We all know that the stock market has moved up significantly over the past few months. The real question is: is the move up based on the belief that there is enough economic growth available for corporate earnings to continue rising, or is it simply due to a flow of funds?
Let’s analyze this question by taking a look at Wal-Mart Stores, Inc. (NYSE/WMT). Wal-Mart just released its forecast for second-quarter corporate earnings, which was less than most analysts had expected. The company now forecasts corporate earnings on a per-share basis for the second quarter to be $1.22–$1.27, lower than the average estimate by analysts of $1.29. (Source: “Walmart reports a 4.6 percent increase for Q1 EPS of $1.14; U.S. businesses forecast positive comp sales for Q2,” Wal-Mart Stores, Inc. web site, May 16, 2013, accessed May 16, 2013.)
As a sign of the health of America’s economic growth level, Wal-Mart reported that comparable same-store sales dropped by 1.4% between January 26, 2013 and April 26, 2013. Internationally, Wal-Mart is doing better, with sales up 2.9% during the first quarter.
However, corporate earnings suffered during the first quarter due to several reasons, including very cold weather, continuing weak employment levels, and the payroll tax hike. Many businesses that cater to the lower- to mid-level consumer will most likely encounter similar problems due to these issues and general sluggish economic growth.
Recent data have been relatively mixed regarding the potential for economic growth to begin moving upward. However, for Wal-Mart’s corporate earnings, there is the potential for a slightly stronger second half because some of the company’s initial hurdles have been … Read More
Complacency among investors is extremely dangerous. Many investors, both retail and institutional, have very short memory spans.
It wasn’t too long ago that the eurozone was in the midst of a financial crisis. While the worst appears to be over—at least temporarily—economic growth still remains elusive for the eurozone.
Yet in spite of all the dangers, investors have returned to the eurozone en masse. Spain recently sold one-year bills yielding just 0.994%, the lowest since 2010. Demand is extremely strong for these periphery nations, even though it’s clear that many parts of the eurozone are lacking economic growth.
Currently, Spanish 10-year bonds yield approximately 4.29%, which is down from last summer when they were yielding 7.75%. (Source: Benoit, A., et al., “Spain Sells Bill at 3-Year Low Yield as Banks Hired for Bond,” Bloomberg, May 14, 2013, accessed May 14, 2013.)
Investors are becoming complacent yet again. Instead of simply dipping their toes into the water, they’re plunging into some of the riskier parts of the eurozone that have the least potential for economic growth, and these investors are hoping that if things don’t work out, the European Central Bank (ECB) will bail them out.
The danger is that the ECB has previously stated that it will only consider short-term duration investments for possible support, not the long-term bonds. Either way, economic growth needs to re-ignite for long-term investments in the eurozone to make sense.
However, recent data from even the strongest eurozone member, Germany, indicate that a rebound in economic growth is far from certain.
According to the Center for European Economic Research (ZEW), its index of investor expectations … Read More
One of the biggest worries for investors is the anemic economic growth globally. This has made it extremely difficult to generate corporate earnings going forward. As investors, we are constantly looking for signs that a firm has the ability to increase corporate earnings substantially for the near future.
Ultimately, for corporate earnings to move upward, revenues need to increase as well. With the lack of economic growth internationally, this is becoming a serious problem.
As an example of the extent of weak economic growth internationally, McDonalds Corporation (NYSE/MCD) posted a drop of 0.6% for comparable same-store sales in April. (Source: “McDonald’s global comparable sales decreased 0.6% in April,” McDonalds Corporation web site, May 8 2013, accessed May 13, 2013.)
The company saw its comparable same-store sales in Europe decrease by 2.4%, and the Asia-Pacific, Middle East, and African (APMEA) regions reported a 2.9% drop in same-store sales. Most analysts were expecting a drop of only one percent in Europe and a 1.4% drop for the APMEA region.
A positive note showing the disparity in economic growth was that same-store sales for the U.S. increased 0.7%, versus expectations of a slight decline. As weak as the U.S. is regarding economic growth, much of the rest of the world is in worse shape.
