monetary policy
Why This Company Will Fare Well as the Economy Stutters
By George Leong for Daily Gains Letter | Jul 28, 2014
If you think Americans are firmly comfortable in the economy and jobs, think again. Yes, the stock market has returned strong gains and has been an investment opportunity over the past five years (since the end of the Great Recession in 2008), but much of it was artificially driven by the lax monetary policy put forth by the Federal Reserve. Now that the quantitative easing is dissipating and interest rates are set to edge higher sometime in mid-2015, I’m not all that comfortable.
The jobs numbers are improving, but they are still well below the 500,000 per month that some pundits deemed to be a sign of a healthy jobs market. We are generating about 200,000 jobs each month, which is well below what we want to see. In fact, we have only recovered the jobs lost during the recession—and we still need to build on that.
Given that there are still approximately 46 million Americans collecting food stamps, you’d understand why I still feel uneasy about the so-called economic growth in progress.
Consumers are still not spending at a rate many are hoping for. This is especially true in durable goods, which are not required for everyday living, so their buying can be bypassed.
As far as I’m concerned, the retail numbers still stink and don’t point to an investment opportunity in retail. Just take a look at the metrics at the big multinationals, such as Wal-Mart Stores Inc. (NYSE/WMT) and other retailers. While retail sales grow at a muted pace here, the growth is around 12% in China, where there is an investment opportunity in retailers.
Dick’s Sporting … Read More
Three Silver Plays That Can Weather a Short-Term Downturn
By John Whitefoot for Daily Gains Letter | Mar 27, 2014
Technically, the Federal Reserve’s job is to oversee the monetary policy (short-term interest rates) of the world’s biggest economy. Obviously, it does, but it’s also important to remember that its opinion and carefully chosen words also have a major impact on the global markets and world economies.
If the Federal Reserve says the U.S. economy is doing well, investors flood the markets. If, on the other hand, the Federal Reserve says the U.S. economy is having difficulty gaining traction, investors turn their attention to precious metals to hedge against a weak U.S. and global economy and inflation.
It’s worked like clockwork since the Federal Reserve stepped in to help kick-start the U.S. economy with its generous monetary policy after the markets crashed. During the first round of quantitative easing (November 25, 2008 to March 31, 2010), silver climbed 65%.
Sensing the economy was still unstable, the Federal Reserve initiated its second round of quantitative easing (November 3, 2010 to June 30, 2011), during which time silver climbed an additional 39%. In September 2012, the Federal Reserve commenced its third, open-ended round of quantitative easing. If history is any indicator, the third round of quantitative easing should have been a boon for silver—but it wasn’t.
Silver prices edged steadily lower over the ensuing months. In April 2013, The Goldman Sachs Group, Inc. famously trimmed its outlook for gold to $1,450 an ounce by the end of 2013 and $1,270 at the end of 2014. The company noted that the banking crisis in Cyprus didn’t have the expected positive effect on the price of gold.
Silver and gold prices fell lower in … Read More
Should You Be Prepared for a Bullish Run in Gold Bullion?
By John Whitefoot for Daily Gains Letter | Mar 26, 2014
After 12 years, gold bullion’s glorious bull run ended with a thud in 2013, retracing 30% and locking in the biggest annual decline since 1981. Many speculate that gold bullion prices melted in 2013 as investors tried to figure out when the Federal Reserve was going to be cutting its generous $85.0-billion monthly bond purchases.
Investors lean toward gold bullion and other precious metals as a hedge against both a weak U.S. dollar and inflation. A tapering of the Federal Reserve’s monetary policy suggests that the U.S. economy is getting stronger. While there was no real sign of sustained economic strength in 2013, just the idea that the Federal Reserve would have to start tapering at some point was enough to send gold bullion prices lower.
That coupled with a strong—but misguided—run on the S&P 500 also helped push gold bullion prices lower. I say “misguided” because quarter after quarter, more and more companies on the S&P 500 revised their earnings guidance lower. At the same time, companies masked their weak earnings and revenues with cost-cutting measures and near-record-high share repurchase programs.
That came to a crushing halt at the beginning of 2014, when the Bureau of Labor Statistics reported abysmal January payroll figures. Instead of adding the forecasted 196,000 jobs—the U.S. economy added just 74,000.
Weak January payroll data coupled with political tension in Ukraine helped send gold bullion prices higher. Between the beginning of January and the middle of March, gold bullion prices rebounded, climbing 15% year-to-date to around $1,390 per ounce.
