve listens to its own economists, any attempts to taper QE could still be a few years away. While the general opinion is a 6.5% U.S. unemployment rate, at least six Federal Reserve economists think a more realistic U.S. unemployment rate goal should be as low as 5.5%.
With a current unemployment rate of … Read More
Whether you’re in Pamplona, Spain or on Wall Street, when it comes to running with the bulls, the object is to stay ahead of the pack. This means not getting gouged physically or financially. However, there are an increasingly large number of investors out there right now who think they’ve got a handle on the bull market.
Why? The Federal Reserve says it won’t taper its generous $85.0-billion-per-month quantitative easing policy until the U.S. economy improves. And by that, it means—for now at least—an unemployment rate of 6.5% and an inflation rate of 2.5%.
As a result, the Federal Reserve’s easy money and artificially deflated near-record low interest rates have put the stock market front and center for income-starved investors looking for capital appreciation. As long as the Fed keeps its printing presses in overdrive, there’s no reason to think that the bull market will take a breather.
Case in point: in spite of a year marred with revised lower earnings in the first, second, and third quarters and a record 83.5% of companies issuing negative guidance for the fourth quarter, investors have been flocking with reckless abandon to the S&P 500, which continues to trade near record levels. (Source: “Earnings Insight,” FactSet web site, October 6, 2013.)
For the last week of October, 45% of investors were bullish on the market, down from 49.2% for the week ended October 24—the highest level since February 2011. Month-over-month, the number of market bulls climbed 25%. Over the same period of time, the S&P 500 climbed 4.8%. In the last week of June, just 30.28% of Americans were bullish, representing a four-month … Read More
The stock market is certainly getting all the attention these days, but not a lot is said about other disturbing fundamentals. These fundamentals are troublesome, and if they aren’t fixed, the U.S. economy could end up in a downward spiral in a very short period of time. With these conditions, those who are saving and investing for the long term can face a significant amount of scrutiny.
I’m talking about the U.S. national debt and the U.S. government posting another budget deficit.
When someone goes to get a loan, the bank usually asks how much in assets the person has or what their credit score is; this way, the bank can judge their ability to pay back the loan. If a person has a significant amount of debt already and a bad credit score, then banks will be hesitant to give them anything. There’s no rocket science behind this; the chances of a person with bad credit and a lot of debt defaulting on their liabilities are very high.
When I look at the U.S. economy, I see something very similar and wonder if those who are buying U.S. bonds, thereby giving loans to the U.S. economy, will one day say, “No, we will not give you any money.”
You see, since the financial crisis, the U.S. government has been registering a massive budget deficit. For example, in fiscal 2012, the U.S. government posted a budget deficit of over $1.0 trillion. In fiscal 2013, the U.S. government registered a budget deficit of $680 billion—slightly lower than the preceding years, but a deficit nonetheless. (Source: “Final Monthly Treasury Statement of Receipts … Read More
Are the long-term retirement plans of working Americans being held hostage by the Federal Reserve?
If the point of quantitative easing was to stave off a recession and spur jobs growth, I think it’s fair to say the Federal Reserve’s $85.0-billion-per-month money-printing scheme has been a failure. At the very least, I’m not so sure the money was well spent, and that the end does not justify the means.
I enter as evidence almost $4.0 trillion that the Federal Reserve has dumped into the U.S. economy since 2009. To put that into perspective, the average unemployment rate that same year was around 8.5%; that translates into roughly 13.1 million Americans being out of work in 2009. Fast-forward to today, and the unemployment rate stands at an unacceptable 7.2%, or 11.3 million Americans. (Sources: “Civilian Labor Force (CLF16OV),” Federal Reserve Bank of St. Louis Economic Research web site, last accessed October 24, 2013; “The Employment Situation – September 2013,” U.S. Bureau of Labor Statistics web site, October 22, 2013.)
It could be argued that over the last four years, the Federal Reserve has printed off $4.0 trillion to create 1.8 million jobs.
But at what expense? Since the stock market crash in 2008, the Federal Reserve, through its use of quantitative easing, has sent U.S. interest rates towards near-record lows. In fact, the Federal Reserve has kept the federal funds rate target between zero and 0.25% for almost five years.
That’s terrible news for anyone looking to save money, and near-record-low interest rates make it virtually impossible for people to save money to meet their retirement needs. Sadly, for those nearing … Read More
The best time to look at certain sectors and stocks is when investors are running for the exits. Unfortunately, the U.S. government shutdown and looming debt ceiling deadline have sent investors scurrying in every direction. Still, one area that will be negatively impacted should the U.S. government shutdown continue and the debt ceiling limit not be raised is the slowly rebounding U.S. housing market.
That doesn’t mean investors should shun the U.S. housing market and homebuilder stocks altogether; if anything, the current lull is the perfect time to take a closer look at this sector. Both the shutdown and debt ceiling will eventually be in the rearview mirror and the wheels of economic progress will sputter back to life.
According to the latest S&P/Case-Shiller Home Price Index, U.S. house prices rose 12.4% for the 12 months ended July 31, the biggest annual increase since February 2006. Home prices, which have climbed 16% since the beginning of 2012, are still roughly 22% below their 2006 pre-recession highs, meaning, there is still plenty of room to run before the U.S. housing market can say it has fully recovered.
Unfortunately, the U.S. government shutdown and fears about the debt ceiling are coming just as construction and new housing sales are beginning to show signs of life. Residential starts in August were up slightly (0.9%), with an annual pace of 891,000—a marked improvement over the April 2009 low of 478,000 starts.
There are a number of ways a long-term government shutdown would exacerbate growth in the U.S. housing market. Because federal employees are furloughed, there is no one to approve mortgages; those in the … Read More
For the last five years, the U.S. has relied on quantitative easing, one of the most unconventional monetary policies, to kick-start its economy. By printing off trillions of dollars and increasing the money supply on the back of artificially low interest rates, the government is hoping financial institutions will increase lending and liquidity.
Will it work? Not if history is any indication.
On December 29, 1989, during the heyday of the Japanese asset price bubble, the Nikkei Index hit an intraday high of 38,957.44, capping off a decade in which the index soared more than 500%. Despite those dizzying heights, no one could see what the next 25-plus years would bring.