One worry for investors looking at the potential for corporate earnings growth is that much of the sales push by McDonalds has been in lower-priced items. This means that, while revenues might be running at a similar pace, margins will drop.
The chart for McDonalds is featured below:
Chart courtesy of www.StockCharts.com
McDonalds’ stock has performed quite well over … Read More
The latest data on job creation by the Bureau of Labor Statistics (BLS) are interesting for several reasons. While there are some glimmers of hope, there is still much more work that needs to be done.
For April, job creation improved by 165,000, with the 12-month average now at 169,000 per month. The long-term unemployed level continues to be high, although it is decreasing. Currently, there are 4.4 million long-term unemployed, a decrease of 258,000 during the month of April. This lowered the percentage of long-term unemployed to 37.4% of the overall unemployed, down 2.2% for the month. Another important metric is the participation rate, which remained at 63.3% and is at historically low levels.
Clearly, economic growth needs to accelerate for job creation to continue moving upward. The participation rate remains quite low, and the large number of long-term unemployed is stubbornly high.
The market reacted positively, not only from the headline number, but also the extremely large positive revisions to the previous months of job creation data. While economic growth appears to be slowing, jobs data were much stronger than previously reported, with February and March job creation data revised upward by 64,000 and 50,000, respectively, from the initially reported data.
Do these data indicate any sectors worth investing in?
Yes; as the healthcare industry continues with a steady pace of job creation, with 19,000 newly employed in April, this brings the 12-month average for job creation in the healthcare industry to 24,000 per month. As an investor, with economic growth still relatively anemic nationwide, it appears the healthcare industry will continue on its upward trajectory.
The new … Read More
One of the most worrying signs from the latest batch of economic data is that the global recession might be reappearing. Central banks around the world have been attempting to fuel their economies through massive stimulus, yet these efforts appear to be failing.
Increasingly, the earnings outlook for a number of companies continues to be quite poor for the remainder of the year. This is giving me pause for thought, because these poor outlooks raise the chances that another global recession will occur.
Last week’s data from the Conference Board Leading Economic Index for the U.S. indicated a drop in March. This was the first drop in seven months—certainly a negative move away from the chance of averting another global recession.
More importantly, the Conference Board’s outlook for the next three to six months dropped 0.1% in March, below the median forecast by a survey conducted by Bloomberg. (Source: Smialek, J., et al., “Leading Index’s Drop Points to Slower U.S. Growth: Economy,” Bloomberg, April 18, 2013.)
Manufacturing also declined, as indicated by the Federal Reserve Bank of Philadelphia reporting that its factory index dropped to 1.3 in April from 2.0 in March. (Source: “March’s Coincident Indexes Show Increased Economic Activity in 47 States,” Federal Reserve Bank of Philadelphia web site, last accessed April 23, 2013.) This was a significant reversal from the median forecast, in which expectations were for the index to rise to 3.0.
How does this affect the earnings outlook for corporations? Many companies have been expecting that the global recession could be averted, as each company’s revenue and earnings outlook last fall was fairly positive for 2013. … Read More
One of the most closely watched parts of the global financial system is the Chinese economy. I don’t need to tell you that the economic recovery in America and the rest of the world is quite sluggish. Many had hoped that China could help propel the global economy higher; however, there are now concerns that this might not occur.
Recent data on the Chinese economy are signs that economic growth is not accelerating. For the first three months of 2013, the Chinese economy posted growth of 7.7%, a lower rate than the fourth quarter of 2012, in which the Chinese economy grew at 7.9%. (Source: Yao, K., et al., “China growth risks in focus as first quarter data falls short,” Reuters, April 15, 2013, accessed April 16, 2013.)
The Chinese economy is a huge player within the international financial system. If the nation was to regain its economic growth rate of the past, this would have a substantial impact on many people and companies around the world.