The bullish run in gold bullion didn’t stop the bears from warning investors to avoid the … Read More
S&P 500 Approaching Inflection Point; How to “Insure” Your Portfolio
By Sasha Cekerevac for Daily Gains Letter | Mar 26, 2014
The winds are changing, my friends. For most of the past year, each time the S&P 500 sold off, it was a buying opportunity. I think we are at an inflection point this year, as we all know nothing lasts forever.
I believe it all began to emerge last week with the Federal Reserve meeting. As long-time readers know, over the past couple of months, I’ve been warning that once the Federal Reserve begins to adjust monetary policy, this will have a negative impact on the S&P 500.
With the Federal Reserve continuing to reduce its asset purchase program, investors are now calculating the length of time until it’s no longer. The reason for distress in the market is that Federal Reserve Chair Janet Yellen announced a tentative six-month timeframe upon completion of the asset-purchase program that the Federal Reserve will begin increasing short-term interest rates.
Why the concern?
Taking a quick look from several angles, this transition won’t be smooth. To begin with, there’s the old saying on Wall Street: “Don’t fight the Fed.” It is obvious that the Federal Reserve is dead set on reducing monetary stimulus and raising interest rates.
Very rarely does the S&P 500 increase during a period of monetary tightening. This is not to say that the S&P 500 will drop tomorrow; the Federal Reserve is continuing monetary easing for the moment. But investors in the market should be aware that once the Federal Reserve begins changing its monetary stance, the S&P 500 will be affected.
Another concern is that economic growth in America isn’t exactly on fire. While it’s true that we aren’t … Read More
How to Increase Your Profits as Monetary Policy Tightens
By Moe Zulfiqar for Daily Gains Letter | Mar 21, 2014
The verdict is in…
The Federal Reserve will taper further. In its statement, the Federal Reserve said, “Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month.” (Source: Board of Governors of the Federal Reserve System web site, March 19, 2014.) The Federal Reserve has been tapering quantitative easing since January by $10.0 billion each month, coming down from $85.0 billion a month in December.
To us, it will not to be a surprise to see the Federal Reserve taper further. If this becomes the case, then in just five months, there will be no quantitative easing. The printing presses will stop.
This doesn’t bother me. It’s all too known and expected.
With this taper announcement, the central bank also provided its projections on where the federal funds rate—the rate at which the Federal Reserve lends to the banks—will go. It said the rate can increase to one percent by 2015. By 2016, this rate can go up to two percent. Mind you, the federal funds rate has been sitting at 0.25% for some time now—since the U.S. economy was in the midst of the financial crisis.
What happens next?
Economics 101 tells us that when interest rates increase, bond prices decline and bond yields increase.
Quantitative easing and low interest rates have caused more harm than good. These two phenomena caused the bond prices to rise and … Read More
What’s Happening in This Stock Market Reminds Me of 1999…
By Sasha Cekerevac for Daily Gains Letter | Feb 26, 2014
What year is this—1999?
Some of you might have been active investors in the bull market during the late 90s, as I was, witnessing the S&P 500 soar during that decade. In fact, the bull market was so strong back then that it created a false sense of confidence, as many people quit their regular jobs to become traders. As we all know, this didn’t last forever and the S&P 500 bull market popped and sold off sharply.
Just a couple of days ago, I read an interesting article about how small investors are back, seduced by the bull market, which has resulted in a very strong performance for the S&P 500 over the past few years.
There is nothing wrong with enjoying this bull market move, but when everyone thinks they are an exceptional trader over a short period of time, this worries me.
In the article, the active investor is an equipment salesman who is now “considering quitting his job to trade full time.” (Source: Light, J. and Steinberg, J., “Small Investors Jump Back into the Trading Game,” Wall Street Journal, February 21, 2014.)
This is what happens in a bull market; the consistent strength lulls people into believing they are somehow able to predict the future, when just a couple of years ago, they had no clue how to make money in the stock market.
That is the real test for investors—will your strategy work through a bear market as well as through a bull market? Just because you keep buying every dip in the S&P 500 and have, so far, been rewarded, this is not an … Read More
Top Two ETFs for When Interest Rates Increase, Investor Sentiment Plummets
By Sasha Cekerevac for Daily Gains Letter | Feb 21, 2014
This past weekend, a friend of mine made a statement that there must be a large amount of economic growth coming shortly because of the booming stock market, driven by investor sentiment.