Over the ensuing decade, the Nikkei continued to slide. To shore up the economy, the Bank of Japan held interest rates near zero and had, for many years, claimed quantitative easing was an ineffective measure.
In March 2001, the Bank of Japan unveiled its first round of quantitative easing. It didn’t take, and since then, Japan has initiated 11 rounds of quantitative easing, dumping trillions of dollars into the markets. Instead of stimulating the economy, it has been saddled with a negative real gross domestic product (GDP) growth rate and record-low interest rates.
By late October 2008, the Nikkei hit an intraday low of 7,141—an 80% loss from its 1989 highs. While it rebounded in 2013 and is currently sitting near 14,170, it’s still down more than 63% since the halcyon days of the late 1980s.
After a quarter century, quantitative easing and record-low interest rates are a regular part of Japan’s economic diet. Thanks to uncertainty in the … Read More
While quantitative easing (QE) may have been put in place to kick-start the economy, it also had the added benefit of kicking income investors to the curb. Since implementing QE1 in November 2008, the Federal Reserve has printed over $3.0 trillion to snap up government bonds.
This has translated into artificially low interest rates, which are supposed to spur borrowing. A low-interest-rate environment has also helped fuel the stock market and put a smoldering spark in the housing market and auto industry. Those same record-low interest rates have also sucked the income out of America’s retirement portfolio.
In a high-interest environment, fixed income assets like Treasuries, bonds, and certificates of deposit are an important part of most retirement portfolios. In theory, they provide regular investors with a stable place to park their retirement money and a means to anticipate a reliable income stream.
In 1980, Treasury bonds peaked at an eye-watering 14%. Today, a 30-year Treasury bond provides a yield of just 3.67%, a far cry from 1980 and a long way from the 5.3% yield in late 2007—before the financial crisis began.
In order to diversify risk, invest in multiple asset classes, and take advantage of growing dividend yields, many investors have turned to exchange-traded funds (ETFs). ETFs are a great option for broad-based investing, especially for those who do not have deep pockets. In fact, with a simple ETF strategy, investors can build a well-diversified portfolio made up of small-, medium-, and large-cap stocks.
While ETFs continue to grow in popularity, investors looking for more options might want to consider exchange-traded notes (ETNs). On the surface, ETNs are … Read More
Federal Reserve Chairman Ben Bernanke has reassured us that his quantitative easing (QE) efforts have been an asset for both Wall Street and Main Street. But for some odd reason, the benefits seem to be trickling upward.
Over the last four years, the S&P 500 has climbed 150%. During the same time frame, the number of Americans receiving food stamps has risen 113% to 47 million, or one-sixth of the American population.
As a broader measure, since the Great Recession began, the top one percent of earners have seen their incomes rise 31.4%, while the bottom 99% saw their earnings rise 0.4%. This translates into the top one percent capturing 95% of the total growth in American wealth during the so-called recovery.
Even those Americans who thought they planned responsibly for retirement have been caught flat-footed. Thanks to QE and artificially low interest rates, the Federal Reserve has taken “income” out of “fixed income” investments and made saving for retirement that much harder.
And with “QE Infinity” in play, it’s not going to get any easier. According to a new global study, one in eight workers say they will never be able to fully retire. It’s worse in the U.S. and the U.K., where the numbers sit at roughly 20%. (Source: “The Future of Retirement: Life after Work?,” HSBC.com, September 2013.)
On top of that, just 51% of American workers say they were “very” or “somewhat” confident that they would have enough money to live comfortably in retirement; in 1995, that number was 72%. That said, 51% actually seems a little optimistic when you consider that 57% of workers say … Read More
Two housing indicators were released earlier this week, and while the numbers seemed divergent, they both really say the same thing—that the U.S. real estate recovery is chugging along, but the current pace is unsustainable.
On Tuesday, a report from S&P/Case-Shiller showed property values in 20 U.S. cities had increased 12.4% year-over-year in July. This marked the largest annual gain since February 2006, when the market was nearing the height of the U.S. housing bubble. (Source: “Home Prices Steadily Rise in July 2013 According to the S&P/Case-Shiller Home Price Indices,” Spice-Indices.com, September 24 2013.)
On top of that, July marked the fourth consecutive month that all 20 cities in the index recorded monthly gains. However, 15 of those cities experienced slower month-over-month gains, suggesting the rate of home price growth may have peaked.
That said, it’s pretty hard to argue we’re in a housing bubble. Since bottoming in March 2012, home prices have rebounded by 21%—but they’re still 22% below their July 2006 pre-Great Recession peak.
Not so coincidentally, mortgage rates have been running in step with the U.S. real estate market and are up more than a full percentage point since May; today, a 30-year fixed mortgage rate averages around 4.5%. Erring on the side of caution, investors sent rates higher as they speculated about whether or not the Federal Reserve would begin to taper its $85.0-billion-per-month quantitative easing program.
Not only has this made borrowing more expensive, but it has also made home ownership less affordable. Those on the cusp have been rushing in from the sidelines to beat the banks’ higher mortgage rates, and in an excited … Read More
The financial crisis struck the U.S. economy five years ago. Those who remember the collapse of Lehman Brothers know how much uncertainty was actually there. It seemed the U.S. economy was going to halt and the financial system would collapse. Ripples across the global economy were felt. Nothing looked safe—it was a total bloodbath. Investors had many questions, including if they would be able to protect their nest eggs.
As a result of all this, to fight the uncertainty and handle the issues at hand, the U.S. government and the central bank jumped in and started to spend. They bailed out the big banks in the U.S. economy to make sure everything would continue to run smoothly. We passed through that successfully, and the worst didn’t come upon us.
Sadly, as all this happened, we saw troubling trends starting to form in the U.S. economy.
Look at the national debt.
As the government started to rev up its spending spree, it posted a budget deficit and eventually borrowed money. To give you some idea, in January of 2008, when the behemoth was starting to awaken, the national debt of the U.S. economy stood at $9.2 trillion. Fast-forwarding to now, it stands at $16.7 trillion. Simple math suggests this is an increase of more than 81%. (Source: “The Daily History of the Debt Results,” Treasury Direct web site, last accessed September 20, 2013.)