The Chinese economy posted industrial production growth of 8.9% year-over-year, below expectations of 10% growth. Power generation was up only 2.1% year-over-year in March, and steel output declined 3.2%, both below expectations.
Don’t forget, China is a huge buyer of many raw materials, including copper and iron ore. This latest data is additional evidence that economic growth is not accelerating, and investors need to reallocate their portfolios in accordance with this information.
One slight positive note was that retail sales within the Chinese economy increased 12.6% year-over-year in March, above expectations of 12.5% and higher than the recorded 12.3% increase for February.
The … Read More
For many years, people from all over the world have been envious of the economic growth in the Chinese economy. Since leaders of that nation have transformed the Chinese economy from purely state-controlled to more capitalistic, China’s growth has been astounding.
Looking back, it is easy today to think of the Chinese economy in terms of the allocation of funds for long-term investing—hindsight is always 20/20. However, the trick is to look forward over the next decade and determine the most likely scenario for long-term investing possibilities.
A common complaint by outsiders regarding the Chinese economy has been the use of cheap wages to increase its competitiveness. It is true that the Chinese economy has benefited greatly from much lower wages than many other nations around the world. Additionally, the size of the working population is huge.
However, it appears that the demographics and costs are now beginning to shift against the Chinese economy, and those interested in long-term investing might be able to create a portfolio that will benefit from this change.
The Asian Development Bank (ADB) recently noted that wages adjusted for inflation have more than tripled over the past decade in the Chinese economy. Additionally, new labor laws have increased costs for businesses to hire and fire people. (Source: “China surging wages threaten economy’s competitiveness, ADB says,” Bloomberg, April 9, 2013.)
Additionally, ADB reports that wages are being pushed higher, as the pool of working-age people shrinks. Because the one child policy has been in place for so many years, China is entering a troubling demographic scenario, as there will be far less people available to work … Read More
Following the global recession, many countries still lack resurgence in their economic growth levels. Many central banks around the world have used their primary tool, aggressive quantitative easing, to try and revive economic growth.
One issue with quantitative easing is that it can drive a currency downward in value. This can have some positive effects in improving economic growth by making that nation’s goods cheaper and driving exports; although it can hurt economic growth, as the price of imports rise, driving up inflation.
This is a tough goal to achieve, in trying to increase economic growth through a very blunt tool, that of quantitative easing. Whereas some initiatives have laser-like precision, quantitative easing is not one of them.
One nation that has recently embarked on a very aggressive quantitative easing program, and will continue to do so, is Japan. In November, Japan elected a new Prime Minister, Shinzo Abe, who called for a very large quantitative easing program to jump-start economic growth. Since the election of Abe in Japan, the yen has fallen by approximately 15% against the U.S. dollar.
This has certainly helped Japanese car makers. Recently, the CEO of Ford Motor Company (NYSE/F), Alan Mulally, voiced his concerns that the Japanese yen’s decrease is increasing the level of competitiveness for Japanese car makers. According to the American Automotive Policy Council, Japanese car makers have a currency advantage worth approximately $5,700 per vehicle. (Source: Philip, S., “Ford CEO Says He’s Concerned About Effect of Weaker Yen,” Bloomberg Businessweek, March 26, 2013.)
The natural question is: if quantitative easing does help economic growth, why doesn’t every nation just do this? … Read More
One of the most difficult things to do is to try and determine the future level of economic growth. There are so many variables that go into the level of economic growth that no model can accurately predict the exact level.
What we can do is look for signs of economic growth, or a lack thereof, and create an investment strategy based on these indications. Looking backward won’t help; we need to look forward.
One method that can help is to see what the professional investors are doing, as they are on the cutting edge when it comes to creating a profitable investment strategy.
Last week saw two distinctly different moves by professional traders. The first was that hedge funds made a massive trade against copper. With global inventories piling up, professionals have an investment strategy that will benefit from the price of copper if it drops.