As I told him, the two are not necessarily tied together.
Over the past few months, we have heard about how economic growth is about to accelerate here in America, and this has helped drive investor sentiment in the stock market higher. However, I think there are many questions that need to be answered before we can assume economic growth will reach escape velocity, and investor sentiment is heavily contaminated with a large addiction to monetary policy.
Some of the data has improved; however, many other reports only lead to murkier water.
For example, we all know that economic growth requires the consumer to be active, since consumption is approximately 3/4 of the U.S. economy. But for the holiday season, many retail companies issued disappointing results, even though there were signs that consumer spending was beginning to pick up. This is an interesting data point: during the fourth quarter of 2013, consumer debt increased by $241 billion from the third quarter, the biggest jump in debt since 2007. (Source: “Quarterly report on household debt and credit,” Federal Reserve Bank of New York web site, last accessed February 19, 2014.)
Should investor sentiment view this increase in consumer debt as a positive or negative for economic growth?
A large amount of the debt increase came from the automobile industry, but what really worries me that could impact future economic growth is the combination of higher debt with weaker retail … Read More
What to Consider Before Investing in These Two Lesser-Known Precious Metals
By Sasha Cekerevac for Daily Gains Letter | Feb 19, 2014
I have been in this business a long time, and I believe that the best tactic is to combine as many positive factors as possible in order to have the highest probability of success.
There are essentially three main methods to look at; this includes fundamental analysis, technical analysis, and quantitative models. You don’t need every single category of analysis to be completed; you just need enough evidence from all to indicate whether or not a stock or index will move up or down. Obviously, there is no 100% guarantee, only a level of probability.
Taking a look at the precious metals market, over the past couple of months, there has been an increasing number of signals leading me to conclude that there is a good probability that precious metals will move up in price in 2014.
Two of these precious metals that have gotten me interested are platinum and palladium. The fundamental analysis in these precious metals includes determining the level of demand and supply globally.
The fundamental analysis of supply for these precious metals is quite interesting and sad, as protests and violence are escalating in South Africa. For those unaware, platinum and palladium are primarily extracted from South Africa and Russia. Any disruption in the supply from these regions will cause an adverse price reaction.
So far this year, there are more than 70,000 South African miners on strike who are looking for higher wages. There have been 10 deaths this year by protests demanding better living conditions. With the South African currency continuing to drop, inflation is rising, causing instability in their economy and the political … Read More
The “Vanishing” First-Time Home Buyer; What It Means for the Housing Market
By John Whitefoot for Daily Gains Letter | Jan 29, 2014
Ah, the U.S. housing market, the so-called silver lining in the U.S. recovery—but not for long, as it may be rusting. The U.S. housing numbers are in, and they aren’t spectacular.
In the U.S. housing market, December existing-home sales rose one percent month-over-month at an annualized pace of 4.87 million units. Analysts were expecting December existing-home numbers to come in at 4.93 million. The one-percent increase also has to be taken with a grain of salt, as it was helped, in part, by a downward revision in November existing-home U.S. housing market sales to 4.82 million units. (Source: “December Existing-Home Sales Rise, 2013 Strongest in Seven Years,” National Association of Realtors web site, January 23, 2014.)
The December existing-home U.S. housing market sales of 4.87 million are also 0.6% below the 4.9-million-unit level recorded in December 2012. And sales of existing homes were down 27.9% at an annualized rate for the entire fourth quarter.
First-time home buyers—the fuel of the U.S. housing market—accounted for just 27% of all purchases in December, down from 28% in November and October and 30% in December 2012. That’s a huge drop over the 30-year average of 40% and a number real estate professionals and economists consider ideal. It is also the lowest level since the National Association of Realtors began tracking this metric in 2008.
First-time home buyers, who tend to purchase lower-priced homes, are being pushed out of the U.S. housing market recovery by all-cash sales. All-cash sales accounted for a whopping 42.1% of all U.S. residential sales in December, up from 38.1% in November and 18.0% in December 2012. (Source: “Short Sales … Read More
Is This Currency Losing Its “Safe” Status?
By Moe Zulfiqar for Daily Gains Letter | Jan 24, 2014
Not too long ago, I wrote about an economic slowdown in the Canadian economy and how it could take the value of the Canadian dollar even lower. (Read “How American Investors Can Profit from the Canadian Economy’s Demise.”) By no surprise, the Canadian dollar (also referred to as the “loonie”) looks to be in a freefall. Take a look at the following chart.