Unfortunately, it doesn’t end here. Not too long ago, Treasury secretary Jack Lew sent a letter to the U.S. government saying that if they don’t increase the national debt limit currently in place by October, the U.S. economy … Read More
When it comes to the U.S. housing market, everything may look perfect on the surface, with homes being swept up at a rapid pace. However, this could all fall apart with the answer to one simple question: do existing-home sales numbers signal continued strength in the U.S. housing market and housing market-related stocks?
U.S. existing-home sales climbed 1.7% month-over-month to a seasonally adjusted annual rate of 5.48 million in August from 5.39 million in July. The year-over-year numbers are even more staggering, up 13.2% over the 4.84 million level in August 2012. While U.S. housing market sales are at their highest peak since February 2007, they are also above year-ago levels for the past 26 months (June 2011). (Source: “August Existing-Home Sales Rise, Limited Inventory Continues to Push Prices,” Realtor.org, September 19, 2013.)
Unfortunately, for many reasons, the party in the U.S. housing market might be short-lived.
In January, the interest rate on a 30-year fixed mortgage was around 3.41%; today, it’s 4.55%. While one percentage point might not sound like much, it translates into an increase of more than 30%. With mortgage rates on the rise, many first-time home buyers fear that affordability will be out of reach. (Source: “Average Mortgage Rates: January 2013,” MortgageNewsDaily.com, last accessed September 19, 2013.)
In an effort to do a runaround on rising interest rates, many first-time home buyers are jumping into the housing market. While interest rates are on the rise, it’s important to remember that they’re still well below the 6.48% level offered in August 2008, just before the housing market crashed. Still, the rise in interest rates was enough to … Read More
In spite of high unemployment and stagnant wages, sales reported by U.S. automakers have been incredibly robust, with America’s big three automakers reporting double-digit sales growth for August.
General Motors Company (NYSE/GM), the second-largest U.S. automaker, said its August sales rose 15% year-over-year, making August its strongest month since September 2008. Ford Motor Company (NYSE/F), the largest U.S. automaker, and the Chrysler Group each realized 12% increases last month. (Source: “New Vehicle Sales,” Motor Intelligence web site, September 4, 2013.)
Interestingly—or perhaps not all that surprisingly—some non-U.S. automakers and their luxury divisions reported some of the largest gains. Maserati of N.A. Inc sales were up 49% in August, Rolls Royce sales were up 121%, and Jaguar sales were up more than 67%.
For the current year-to-date, U.S. light market vehicle deliveries total 10.64 million, a 9.6% increase over the 9.71 million sold during the same period last year. If car sales keep this pace, the U.S. is on track for its best year since 16.1 million vehicles were sold in 2007.
Why are so many more Americans buying from U.S. automakers? Thanks to better trade-in values and record-low interest rates, more and more Americans are opting to lease from U.S. automakers.
Once used primarily as a tool for attracting luxury car buyers, leasing is now an attractive option for a growing segment of the population. And it shows no signs of slowing down; the number of Americans leasing from U.S. automakers has been at least 22.5% in every month this year. During the second quarter, leases accounted for more than 27% of all sales, versus 24% in the same period … Read More
Consumers like to purchase stuff, whether they need it or not. In the United States, this tendency to buy is our economic engine, driving 70% of all U.S. economic growth. In 2012, $11.119 trillion of the $15.685 trillion produced in the U.S. went towards household purchases. (Source: Amadeo, K., “What Are the Components of GDP?” About.com, April 25, 2013.)
With that much at stake, it’s easy to see why consumer confidence levels are one of the best economic indicators we have. If consumers are optimistic, they’ll spend more, and the economy expands; if they’re pessimistic, they rein in their discretionary spending, and the economy grinds down.
While Wall Street may be riding high, most of Main Street isn’t, and you can see that reflected in the consumer confidence numbers. High unemployment, high debt levels, and the idea of higher interest rates and slower economic growth have put a damper on America’s desire to spend the country out of its recession.
U.S. consumer confidence levels fell in August, just one month after reporting a six-year high. According to the Thomson Reuters/University of Michigan’s preliminary reading, consumer sentiment slipped to 80.0 from 85.1 in July, the highest since July 2007. Wall Street economists, who clearly have their pulse on the heartbeat of the average American, were expecting August consumer confidence levels to actually increase to 85.5. (Source: “U.S. consumer sentiment weakens in August,” Reuters web site, August 16, 2013.)
It was a different story in the eurozone: consumer confidence levels there rose in August to their highest level in more than two years. During the second quarter, it was reported that the … Read More
After a serious pullback in May, is it time for income-starved investors to reconsider real estate investment trusts (REITs)? Or will America’s favorite sugar daddy, Federal Reserve Chairman Ben Bernanke, tease investors with ongoing threats of tapering?
The North American REIT bull market was stopped dead in its tracks on May 22, after Bernanke hinted the central bank might begin tapering its massive $85.0-billion-per-month government bond-buying program.
By being the major purchaser of U.S. government bonds, the Federal Reserve has been able to keep interest rates artificially low. Tapering its bond-buying program would mean, in theory, that interest rates head higher. In an effort to protect their retirement portfolio, investors are selling stocks they see as being vulnerable to rising interest rates.
REITs are at the top of the list. That’s because REITs are in the business of purchasing property and higher interest rates on the heels of financing translates into lower profitability.
While artificially low interest rates are a godsend to REITs, they’re a nightmare for average Americans looking to generate retirement income on their long-term bonds.
Interestingly, since May and the ensuing market volatility, the Federal Reserve has said that inevitable tapering would not necessarily result in higher interest rates. That’s more good news for REITs—and more bad news for income-dependent investors.
Unfortunately, many REITs have failed to fully recover from the Federal Reserve’s May 22 comments. Those depressed prices have opened up a door of opportunity for savvy investors. That’s because, when prices for REITs (and dividend stocks) fall, yields rise. The volatility means investors can pick up quality REITs at depressed prices with higher returns.
