Investment Contrarians

Federal Reserve

Created in 1913 with the enactment of the Federal Reserve Act, the Federal Reserve (the Fed) is the central banking system of the U.S. The Fed functions as the bank of the U.S. government, overseeing the nation’s financial institutions. As the central bank, the Fed safeguards and manages the U.S. economy and its money supply with its economic and monetary policies, which makes it a very powerful global player. Ben Bernanke is the current chairman of the Federal Reserve.


Did You Give Thanks this Weekend for the Fed’s Easy Money Policy?

By for Investment Contrarians | Aug 6, 2014

021213_IC_leongStock Market Crash August 2014.

Reflecting on this past Thanksgiving weekend, there was a lot to be thankful for, especially if you have been long in the stock market for the past four years. Now is a time for reflection.

The advance in the stock market has been stellar following the bottom in March 2009. The S&P 500 is up 171% since March 6, 2009 for a four-year annualized gain of about 38%.

In Japan, the Nikkei 225 is at a six-year high and over in Germany, the benchmark DAX is also at a record high.

However, the records in the stock markets are falling, not just in good old America, but worldwide. Of course, there are the exceptions, such as China, which I still consider to be undervalued and worth a look for investors searching for growth in foreign stock markets. In China, you can play almost anything due to the country’s insatiable appetite for goods and services. Some of the top areas for growth in China are the technology, health care, travel, and financial services sectors.

Yet while all of the stock market records are being set, I wonder if this is simply the new reality for stocks, or are we just setting ourselves up for a massive hangover when stocks fall? stock market crash 2014.

The Russell 2000, for instance, is a play on the economy. The idea is that small companies tend to fare better when the economy recovers, as these companies tend to be more flexible. The index is up over 35% this year and more than 40% year-to-date. That’s a great advance, but the … Read More


Why What’s Happening in the Bond Market Now Is So Important to Stock Investors

By for Investment Contrarians | Dec 10, 2013

Stock InvestorsTaper or no taper? When? How much? These are the worries that are currently driving tensions in the stock market on a daily basis. As I wrote in a previous article, no one seems to care that corporate revenue growth is muted and consumers aren’t spending.

Last week, we saw jobs market data that helps support the Federal Reserve’s reasons to begin tapering its bond buying program.

The non-farm payrolls reported the generation of 203,000 new jobs—better than the consensus estimate of 180,000 for the month of November. This represented the second straight month that more than 200,000 jobs were created, and while the jobs market has a long way to go, this is positive news. Jobs numbers were revised upwards in September and October.

Now it may be true that the quality of jobs created could be improved upon, as much of the increase in the jobs market continues to be driven by the service sector and other lower-skilled jobs. However, the results do suggest some action may be taken by the Federal Reserve.

The unemployment rate fell to a five-year low of seven percent, much better than the consensus 7.2% and October’s 7.3%. The rate appears positive on the surface.

The Federal Reserve had said it wants to see the unemployment rate fall to around 6.5% before it considers raising interest rates, but with a seven percent rate, you have to wonder if the Federal Reserve is thinking hard about when to rein in its monthly bond buying and reduce the stock market’s dependency on cheap money.

Yet I don’t think the Federal Reserve will begin tapering until … Read More


Best Investment Strategies to Battle Coming Inflation

By for Investment Contrarians | Dec 9, 2013

Best and Worst Investment StrategiesThe S&P 500 may be entering bubble-like territory: that’s what I’ve been writing for the past few months.

Now, it appears as though I’m not the only one who’s worried about asset classes beginning to form bubbles from the excess money printing. 2013 Nobel Prize-winner Robert Shiller also recently stated that he is concerned that prices have risen far too quickly across many asset classes, from real estate to stocks.

As I’ve written several times over the past couple of months, investing in stocks at these elevated levels is quite risky. My belief is that much of the upward move in the S&P 500 has been primarily based on the liquidity (money printing) being pumped by the Federal Reserve.

Investing in stocks with this premise can only work for the very short-term trader who’s quick enough to get out when the tide begins to turn.

Because people are not investing in stocks based on actual fundamentals right now, one can’t expect the value in the S&P 500 to remain elevated once there’s a change in monetary policy, since much of the move has been artificially supported.

Let’s take a look at how the S&P 500 has been affected by monetary policy over the past few years, and how investing in stocks at the current level is becoming increasingly risky.

S&P Large Cap Index Chart

Chart courtesy of www.StockCharts.com

The first quantitative easing program by the Federal Reserve lasted from December 2008 until March 2010. This period is not shown on the chart above, as one could argue that the S&P 500 became extremely oversold and that investing in stocks for the long-term made sense at … Read More


Fear Index Hits Multiyear Low; A Bad Omen for Stock Investors?

By for Investment Contrarians | Dec 9, 2013

Investors Too ComfortableLet me begin by first stating this: I’m not going to talk about the Federal Reserve in any detail, or about the holiday shopping season and how it’s so important to the retail sector and the economy because these don’t seem to be of any great concern to the markets.

The reality is that both traders and investors appear to be really comfortable at this moment with the record-high levels in the stock market. Take a look at the multiple records recently set by the S&P 500 and Dow Jones Industrial Average; you won’t see any sign of a pullback. Yet no one seems to care—even though this is all incredibly dangerous for the stock market.

This is simply not a normal trading environment for the stock market, since the Federal Reserve has largely been responsible for the record advances, as I previously discussed in this column on Friday.

A look at the CBOE Volatility Index (VIX), or the “fear index,” reveals the current multiyear low in the VIX, which we haven’t seen since 2007, prior to the subprime mortgage-driven stock market correction in 2008, The current low level of the VIX suggests that the stock market is relaxed and is not expecting any strong moves in either direction on the horizon. Looks like the market could be in for a surprise in the New Year.

Are traders simply too relaxed? The chart of the VIX below shows the big gaps between the VIX readings and the S&P 500.

In 2007, the VIX reading was below 10, but the S&P 500 didn’t begin to sell off until the VIX increased … Read More


Can’t Afford a Picasso? Try Investing in This Stock Instead

By for Investment Contrarians | Dec 6, 2013

Investing in This StockThere’s one point that I cannot stress enough in this column, and longtime readers are sure to know it: consumer confidence is extremely important for economic growth here in America.

It’s simple logic. Because so much of our economy is built on domestic spending, without an increase in consumer confidence, consumer spending will languish and we won’t have higher levels of economic growth.

Recently, new information from the Conference Board was quite disappointing. The Consumer Confidence Index dropped to a seven-month low in November to 70.4, following a decline in October as well. (Source: “Consumer Confidence Declines Again in November,” The Conference Board web site, November 26, 2013.)

Over the short term, consumer confidence declined due to people stating their concerns regarding a weakening of economic conditions. What’s more concerning is that the expectations for the next six months worsened, as people stated they were increasingly worried about their job prospects and earnings, which isn’t a surprise considering the data hasn’t been all that positive lately, especially when it comes to wage growth.

If consumer confidence is turning pessimistic over the stability of jobs or paychecks, how can we really expect the average American to increase their spending or businesses to feel more confident in expanding?

This type of uncertainty leads to slower economic growth. If you are unsure of your financial health over the next few months, chances are you won’t increase your spending, and a lower level of consumer confidence leads to muted economic growth.

Clearly, one market sector I am worried about is that of companies catering to the average American.

Target Corp Chart

Chart courtesy of www.StockCharts.com

Target Corporation … Read More