The Canadian dollar is currently trading at its lowest level since September of 2009. Since the beginning of the year, the loonie has declined more than four percent compared to other major global currencies.
Considering all that is currently happening, can the Canadian dollar go down any further?
Chart courtesy of www.StockCharts.com
Simply put, yes, the Canadian dollar may still see some more downside. After the U.S. economy showed a significant amount of stress during the financial crisis, investors flocked to buy the Canadian currency. This may not be the case anymore.
Since the last time I wrote on this topic, some more information on how the Canadian economy is doing has been released. This new information reaffirms my suspicions. It seems the economic slowdown in the Canadian economy is gaining some momentum; even the central bank of Canada looks slightly worried. This could be very bearish for the Canadian dollar.
First of all, wholesale sales in Canada in the month of November remained unchanged from the previous month. Out of the 10 provinces in the country, only four reported an increase in their wholesale sales. (Source: “Wholesale trade, November 2013,” Statistics Canada web site, January 21, 2014.) Wholesale sales can provide an idea about the retail … Read More
Why This Chart Should Worry Investors
By Sasha Cekerevac for Daily Gains Letter | Jan 24, 2014
Every day it seems as though the S&P 500 makes a new high. This strong performance over the past year is creating complacency, as more retail investors are piling into the market.
However, I would certainly urge caution, especially for any new capital being put to work at these lofty levels. With earnings season upon us, we’ve already seen several sectors in the S&P 500 get hit significantly, especially retail stocks.
We keep hearing about resilience among Americans, but consumer sentiment is not as strong as many analysts believe. This is why I wasn’t surprised when retailers disappointed.
One of the common arguments I hear about the S&P 500 is that the market is not expensive historically. I disagree with this argument, and add that the underlying fundamental strength of the U.S. economy, built on consumer sentiment, is far weaker than most people believe.
Regarding the valuation level of the overall stock market, best represented by the S&P 500, an interesting data point comes from Professor Robert Shiller of Yale University, whose research shows that U.S. stocks currently trade at a 25.4 multiple of the cyclically adjusted price-to-earnings ratio—far above the historical average. (Source: The Economist, January 4, 2014.)
Now, it would make sense for investors to pay a premium for S&P 500 companies if the economy and consumer sentiment were accelerating, But this is not the case.
Profit growth by the S&P 500 companies is decelerating. For the third quarter, total profits by corporations in America were $39.2 billion, down from a $66.8-billion increase in corporate profits during the second quarter. (Source: Ibid.)
Not only are companies within the … Read More
These Value Stocks Could Outperform the Market in 2014
By John Whitefoot for Daily Gains Letter | Jan 23, 2014
Yesterday, I wrote about how a raft of weak first-quarter results could trip up the S&P 500 and put a dent in its unblemished bull run. My theory: the S&P 500’s stellar performance in 2013 was a result of financial engineering (share buybacks and cost-cutting) and the Federal Reserve’s monetary policy, not strong revenue and earnings growth.
As a result, the S&P 500 and other key stock indices are overbought and overpriced, meaning stocks will have a tough time justifying their lofty valuations if first-quarter results fail to wow investors. And odds are good that they will disappoint. A record 94% of S&P 500 reporting companies revised their fourth-quarter guidance lower.
That is, unless investors fail to realize earnings projections were lowered and reward stocks for beating barely there expectations—it’s not impossible. For evidence, I point to the action in the S&P 500 in 2013.
With stocks on the S&P 500 being overpriced, it’s getting more and more difficult to find equities that will actually perform well based on legitimate metrics, like revenues, earnings, and cash. For the most part, it seems investors punish those stocks that don’t perform as well as expected by simply not lifting their share prices higher. As a result, it’s become increasingly difficult to build a balanced portfolio with both growth and value stocks—especially when you consider the fact that analysts expect the S&P 500 to grow just six percent in 2014. Analysts might be more optimistic about the S&P 500 long-term, but that’s of little solace for investors hoping to actually make money this year.
Investors on the lookout for value stocks may need … Read More
Where the Fed Went Wrong When It Decided to Taper
By John Whitefoot for Daily Gains Letter | Jan 14, 2014
The merriment, mirth, and cheer on Wall Street over the holiday season may have been a bit premature; in fact, the optimism about the U.S. economy that ushered in the New Year may have already come to a screeching halt.