REIT … Read More
“I think it’s all about taking risk; you have to take more of it—get out of your comfort zone. You can’t just keep doing the same thing and expect different results—it’s that simple.” These were the exact words from my friend, Mr. Speculator, on portfolio management. “I am not looking for just a menial 10% return,” he added. “I am in it for a much bigger gain. To gain more, you have to risk more.”
Mr. Speculator is right about one thing: to gain more you have to risk more.
However, long-term investors who are saving for retirement, their kids’ education, or anything else for that matter, should not follow the lead of Mr. Speculator. Taking high risks can be dangerous, and at times, it’s no different than gambling. Being willing to risk it all is not a good investment management technique.
When it comes to retirement, investors need to have a very strong focus on one four-letter word—“risk”—or else one move in the wrong direction could make a dent in their portfolio—which may cause them to push back their retirement or give up on their plans altogether.
Take a look at the current bond market, for example; clearly, the risks are increasing. Look at the chart of the yield on 10-year U.S. Treasury notes below:
Chart courtesy of www.StockCharts.com
The yields have increased roughly 75% since the beginning of May.
Bond investors are fleeing. According to the Investment Company Institute, in June, U.S. long-term bond mutual funds had a net outflow of 60.4 billion—this was the first since August of 2011. In July, they continued to flock to the … Read More
Let’s face it: investing isn’t easy, and it becomes even more discouraging when investors face losses in their portfolio. To avoid a drawdown in their portfolio, investors should avoid the following five mistakes.
1. Not having an investment plan
Investors should have some sort of plan put together before they even jump into the world of investing and start allocating their portfolio to different investments. Having a plan guides them in what kind of investments they should be making and the risks they should take. An investment plan doesn’t have to be very lengthy; it just needs to explain the investor’s risk appetite, investment horizon, and purpose for investing their funds. Without a plan, an investor may turn into a speculator and take risks that can impact their portfolio significantly.
2. Investing in what you don’t understand
This is a very critical error. Investors need to know how the company operates before they purchase its shares. Keep in mind that this isn’t limited to stocks alone; investors should understand how any investment works before they decide to hold it in their portfolio.
For instance, long-term bonds are more sensitive to interest rates compared to short-term bonds. Investors saving for the long term must consider interest rates before buying bonds.
3. Getting emotionally attached to investments
After the crash in the stock market in 2008 and 2009 and the prior tech boom, one observation should be very apparent: markets tend to swing up and down. Investments that are good for the portfolio now may not be so great in two years. Investors need to realize this and not get emotionally attached … Read More
Investors beware: the bond market is treading in dangerous waters. The risks are increasing, and if all the pieces of the puzzle fall into place, it can make a significant dent in your portfolio.
Look at the chart below of yields on long-term U.S. bonds. It shows the yields continuing to increase, while bond prices are falling.
Since the beginning of May, the bond market has seen a massive sell-off. Going by the chart above, yields on the 30-year U.S. bonds have increased more than 30%. This is significant and shouldn’t go unnoticed, because long-term U.S. bonds are used as a benchmark for rates on other bonds in the bond market. If the U.S. bonds decline in value, their yields increase, and the bond market usually moves in the same direction.
We are seeing that investors have started to flee the bond market already.
According to the data from Investment Company Institute, in June, the U.S. long-term bond mutual funds witnessed their first outflow since August 2011, with outflows amounting to more than $60.4 billion. In May, there were inflows of $12.2 billion. (Source: “Historical Flow Data,” Investment Company Institute web site, last accessed August 8, 2013.)
Why is this happening? The Federal Reserve, which has kept the bond yields lower by becoming a major purchaser of U.S. bonds, is contemplating when it should decrease the amount of its monthly bond purchases. There is fear that a cut in the Fed’s bond buying could further escalate the sell-off in the bond market.
On top of this, there’s a notion that the U.S. economy is getting better. Investors usually run towards … Read More
America’s favorite sugar daddy, Federal Reserve chairman Ben Bernanke, has once again come to Wall Street’s rescue. The U.S. Federal Reserve said that while the economy continues to recover, it is still in need of support. As a result, it will continue its $85.0 billion-per-month bond-buying program unabated. (Source: “Federal Reserve Issues FOMC Statement,” Board of Governors of the Federal Reserve System web site, July 31, 2013.)
Before the markets opened Wednesday, the Bureau of Economic Analysis reported that second-quarter U.S. gross domestic product (GDP) expanded at a faster-than-expected pace of 1.7%; that’s up from a revised 1.1% in the first quarter. (Source: “National Income and Product Accounts Gross Domestic Product, second quarter 2013 (advance estimate),” Bureau of Economic Analysis web site, July 31, 2013.)
Despite the better-than-expected results, the Federal Reserve said that the U.S. economy expanded at a modest pace during the first six months of the year, and that the overall economic picture remains lackluster.
To help quell nervous investors, the Federal Reserve also revised the unemployment rate at which it would consider raising interest rates to six percent; previously, the Federal Reserve had said it would raise interest rates once the jobless rate hit 6.5%. Needless to say, with unemployment sitting at 7.6%, the U.S. economy has a long way to go.
Lower long-term interest rates are supposed to encourage consumers and businesses to take out loans for homes, new equipment, etc. At the same time, banks have been reluctant to lend to those who need it the most, which is reflected on Wall Street. Thanks to the Federal Reserve’s $85.0-billion-per-month quantitative easing policy, the S&P … Read More
The global economy is showing traits that shouldn’t go unnoticed by investors. Instead, investors should keep a close eye on their portfolio and make sure they are managing their risk properly by not being overexposed to a certain region, having their assets allocated in different asset classes, and having stop orders in place for their doubtful positions.
Investors need to know that companies trading on the key stock indices have exposure to the global economy; this means their stock prices can suffer.
The global economy looks to be heading towards a period of stagnant growth or an outright economic slowdown. The reason behind this notion is very simple: countries across the board in the global economy are witnessing anemic growth, and the demand is declining.
For example, consider India, one of the well-known emerging markets in the global economy. The central bank of India expects the country to grow by 5.5% in the fiscal year ending March 2014. This was lower than the central bank’s earlier forecast of 5.7%. (Source: Goyal, K., “India Central Bank Holds Rates in Push to Stem Rupee Plunge,” Bloomberg, July 30, 2013.)