Clearly, the professional traders don’t believe there will be enough economic growth to absorb such a high level of inventory, which is currently at a nine-year high globally. (Source: Richter, J., “Hedge Funds Most Bearish Ever on Copper, Favor Gold: Commodities,” Bloomberg, March 25, 2013.)
Hedge funds increased their short positions in copper by a massive 53% last week, according to the Commodity Futures Trading Commission. Copper is closely associated with economic growth, since so many industries use copper. As economic growth expands, the use of copper does as well.
The build-up in copper supply is worrisome, as this means that either builders are holding back on ordering more copper, unsure of how strong economic growth will be in the second half, or … Read More
There is a potential financial crisis brewing in Cyprus, and no one in the U.S. really seems to be that concerned. Just like our out-of-control national debt, sequestration, and growing number of unemployed and poor. Stocks continue to move higher, and it appears as though nothing can stop them.
There is clearly a financial crisis in the eurozone, which I feel traders in the U.S. have largely pushed aside during the American stock market rally.
In Cyprus, we all know the government tried to place a tax on all bank deposits in an attempt to raise $7.6 billion in capital as part of the country’s bailout deal. The strategy was turned down; so here we have the tiny island of Cyprus in the Mediterranean Sea where the estimated gross domestic product (GDP) of $22.45 billion in 2012 (source: International Monetary Fund) would be ranked dead last amongst the U.S. states, finishing behind Wyoming with just over $25.0 billion in GDP in 2011 (source: U.S. Department of Commerce).
So what’s the deal with Cyprus, and why should you be concerned?
While Cyprus is tiny and pretty well insignificant as far as its economic clout goes, a financial crisis, especially within the country’s fragile banking system, could drive widespread mistrust and confidence issues throughout the eurozone. This is the concern; that Cyprus could foreshadow a deeper financial crisis in the problematic regions of Italy, Spain, and Portugal.
Greece went through its financial crisis roller coaster, including two bailouts, and it is currently surviving on loans and credit. It’s going to take decades for Greece to recover from its financial crisis.
The fear … Read More
As the stock market in America continues to move upward into elevated territory, the Federal Reserve and its monetary policy program of creating an abundance of liquidity and cash in the financial system deserve much of the credit.
However, the average American has not participated in this giant creation of wealth over the last few years and they are extremely concerned about their future retirement plans.
The problem with the Federal Reserve’s monetary policy program is that it cannot solve inherent structural issues prevalent in America today. Monetary policy initiatives can help only a certain section of America, namely the financial markets.
Many Americans over the last few years have seen wages stagnate while costs continue rising. This has left the average American with far less money available to invest, if at all. The net result is that millions of Americans do not have any investment in the stock market, leaving them to sit on the sidelines of the recent boom created by the Federal Reserve through its monetary policy initiatives.
Additionally, many retirees have their money in bonds. Because of the Federal Reserve’s monetary policy program of keeping interest rates low and aggressively buying bonds, this has left real yields extremely low; in some cases, they’re essentially nothing.
This means that retirees who do have some cash available to invest in a relatively safe investment can’t generate any income, because the Federal Reserve is so aggressive in its monetary policy stance.
According to the Employee Benefit Research Institute (EBRI), a survey reported that 57% of American workers had less than $25,000 in total household investments and savings, not including … Read More
While I do like gold, I’m somewhat perplexed over the metal’s near-term stock chart. The chart shows indecision and indicates a potential downside break at $1,550, with gold potentially falling out of its current sideways channel.
And it also appears that the professional money has mixed feelings about gold. Famed investor George Soros cut his gold holdings, but Paulson & Co. made no changes. (Source: Rooney, B., “Soros dumps gold as prices sink,” CNN, February 16, 2013, last accessed March 12, 2013.)
Despite gold’s reputation as a safe haven to stash your money, there is a lack of buying interest across the board, as the sentiment toward gold is rapidly declining; hedge funds are selling.
So, is a major downward move on the chart coming?
In my view, gold is at a crossroads. It could continue to trade in its sideways channel, where you can simply buy on weakness down to $1,550 an ounce and sell on rallies.