In mid-December, the Federal Reserve surprised investors when it announced it was going to start tapering it’s generous $85.0-billion-per-month easy money policy in January to just $75.0 billion per month. The pullback was a surprise, because the Federal Reserve initially hinted it wouldn’t ease its monetary policy until the U.S. unemployment rate fell to 6.5% and inflation rose to 2.5%. At the time of the announcement, U.S. unemployment stood at seven percent and inflation was hovering around historic lows below one percent.
The Federal Reserve moved sooner than expected with its tapering because of a (so-called) stronger U.S. economy and jobs growth. And, going forward, it said that U.S. unemployment figures will improve faster than expected. But, a raft of new economic numbers is calling that optimistic forward guidance into question.
In December, the U.S. economy created just 74,000 jobs, the slowest pace in three years, with the majority of the jobs (55,000) coming from the retail industry. Despite the weak jobs growth, the U.S. unemployment rate managed to fall from seven percent to 6.7%—the lowest rate since October 2008. But numbers are deceiving—the big drop in the unemployment rate was primarily a result of 347,000 people dropping out of the labor force.
Throughout 2013, the U.S. economy created 2.18 million jobs; in 2012, the U.S. economy created 2.19 million jobs. Looking at this from another angle, in 2013, the … Read More
Corporate Earnings Up 46% YOY for This Global Auto Stock
By Sasha Cekerevac for Daily Gains Letter | Dec 20, 2013
What does it take to develop a successful, long-term investment strategy?
This is the correct question to ask, rather than asking simply which stock(s) to buy. To be successful over the long term, you need to have a comprehensive investment strategy that takes into account your goals and risk parameters.
Having said all of that, at the end of the day, I’m looking for a company that has both an attractive valuation and the ability to increase corporate earnings at a rate above market expectations.
One way to develop an investment strategy is to look at the factors driving corporate earnings for a specific industry and individual company.
A great example is the automotive sector and Honda Motor Co., Ltd. (NYSE/HMC). Based in Japan, Honda actually has several different segments that they sell into, with automotives being their most commonly known products sold worldwide.
Chart courtesy of www.StockCharts.com
Why do I think corporate earnings will continue rising at Honda, and what factors am I considering when looking at this stock as part of an investment strategy?
Looking at the automotive industry here in America, sales are obviously soaring now compared to what we’ve seen over the past few years. Is there any real sign that this will change anytime soon? I don’t believe so, and I think cheap financing will continue for some time.
Globally, car sales will continue to increase as many nations around the world are keeping interest rates low, creating cheap financing.
Another reason I believe Honda will continue to rise is the policies stemming from the Bank of Japan and the government of Japan. For those … Read More
Government to Run Budget Deficits Until 2038; How Can Money Printing Stop?
By Moe Zulfiqar for Daily Gains Letter | Nov 4, 2013
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
Debt Ceiling Debates Pushing Central Banks Toward Financial Independence
By John Whitefoot for Daily Gains Letter | Oct 10, 2013
I realize gold is out of favor right now, but there are just too many technical and fundamental indicators pointing to the upside. With the yellow precious metal currently trading near a three-year-plus low, one has to wonder if now is a good time to get involved.
While gold prices recently dipped below the 50-day moving average, they have been finding support on the back of the U.S. government shutdown and impending debt ceiling showdown.
Gold prices were up earlier this week as the U.S. government shutdown barreled into its second week with no end in sight. Astute investors have turned their backs on the U.S. dollar in favor of the yellow precious metal, a global, borderless currency that acts as a store of value.
Granted, Federal Reserve chairman Ben Bernanke claims he doesn’t understand gold prices. But that hasn’t prevented other central banks around the world from adding it to their coffers.
Central banks, which own roughly 18% of the world’s gold supply, are expected to increase their reserves of the precious metal in 2013 by as much as 350 tons, valued at about $15.0 billion. In 2012, central banks from around the world purchased 535 tons of the yellow precious metal, the most since 1964.
Gold may be trading down more than 20% year-to-date, but between July and September, it posted its strongest quarterly gains in a year. Why is the precious metal re-emerging? Oddly enough, it has nothing to do with the Federal Reserve’s $85.0-billion-per -month monetary policy; rather, it’s the idea that the world’s strongest economy and holder of the reserve currency could default on its … Read More
Why There’s Trouble Ahead for the Housing Market
By Moe Zulfiqar for Daily Gains Letter | Sep 17, 2013
The housing market is one of the biggest challenges currently faced by the U.S. economy. When it improves, or when we see an increase in activity, then it can be assumed that there will be some economic growth.