In June, industrial output in the third-biggest hub in the global economy, Japan, fell 3.3% from a month earlier. This was the first time in five months that industrial output in the country fell; it had increased 1.9% in May. (Source: “RPT-Japan June industrial output falls 3.3 pct mth/mth,” Reuters, July 29, 2013.)
In addition to this, in the same month, the country’s retail sales also didn’t register as expected. Retail sales in the Japanese economy increased only 1.6%, compared to the 1.9% … Read More
The road to home ownership in America may have been paved with good intentions, but the current housing market recovery shows it’s not leading to Oz. Even though home values are on the rise, U.S. home ownership, at 65%, is at its lowest level in 18 years—and for some, that’s still too high.
Since the real estate market bubble burst in 2007, a number of riskier borrowers have been squeezed out. At the same time, there are a lot of potential first-time home buyers unable to take advantage of near-record-low borrowing costs and get into the housing market because banks are wary of lending. And for a sustained housing market to take hold, first-time home buyers need to be able to actually access the housing market.
In fact, the so-called “housing market recovery” isn’t really benefiting those Washington has been pushing for. Thanks to tax credits that were made available when the Great Recession began, first-time buyers accounted for more than 50% of U.S. housing market sales as of 2009. That’s a substantial increase over the 30-year average of 40%.
The U.S. housing market has experienced some major changes since then. Today, first-time home buyers account for just 29% of sales. One could argue that first-time home buyers, typically in their 20s and 30s, don’t have enough credit history to get a mortgage. And because of stagnant wages and mile-high unemployment, they haven’t had time to build up a nest egg. After being bailed out by tax payers, banks are no longer willing to lend to those they believe are untrustworthy.
So while affordability in the U.S. housing market is … Read More
Word on the street is that the U.S. Federal Reserve will soon be announcing its intention of keeping interest rates low for a long time. While this may be good news for first-time home buyers looking to lock their mortgages in at near-record-low rates, it’s terrible news for anyone with a retirement portfolio made up of fixed-income investments like cash, bonds, and annuities.
To make up the ground lost to artificially low interest rates, investors may need to rebalance their retirement portfolio to include a higher allotment of stocks. But where should investors turn? During the first five months of the year, it was pretty hard to lose money on the stock market.
Between January 2 and May 21, the day before the Federal Reserve hinted it would scale back its $85.0 billion-per-month quantitative easing policy, the S&P 500 was up more than 17%. Since then, the Federal Reserve-inspired roller coaster has rewarded patient investors with a one-percent return.
For much of June, the S&P 500 experienced a volatile ride, with investors wondering just how well Wall Street would do without the intervention of the Federal Reserve. To calm investors, the Federal Reserve intervened and said that there is no hard and fast set time for any tapering. Not only that, the Federal Reserve said that eventually cutting back won’t necessarily translate into higher interest rates. Disaster averted!
What that means is that those with large sums of money to plunk down on the stock markets will continue to do well. While those with their money tied up in their homes—the majority of Americans—will not.
Those investors parked somewhere in … Read More
On July 23, the Dow Jones Industrial Average hit an all-time intraday high of 15,604.22. That same day, the S&P 500 also hit a new high of 1,698.78. With the markets doing so well, you could be forgiven for thinking today’s baby boomers are laughing all the way to the bank.
But that’s not so! Most baby boomers haven’t really benefited from the bull market. While it runs with reckless abandon, it’s leaving behind most Americans who are in retirement. Over the last five years, stocks and bonds have rallied, but the housing market has remained relatively flat. That means affluent Americans who park their assets in stocks and other financial products have done quite well. Those Americans with their wealth tied up in the value of their homes, however, have not.
Since the beginning of the current bull market in 2009, the S&P 500 has climbed more than 160%. U.S. housing prices, on the other hand, are still more than 25% below their 2006 highs.
Retiring baby boomers are also facing another challenge. Early boomers—those between 61 and 65—are more financially stable (for the most part) than their younger peers (those between 50 and 55). The early boomers worked during a period of economic stability in an era when defined benefit plans were the norm. In 1965, the inflation rate was 1.59%; by 1970, it had risen to 5.84%.
The late boomers, in contrast, started working in a more unsettled economic time. In the 1980s, many companies rolled their retirement plans over to 401(k) accounts, tying their self-directed retirement savings to the ups and downs of the stock market. … Read More
What a difference 81 years can make. On July 8, 1932, the Dow Jones Industrial Average hit a Great Depression-era low, closing at 41.22, representing an 89.19% loss from its March 1929 peak of 381.17. Over the next 18 months, the Dow Jones Industrial Average gained 150%.
Over the last 81 years, the Dow Jones Industrial Average has climbed 3,700%, and closed at a record-high 15, 461 yesterday. Since hitting a Great Recession low of 6,705.63 in March 2009, the Dow Jones Industrial Average has rebounded almost 130%.
What have we learned over the last 80 years of investing? Maybe that patience is an investor’s most important virtue. When the markets have been faced with wars, terrorism, and economic or political upheaval, they always rebound. Even when the markets are down, there’s always a bullish play waiting to be discovered.
After all, making money in the stock market is about taking advantage of opportunities. People run to and away from stocks for the wrong reasons. In the words of Warren Buffet, “A public-opinion poll is no substitute for thought.” (Source: BrainyQuote, last accessed July 11, 2013.) When it comes to investing, it’s more important to think for yourself than to follow the herd.
That is especially true today. With the Dow Jones Industrial Average hitting a new record, that exuberance has more to do with the Federal Reserve’s $85.0 billion-per-month quantitative easing policy and artificially low interest rates.
In essence, today’s growth on Wall Street can be attributed to Federal Reserve chairman Ben Bernanke, the world’s biggest sugar daddy.
This will become evident after the second-quarter earnings season is in … Read More
Right now, the S&P 500 is just two percent from its all-time high and the Dow Jones Industrial Average is just half a percentage point away from its own record. That’s why I think it’s the perfect time to short both.
The stock market indices have gotten ahead of themselves. In fact, they might be the only spot in the entire U.S. economy showing signs of growth—the markets are running counter to every economic indicator they are supposed to reflect.