While I agree the near-term risk is high and could see prices move downward toward $1,500 an ounce, any major declines in gold prices should be viewed as a potential opportunity to accumulate gold as a contrarian investment, especially if the eurozone mess intensifies and an asset bubble surfaces in China (which is also seeing a dangerous rise in inflation to 3.2%). The problem in China is that the new government’s strategy to drive consumer spending to spur economic growth will only add to the inflationary pressures and overall market risk that are already present.
I also sense that the market is underestimating the major debt and growth situation in Italy and … Read More
With the relative calm in the eurozone lately, one might be led to believe that the worst is over and economic growth is about to ignite. Nothing could be further from the truth.
The latest data on the eurozone show that unemployment increased in January to a record high of 11.9%. This is the highest unemployment rate since 1995, when the 17 nations within the eurozone started to keep record. (Source: Brittain, A., “Unemployment Worsens in Euro Zone,” Wall Street Journal, March 1, 2013.)
Recent elections in Italy revealed the growing anger from the eurozone’s citizens at the country’s lack of economic growth. Italy experienced one of the largest increases in unemployment within the eurozone for January, jumping to 11.7%, an increase of 0.4% from December.
While the European Central Bank (ECB) and politicians in every country have been trying to re-ignite economic growth, the fact is that the eurozone reported a decline in its gross domestic product (GDP) of 0.6% from the third quarter to the fourth quarter 2012.
This isn’t just far from economic growth; it’s a serious contraction. This should worry Americans, because our own economic growth is stalling. If the major industrialized nations have no economic growth, who’s going to pull us out of the quagmire our economy is in?
The ECB still has some ammunition left in its arsenal, since inflation is actually receding. The latest inflation numbers for the eurozone showed an annual rate of 1.8% in February, a decrease from the two-percent level in January. With the ECB holding its main interest rate at 0.75%, there is room for additional monetary easing.
The … Read More
The American economy, as with most developed nations, is based primarily on consumer spending. With the collapse in the housing and stock markets several years ago, a big chunk of wealth evaporated overnight. This hurt consumer sentiment, which resulted in a significant slowdown in economic growth.
For economic growth to regain momentum, consumer spending needs to increase, but it needs to be based on a solid footing. It’s one thing if consumer spending was increasing due to higher disposable income, but it’s quite another if consumer spending was increasing due to higher levels of debt, which would lead to fragility when it comes to long-term economic growth.
New data from the Commerce Department stated that personal income declined by 3.6% in January, far worse than economists had expected. However, personal consumption increased by 0.2% in January. (Source: Sparshott, J. and Morath, E., “U.S. Incomes Fall, Spending Rises,” Wall Street Journal, March 1, 2013.)
The higher payroll tax is clearly hurting disposable income for most Americans. Disposable income, which is the amount of income left after taxes, decreased by four percent in January. According to the United States Department of Commerce, this is the largest decline on record. With economic growth being extremely weak, this type of decrease in income has the potential to severely impact consumer spending for some time.
This information was collected prior to sequestration. If budget cuts are to be enacted without revisions, it will be difficult to see how economic growth will accelerate through the remainder of the year. Consumer spending will most likely suffer at some point, because incomes are not growing, taxes are rising, … Read More
One of the biggest detriments to global economic growth has been the weak eurozone region. Not only has economic growth been dismal within the eurozone area, but the level of financial instability over the past few years has left investors and businesses uncertain about the future.
While there was some indication that economic growth might have been rebounding within the eurozone, new data point to a much weaker underlying economy than previously thought.
According to Markit Economics, which just published its Eurozone Purchasing Managers Index (PMI) for February, the situation amongst the region’s economies seems to be getting worse. The Flash Eurozone PMI Composite Output Index was 47.3 in February, down from 48.6 in January. Both the services and manufacturing PMI indexes also decreased for the eurozone. (Source: “Markit Flash Eurozone PMI,” Markit Economics web site, February 21, 2013.)