For example, if there’s activity in the housing market, meaning that home buyers are buying homes, those home buyers are going to need things that are necessary to run households. This phenomenon has long-lasting effects: it increases consumer spending in the U.S. economy and creates jobs.
When the housing market in the U.S. economy improved in 2012, we saw the gains; but going forward, we are seeing a significant amount of trouble.
First of all, the U.S. economy is in jeopardy, on the brink of a monetary policy shift—the primary concern being quantitative easing. We are hearing the Federal Reserve will start to slow its asset purchases in September and end the quantitative easing by next year. This monetary policy by the Federal Reserve kept the mortgage rates in the U.S. economy low. This was great, as it gave Americans incentive to buy homes; as a result, we saw the housing market improve. Now, with the speculations on quantitative easing ending, the mortgage rates in the U.S. economy are increasing.
Consider the 30-year conventional mortgage rate tracked by Freddie Mac. In August, this rate stood at 4.46%; in the same period a year ago, it was at 3.60%, meaning it has increased almost 24% in the matter of a year. (Source: “30-Year Fixed-Rate Mortgages Since 1971,” Freddie Mac web site, last accessed September 11, 2013.)
While some will argue that these mortgage … Read More
Soaring Key Stock Indices Headed Downward; How May 22 Changed Everything
By Moe Zulfiqar for Daily Gains Letter | Jun 17, 2013
It turns out that May 22 was very critical for the key stock indices. But surprisingly enough, this wasn’t just the case for stock exchanges here in the U.S.—it was the same for the global economy, as well. Just take a look at the chart below.
At first, the chart may look a bit confusing, but simply stated, it’s the performance of the S&P 500 (indicated by the black line) and other key stock indices around the world. For example, the blue line represents Japan’s Nikkei 225 Index, the green line shows the performance of France’s CAC 40 Index, the brown line depicts the changes in the Bombay Stock Exchange in India, the red line is the German DAX Composite Index, and the yellow line represents the performance of the Shanghai Stock Exchange Composite Index.
Chart courtesy of www.StockCharts.com
It’s interesting to note that since May 22, when the Federal Open Market Committee (FOMC) meeting minutes hinted that the Federal Reserve may start to pull back on its quantitative easing as early as June, the stock markets around the world haven’t reached any new highs. As a matter of fact, they have been trending downward, continuing to make lower lows and lower highs.
Essentially, what this shows me—and what shouldn’t be a surprise to you—is that the key stock indices around the world were climbing on hopes of easy monetary policy and increased money printing. Now that the Federal Reserve may be ready to pull the punch bowl from the party, investors are panicking and selling.
Looking at all this, should investors take this as a turning point on the … Read More
Soaring Bond Yields Suggesting Bigger Sell-Off in the Bond Market Ahead?
By Moe Zulfiqar for Daily Gains Letter | Jun 10, 2013
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
Home Prices Up, Housing Market Hot Again: Can It Last?
By Moe Zulfiqar for Daily Gains Letter | May 31, 2013
The headlines are flashing: the housing market is in recovery mode. It isn’t very uncommon to hear that the real estate market in the U.S. economy is hot once again. No doubt, the reasons for all this optimism towards the housing market are pretty strong, as well.
The S&P/Case-Shiller index of home prices in the U.S. economy increased 10.9% from March of 2012 to March of 2013. This was the biggest increase in U.S. home prices since April of 2006. (Source: Woellert, L., “Home Prices in U.S. Rise by Most Since 2006 in March,” Bloomberg, May 28, 2013.) The chart below shows the change in the S&P/Case-Shiller index over the last eight years:
Chart courtesy of www.StockCharts.com
Similarly, the new-home sales data in the U.S. housing market showed better-than-expected results. According to the U.S. Commerce Department, new-home sales in April increased 2.3% to an adjusted annual rate of 454,000, compared to 444,000 in March. From the same period a year ago, new-home sales edged higher by 29% and new-home prices increased 15% in April of that year. Economists surveyed by MarketWatch expected the new-home sales number to be 430,000. (Source: Goldstein, S., “April new home sales up 2% to 454,000,” MarketWatch, May 23, 2013.)