The International Monetary Fund (IMF) cut its growth forecast for both the U.S. and global economics. The downward revisions come on the heels of the Federal Reserve saying it would most likely start to taper its $85.0 billion-per-month quantitative easing policy this year. This action will, of course, lead to an increase in interest rates.
After initially predicting U.S. 2013 growth of 2.2%, the IMF revised it downward to 1.9% in April, then modified it downward again this week to just 1.7%. (Source: “Emerging Market Slowdown Adds to Global Economy Pains,” International Monetary Fund web site, July 9, 2013.)
That means that the IMF has revised its 2013 economic growth projections for the U.S. downward by almost 25%. It also altered its projections for the U.S. economy in 2014, from 2.9% down to 2.7%.
The downward revisions shouldn’t come as a big surprise. Unemployment remains high, S&P 500 companies continue to sit on record sums of cash, and gold prices have tumbled. Japanese government bonds have tanked and China’s economy is cooling; so, too, are interest rate–sensitive sectors, like utilities and homebuilders.
Here at home, the writing has been on … Read More
Investors who love technical analysis must be having a sense of déjà vu. Whenever the Federal Reserve announces it’s ending its quantitative easing policy, the markets respond by cratering.
In March 2010, when the Federal Reserve announced it was ending its first round of quantitative easing (QE1), the Dow Jones Industrial Average and S&P 500 both fell 14% over the next three months. To help prop up the economy, the Federal Reserve initiated QE2 in November 2010 and concluded it seven months later. By early October, the Dow and S&P 500 had lost close to 15% in value.
In September 2012, the Federal Reserve initiated QE3—investors’ nerves were calmed when they discovered it was open-ended. Today, the Federal Reserve spends $85.0 billion a month on Treasury bonds and mortgage-backed securities to help prop up the American economy.
As I have been reading, that massive monthly cash injection doesn’t even begin to give the full picture of how much liquidity the Federal Reserve’s quantitative easing policies, and those of other central banks, are flooding the financial markets with.
Since the financial crisis began in 2007, the five biggest central banks have purchased roughly $12.0 trillion in assets. Coupled with the near-record-low interest rates, that accounts for about $33.0 trillion of fiscal and monetary stimulus spending—that’s about 46% of the global economy.
Suffice it to say, the Federal Reserve’s artificially low interest rates have made it easier than ever to borrow money, sending many international stock markets to new heights. And it’s from these dizzying heights that the markets are pondering the future of QE3.
While the Federal Reserve hasn’t said equivocally … Read More
The U.S. Department of Commerce reported that in the month of May, exports from the U.S. economy accounted for $187.1 billion, and imports from the global economy were $232.1 billion.
This situation of more imports than exports caused a trade deficit of $45.0 billion in May. Compared to the previous month, the trade deficit increased almost 11% from April. (Source: “U.S. International Trade in Goods and Services – May 2013,” U.S. Bureau of Economic Analysis web site, July 3, 2013.)
On the surface, the trade deficit may not sound like a big deal, but it has a profound affect on the currency and the gross domestic product (GDP) of a country. Here’s what you need to know: the U.S. economy has been registering a trade deficit since at least January 1992. (Source: “Trade Balance: Goods and Services, Balance of Payments Basis,” Federal Reserve Bank of St. Louis web site, last accessed July 3, 2013.)
A short-term trade deficit isn’t something to worry about—it can happen for many reasons, and can be easily absorbed by a strong economy—but a long-term, continuous trade deficit can be alarming. It can jeopardize the value of a currency and inhibit economic growth.
Essentially, what happens is that the country with a trade deficit is seeing its currency leave its borders. Right now, that means that other countries hold a significant amount of U.S. dollars. If they decide to sell their holdings on the market, it would create a huge increase in the supply of U.S. currency, leading to a lower dollar.
Similarly, GDP is calculated by adding the consumption, investments, government spending, and net exports … Read More
With the Federal Reserve signaling its $85.0 billion-per-month quantitative easing policy may be coming to an end, many investors are scrambling, looking for places to invest.
The Fed cutting back on its monthly Treasury bond and mortgage-backed security purchases means demand will slide. And that will take the price of bonds with it, sending yields and interest rates higher.
The easy money may be coming to an end, but that doesn’t mean there aren’t safe havens out there for investors to take advantage of. All you need to do is find those equities that do well when interest rates rise.
Many investors believe that rising interest rates are a boon to the banking industry. But if short-term interest rates get too high, individuals with huge debt loads often end up defaulting—and that costs banks money.
Banks tend to make money when long-term rates rise faster than short-term rates. In that scenario, banks can borrow more cheaply from depositors and make more money from higher-interest loans.
It may not be as glamorous as investing in gold, platinum, or oil and gas, but one sector that looks like it could benefit from higher interest rates is life insurance. While the markets have been tanking on fears of stimulus easing, some insurance stocks have been surging.
That’s because bond yields are to life insurance companies what metal prices are to the mining industry. As a result, insurance companies are the one industry that actually thrives in an environment of rising interest rates.
That’s because insurance companies make money on the returns they earn on premiums from policyholders. Insurance companies don’t make as much … Read More
I used to think that financial results and economic data were the backbone of Wall Street, but I think it’s safe to say that the most important force driving the markets today is the Federal Reserve.
Everything the markets have done since the Federal Reserve initiated its first round of quantitative easing back in 2008 is testament to this. After bottoming in early 2009, the Dow Jones Industrial Average has climbed almost 120%, while the S&P 500 is up more than 135%.
As this five-year period of unprecedented Federal Reserve-inspired money printing continues, unemployment remains high, home values are still 25% below their pre-market crash levels, wages are stagnant, and the number of Americans relying on food stamps has soared 80% to 47.5 million.
For further proof, just look at the actions of the last few weeks. On May 22, the Federal Reserve hinted it might start tapering off its $85.0 billion-per-month quantitative easing policy as early as Labor Day.
The global markets responded with a massive sell-off. Just the idea that the global economy could survive without the Federal Reserve’s cheap money supply and artificially low interest rates was a little too much to bear.
Then, on June 19, the Federal Reserve riled markets again when it came right out and said that thanks to the strong economy, it would consider tapering off its monthly $85.0-billion quantitative easing policy by the end of the year. It also said it could end its quantitative easing policies altogether in 2014. Again, the markets tanked.