Even strong nations within the eurozone are experiencing a halt to any expansion in economic growth. The German PMI Composite Index was 52.7 in February, down from 54.4 in January. The U.S. PMI, meanwhile, showed a relatively strong manufacturing reading of 55.2 for February, down from 55.8 in January. (A number above 50 indicates economic growth; a number below 50 means economic contraction.)
This is an indication that the eurozone is far from generating strong economic growth. While many have hoped that strong nations, such as Germany, could pull up the rest of the eurozone into reasonably stable economic growth levels, it appears that the periphery eurozone nations might be bringing the stronger countries down.
For investors who have begun to dip their toes into eurozone investments, this appears to be … Read More
In their attempts to stimulate economic growth, more countries are looking at the possibility of devaluing their currencies. The latest to fall into this pattern is Venezuela, which has just devalued its currency, the bolivar, by 32%.
No one should be surprised by the latest move from the Venezuelan government, since this is the fifth currency devaluation in nine years. The net result has been stagnant economic growth and a very high inflation rate.
The annual inflation rate in Venezuela was approximately 22% in January, and it’s certainly set to move above 30% following this latest devaluation. (Source: Devereux, C. and Pons, C., “Chavez Devaluation Puts Venezuelans to Queue on Price Raise,” Bloomberg BusinessWeek, February 11, 2013.)
Considering 70% of the goods consumed in Venezuela are imported, this will have a huge negative impact on its citizens.
Unless the government is willing to tighten monetary policy to prevent a runaway inflation rate, which is unlikely, look for a significant decrease in consumption of foreign goods within the country.
While the official exchange rate has now moved from 4.3 bolivars per U.S. dollar to 6.3 bolivars per U.S. dollar, the unofficial exchange rate is even weaker at more than 20 bolivars per U.S. dollar.
Venezuela’s repeated attempts at trying to stimulate economic growth while increasing the amount of U.S. dollars available for foreign purchases has led to a decline in purchasing power by the average citizen and a pathetic economic growth rate.
Foreign companies selling into that market will be hurt by the higher inflation rate, since the government imposes some price controls. Venezuela’s President, Hugo Chavez, previously seized retail stores … Read More
When it comes to developing and creating a long-term investment strategy for your portfolio, one of the more difficult aspects is maintaining a focus on the horizon. What this means is that sometimes one needs to look past the short-term aberrations and focus on where the economy and stocks will be in the future.
The topic of mining stocks has come up quite often lately. Initially, when one talks about mining stocks, many people automatically gravitate toward gold and silver companies.
I would suggest that there are data showing that other commodity mining stocks might offer strong long-term potential capital appreciation.
Professionals know that the market price of a stock offers far more information than any one data point. If the price of a stock or commodity is moving, this is certainly an indication of where people are placing their funds through their own investment strategy.
While some might have an investment strategy primarily in mining stocks, I would urge diversifying away from any one commodity in this sector, creating a more diversified portfolio in general.
Getting ahead of the curve over the retail public is a difficult but attainable investment strategy. I would suggest that, in addition to looking at economic data in forming one’s own analysis, one should look to the price charts and see what’s happening on the ground.
Recently, we’ve seen a recent breakout in one commodity that might surprise a lot of people: copper.
“Doctor Copper,” as the commodity is often called due to its ability to predict economic growth, has just broken out of its downtrend. While many are focusing on the recent negative … Read More
One of the most difficult concepts for both retail and professional investors and analysts is the incorporation of transitory or one-time events into information regarding economic growth and job creation.
What do I mean? There are many moving parts in the economy. Not all data can be compared on an equivalent basis. Even year-over-year data comparisons should incorporate far more variables.
As an example, recent data on both economic growth and job creation over the past six months have confused many professionals due to the many uncertainties affecting consumers and businesses.
We had the election, the fiscal cliff debate, and heated arguments by politicians on major structural issues, all of which created confusion with the data.