Moreover, existing-home sales in the U.S. economy edged higher by 0.6% in April and registered an adjusted annual rate of 4.97 million, compared to 4.94 million in March. Compared to a year ago, existing-home sales were up 9.7% from April of 2012, when they totaled 4.53 million. (Source: “April Existing-Home Sales Up but Constrained,” National Association of Realtors web site, May 22, 2013.)
On top of … Read More
Stock Market to Crash When Central Banks Stop Printing?
By Moe Zulfiqar for Daily Gains Letter | Apr 30, 2013
As central banks around the world have taken money printing and easy monetary policy, such as low interest rates, as their key tools to boost economic growth, there are concerns among investors about what happens once they actually stop and bring their monetary policy back towards normalization—raising interest rates and no longer printing money like they are doing now.
For example, the Federal Reserve is printing $85.0 billion a month, and its balance sheet has already ballooned more than $3.0 trillion after the financial crisis brought the U.S. financial system to near collapse. On top of all this, the Fed is also keeping interest rates near zero. Similarly, the Bank of Japan is taking the same measures and plans to increase its money supply extensively.
Looking at all this; there is a notion among investors that the stock markets are currently going higher because the central banks are printing money—not because of real reasons, such as earnings growth. When the economy is flooded with money, it usually has to find a home; the money is flowing into the stock market. Once they start normalizing their monetary policy, the stock market may come crashing down.
This opens the floor to debate; does money supply actually dictate the direction of the stock market? Please look at the chart below:
Chart courtesy of www.StockCharts.com
The chart above consists of the U.S. M2 money supply and the S&P 500.
Before going into further details, readers should know that the M2 money supply is a broad measure of money in an economy. In addition to currency in circulation (coins and notes), M2 also includes the … Read More
Bond Investors Beware: Troubles Ahead
By Moe Zulfiqar for Daily Gains Letter | Mar 7, 2013
The financial crisis of 2008–2009 was one of the most stressful periods for not only the U.S., but the entire global economy—the financial system was on the verge of collapse. As a result, investors, who dislike risk, moved toward safer assets, such as bonds, because they would rather get a certain lower rate of return than chance taking a loss.
On top of all this, central banks implemented loose monetary policy to provide liquidity to the financial system, lowering interest rates and purchasing troubled assets from the banks.
This phenomenon caused bond prices to skyrocket and yields to collapse. Take a look at the chart below, showing activity in 30-year U.S. bonds.
Chart courtesy of www.StockCharts.com
The 30-year bonds rallied. In October of 2008, just before the stock market started to drop, these bonds were trading below 115. They have come a long way since, and they currently hover around 145—an increase of more than 26%. As the prices of 30-year bonds increased, their yields collapsed as well. Before the financial crisis began, getting a yield of around five percent was normal. Now, the same yields have plummeted, and investors only get a yield of around three percent—a 40% drop.
The Great Rotation
The Federal Reserve has kept interest rates near zero for sometime now—it plans to keep them there until 2015. The idea behind what is called the “Great Rotation” is very simple: bond prices went up, and the yields collapsed. What happens when the Federal Reserve starts to increase interest rates and gets away from the loose monetary policy?
There are misconceptions with investors that bonds are … Read More
This Stock Market Can Go Higher
By Mitchell Clark for Daily Gains Letter | Mar 4, 2013
Corporate earnings are still pouring in, largely from smaller companies that take longer to put their financial results together. The numbers continue to be generally good, and if there is a trend, it’s that earnings are beating consensus, but revenues are coming in just slightly short. For the most part, companies are confirming existing earnings guidance for 2013.
In terms of portfolio strategy, I’m still very hesitant about buying this stock market. We’re at five-year highs and general economic conditions are still pretty slow. But there’s one thing I’m not and that’s bearish. The stock market is appropriately valued, considering current earnings and forecasts for a great number of blue chips are for high single-digit growth in revenues and earnings for 2013. Combined with dividends, this should produce another decent year.
While stock market investment risk is high, a lot of risks in global capital markets are actually priced into the stock market, bonds, and currencies. The sovereign debt crisis and economic weakness in the eurozone is still very pronounced, but the market knows this. U.S. fiscal problems and the inability of policymakers to deal with them decisively are priced into this market. Investors are looking beyond the previous trading catalysts and are now focusing (finally) on what corporations are saying about their businesses. Revenues and earnings are now the big catalyst.
The key, leading index for the stock market remains to be the Dow Jones Transportation Average. Its breakout late last year led the broader market to a new upward trend, and many component stocks within the index are doing great. And corporate earnings from this group came in … Read More