Just how strong is the U.S. economy? During the first quarter, 78% of S&P 500 companies issued … Read More
The American Dream has taken a beating over the past few years, after the housing bubble burst and the subsequent market crash. But that’s all in the past now—or so it seems. The idea of home ownership is back on the table for a growing number of Americans.
The Department of Commerce reported that new-home sales climbed 2.1% in May compared to April—the highest level since July 2008. While the sales of new homes (476,000) remain below the 700,000 annual rate that’s considered healthy, they’re still up 29% year-over-year. The median price of a new home sold in May was up 3.3% year-over-year, at $263,900. (Source: “New Residential Construction in May 2013,” U.S. Census Bureau web site, June 18, 2013, last accessed June 28, 2013.)
Keeping the optimism alive, the National Association of Realtors (NAR) said that more Americans signed contracts in May to buy previously owned homes than at any other time in more than six years.
Total existing-home sales in May were up 4.2% to a seasonally adjusted annual rate of 5.18 million versus 4.97 million in April. Total existing-home sales are also up 12.9% over the 4.59 million recorded in May 2012. The NAR noted that the strong growth is unsustainable unless new home construction starts increase by 50%. (Source: “Existing-Home Sales Rise in May with Strong Price Increases,” National Association of Realtors web site, June 20, 2013.)
The Standard & Poor’s Case-Shiller Index showed that existing-home prices in 20 U.S. metropolitan areas were, on average, 12.1% higher in April than a year earlier. San Francisco led the way at 23.9%, with Las Vegas a close second … Read More
The U.S. bond market seems to be the topic of discussion among investors these days. The pundits of the financial media are constantly screaming out their stance on where it’s headed next and how it will play out for the investors who are involved.
While the majority seems to be favoring a possible downturn in the U.S. bond market, others are saying we might stay at these levels for some time, and are even suggesting buying on the dips. No matter what their opinion may be, they all seem to have solid reasons for their take.
Aside from this, what we already know is that bond yields are on the rise. I mentioned in these pages not too long ago that May wasn’t a great month for the bond market—the momentum was more towards selling. Yields on 10-year and 30-year U.S. Treasuries have surged significantly over the course of the month.
Remember, rising yields of 10-year and 30-year U.S. Treasuries are important for the entire U.S. bond market, because they act as a benchmark for other types of bonds, such as corporate bonds.
Looking at the selling in the U.S. bond market and the increased talks of downturn, I question how big of an impact a collapse in the bond market could really have on the overall wealth of investors and how much money is on the line.
According to the Securities Industry and Financial Markets Association, the outstanding U.S. bond market debt stood at $38.13 trillion at the end of the fourth quarter of 2012. (Source: “Statistics,” Securities and Financial Markets Association web site, last accessed June 6, 2013.) … Read More
For months I’ve been asking if the red-hot stock market has gotten too far ahead of itself. Between December 31, 2012 and May 22, 2013, the S&P 500 increased 19%. During the same period, the Dow Jones Industrial Average climbed 18.9%.
These strong increases came in spite of the fact that during the first quarter of 2013, 78% of the S&P 500 companies issued negative earnings-per-share (EPS) guidance and nearly 80% of the S&P 500 companies issued a negative outlook for the second quarter.
I argued that the current bull market has nothing to do with the shape of the U.S. economy. The current bull market has been supported by the Federal Reserve’s $85.0-billion monthly quantitative easing policy and artificially low interest rates.
And once the quantitative easing policy is cut back, Wall Street will no longer be able to rely on the Federal Reserve, and instead will have to focus its attention on the shape of the actual U.S. economy.
It’s quite possible that investors are beginning to see how dire the U.S. economy actually is. On May 22, the Federal Reserve hinted it might start tapering off its $85.0-billion-per-month quantitative easing policy as early as Labor Day. The markets haven’t been the same since.
Currently trading near 1,600, the S&P 500 is trading down more than four percent from the peak of the rally on May 22. It has also been making lower lows, consistent with a textbook downtrend. The Dow Jones is in hot pursuit, trailing almost four percent from its May 22 peak. The longest uninterrupted rally since the markets bottomed in early 2009 is in … Read More
While talking to a friend of mine about general economics and the current market conditions, discussing topics such as where the stock market is headed next since it has gone up significantly and what these low interest rates mean in the long run, he opened the debate to an interesting front: how much cash should an investor have in their portfolio? Is cash any good to hold for investors who are in the market for the long term, saving for their retirement?
One of the most basic strategies to manage a portfolio is to invest the funds into different asset classes, which is referred to as “asset allocation.” The reason for asset allocation is that if one asset class (i.e. stocks) declines in value, the other class (those with a negative correlation to stocks), can rise and minimize the losses. Most often, investors who are saving for retirement allocate their portfolio to stocks and bonds completely—because they tend to have a negative correlation—and not hold any cash at all.
To say the least, investors who hold cash in their portfolio can benefit significantly, and may be able to earn a higher rate of return compared to those who don’t. But before going into further detail, how much cash should the portfolio of an investor actually have?
To assess how much cash an investor should have in their portfolio, they need to look at certain factors, such as how long they are planning to invest and if they need any funds in the short term.
Going back to the discussion with my friend, he, for example, plans to invest for the … Read More
Despite the raft of negative economic news we’ve been seeing over the last umpteen months, additional sour news that backs up the prevailing negative winds on Wall Street still manages to shock even the most seasoned of analysts.
According to an article headline published by Dow Jones Newswires, “U.S. Factories Show Surprising Contraction.” I’m not sure why the editors at Dow Jones Newswires would be surprised—disappointed, perhaps, but not surprised—but apparently, they are. (Source: “U.S. Factories Show Surprising Contraction,” NASDAQ web site, June 3, 2013.)
They are surprised, in spite of high unemployment, falling median incomes, an increasing number of Americans receiving food stamps, high personal and student loan debt, and stagnant wages. Even Wall Street seems a little tepid. Of the S&P 500 companies that have issued corporate earnings guidance for the second quarter of 2013, almost 80% have issued a negative outlook.
So I’m not sure why anyone would be surprised that U.S. factories showed a contraction.
The Institute for Supply Management (ISM) said its index of economic activity in the U.S. manufacturing sector contracted in May for the first time since November 2012, and only the second time since July of 2009. After flirting with the 50.0 level, the Purchasing Managers’ Index (PMI) fell to 49.0 in May from 50.7 in April. A reading below 50.0 indicates a contraction in the manufacturing sector and, usually, ebbs and flows in step with the health of the economy. (Source: “May 2013 Manufacturing ISM Report On Business,” Institute for Supply Management web site, June 3, 2013.)
And it’s not as if the United States is an economic island. China, the … Read More
Investors interested in making long-term investing commitments in the face of an irrational, Federal Reserve–enhanced bull market need to consider the facts. Sure, the markets are running higher, but it isn’t on sound economic policy.
U.S. unemployment remains stubbornly high, as does personal debt. U.S. wages are stagnant, and first-quarter U.S. gross domestic product (GDP) growth came in well below the expected expansion rate. Of the S&P 500 companies that have issued corporate earnings guidance for the second quarter of 2013 so far, almost 80% have issued a negative outlook.
It’s fair to say the run-up on Wall Street has more to do with the Federal Reserve’s $85.0-billion-per-month quantitative easing policies and artificially low interest rates than it does an economic rebound.
Still, there are potential investing areas that even the Federal Reserve can’t touch. Case in point: no matter what happens on Wall Street, over the next 18 years, roughly 10,000 Americans will turn 65 every single day.
And over the next 20 years, they will each spend $142,000 in medical expenses, though that estimate is an average number and does not include long-term care costs that some retirees may incur. Or at least that’s according to a recent study that examined commercial data from 2002 through 2010 and Medicare data claims from 2006 through 2010. (Source: Yamamoto, D.H., “Health Care Costs—From Birth to Death,” Health Care Cost Institute web site, May 2013.)
Not surprisingly, the study found that the amount of health care a future retiree will need varies by their current age and life expectancy. If you retire at 55, you’ll spend about $372,400 ($744,800 for a … Read More
The eurozone has sent waves of confusion through the global economy, and investors are concerned about what it could do to their portfolio. To say the very least, investors have all the right to be worried—bulls and bears are creating noise, making investment decisions even more difficult to make.
The eurozone is in recession for the second time since 2009.
Back then, the problem was the debt-infested nations like Greece, Spain, and Portugal that swept the region with a slowdown, but now things appear to be different. The strongest nations like Germany and France are showing bleak performance. Similarly, other smaller nations that didn’t even make the news before are now in the headlines—just look at Slovenia and the Netherlands, for example.
Why is this a concern? The problem at the very core is that there are America-based companies that operate in the eurozone. If the region suffers through severe economic slowdown once again, the demand from consumers will decline due to high unemployment. As a result, the U.S. companies will see their sales decline, and eventually, their portfolio will deteriorate.
To fight this economic slowdown in the region, the European Central Bank (ECB) has taken some major steps. For example, to reduce the risks of the region dissolving, the ECB said it will “do whatever it takes” to save the region. (Source: “Verbatim of the Remarks Made by Mario Draghi,” European Central Bank web site, July 26, 2012, last accessed May 7, 2013.)
On May 2, the ECB announced a cut in its interest rates, lowering them to 0.50% from 0.75%. In addition, while … Read More
Thanks to the near-record-low interest rates, many Americans are ready to jump back into the housing market. Unfortunately, many are running into one obstacle—there aren’t enough homes for sale. That’s a good sign, though! After all, a leading indicator of economic growth is a healthy housing market, and a lack of housing should mean that builders can’t keep up with demand.
Part of the reason there is a lack of supply is that many people don’t want to sell. Many homeowners lost a lot of equity in 2006 when the housing market collapsed. Today, 21.5% of all residential homes in the U.S. are worth less than their mortgages. (Source: Panchuk, K.A., “CoreLogic: 10.4 million mortgages still in negative equity,” HousingWire.com, March 19, 2013, last accessed May 7, 2013.)
While housing prices have begun to rebound, they are still down 27.5% from their April 2006 peak. With that much room to grow just for homeowners to break even, you can see why many don’t want to unload their property, and why many first-time buyers are competing for a small number of homes. But homebuilders are stepping in to fill the void.
In 2013, U.S. homebuilders are expected to create one million homes, which will be the fastest pace at which homes were built since 2008. Apartment construction is leading the way, up almost 31% to an annual rate of 417,000, the fastest pace since January 2006. Single-family home building, which makes up nearly two-thirds of the market, fell almost five percent to an annual rate of 619,000. (Source: “New Residential Construction in March 2013,” United States Census Bureau web site, April … Read More
Thanks 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 … Read More
Very 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 … Read More
Saving for a comfortable retirement is what motivates many people to start their wealth management planning regimen. Whether you’ve been planning for retirement since you were 25 or 50, saving is only half the battle; after retirement, the real work begins. With your primary source of income gone, you have to figure out how to make your retirement fund last. That’s not as easy as it sounds.
In 2008, at the beginning of the financial crisis, Metropolitan Life conducted a survey asking people who were about to retire on their 401(k) plans what they thought a safe withdrawal amount would be. The answer, on average, was about 10% annually.
That number might have made sense years ago, when interest rates were high and retirees could bank on making money on fixed-income investments like Treasuries. But today, 30-year Treasuries are paying just 2.8% annually, and 10-year Treasuries offer a lowly 1.66%.
Interestingly, not even the financial crisis got people thinking more seriously about retirement withdrawal rates. In a 2011 Fidelity Investments survey, the mean annual withdrawal rate came in at a solid 8.4%; but the answers were all over the place, ranging from a conservative one percent to a no-holds-barred 25%.
In lieu of a one-percent, 10%, or 25% annual withdrawal rate, many advisors have been telling their clients that four percent is a safer number (adjusted for inflation). But is that sustainable? One study showed that an inflation-adjusted withdrawal rate of more than five percent significantly increased one’s risk of wiping out their retirement savings.
The following chart shows how long a hypothetical $500,000 retirement portfolio (containing 50% stocks, 40% … Read More