For the last six months, we have constantly heard from businesses that they were worried about the impact of the fiscal cliff. Many stated they were reluctant to expand their business; this sentiment can lead to a lower level of job creation, which would affect economic growth.
Is it reasonable to compare this latest set of data to the previous year’s data? What about the year before that? Clearly, the last six months were far different than the same time period last year. And since we can’t reasonably calculate how an individual or business would have acted without these uncertainties being present, data must be interpreted much more cautiously.
An example of interpreting behind the data is the recent release by The Conference Board of its Consumer Confidence Index for January, which declined to 58.6 from 66.7 in December. This was far lower than the median forecast in a Bloomberg survey of 64.0. January’s … Read More
One of the stock market’s most perplexing moves for both professional and retail investors is when the market, best represented by the S&P 500, moves in a direction that might be contrary to current conditions regarding economic growth.
This is one of the most difficult concepts to understand; that the S&P 500 does not represent current economic growth conditions, but what the market believes is highly probable for the future.
We have recently witnessed a substantial move upward in the S&P 500, yet only recently have we seen some positive signs that economic growth may be slightly improving. I stress “slightly,” because no one really expects economic growth for 2013 to be massive.
While jobs growth has been relatively weak, there have been some signs that suggest economic growth is resuming. However, with much of the data, there can be quite a lot of noise that can distort the underlying strength or weakness of economic growth.
One example of a data set that does point to renewed economic growth, though the fundamentals may not be quite as strong, is the recent HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI), compiled by Markit Economics. In January, the China Manufacturing PMI came in at 51.9—a two-year high, up from 51.5 in December. The January China Manufacturing Output Index was 52.2—a 22-month high, up from 51.9 in December. (Source: “HSBC Flash China Manufacturing PMI™: Operating conditions improve at the quickest pace in two years,” Markit Economics web site, January 24, 2013.)
Initially, this seems to signal that economic growth in China is starting to resume, which would be bullish for the S&P 500. … Read More
In America, politicians mistakenly believe they can have it all. To stimulate economic growth, politicians have continually made big promises, without any way to pay for them. This type of imbalance has led to a government debt level that now exceeds $16.0 trillion—an absolutely insane amount.
With the government debt limit about to be hit yet again, we must ask ourselves: do Americans want to be European?
With the current level of tax and spending imbalance, government debt is set to grow higher and higher, even with a slight increase in economic growth.
This point was best explained by the Swedish Prime Minister, Fredrik Reinfeldt, when he stated on Bloomberg TV, “It’s not sustainable for a country to try to have European levels of expenditure with taxation levels like the United States has.” (Source: Carlstrom, J., “Sweden Warns U.S. Against Targeting Welfare With Tax Deficit,” Bloomberg Businessweek, January 25, 2013.)
This point is essential for all Americans to consider. Economic growth is flat in the U.S.; and while politicians talk a big game, we must consider how we’re going to pay for all of these promises. The more government debt increases, the more constraint it puts on the future for all Americans, lowering potential economic growth levels.
To put the difference into context, the European commission estimated that the budget deficit for Sweden will be 0.3% of gross domestic product (GDP) in 2013, as compared to a budget deficit for the U.S. of 7.3% of GDP. Even the European Union (EU) as a whole will only have a budget deficit of 3.2% of GDP. (Source: Ibid.)
The advantage of having … Read More
In April 2011, when silver was trading at $50.00 an ounce, Bank of America Merrill Lynch was extremely bullish and suggested $80.00 was possible. (Source: “Prospect of silver hitting $80 shakes up stock, ETF markets,” International Business Times, May 1, 2011, last accessed January 22, 2013.) Of course, this hasn’t been the scenario, as the metal faces tough resistance at $35.00. Until there is a strong breakout here, I doubt the $40.00-level will be achievable.
While the majority of investors focus on gold, I feel silver could actually have more price upside, given its more speculative nature as more of a trading commodity.
In reality, the buying in the white metal is generally in line with the global economic growth, driving the demand for industrial goods that use silver as a raw material, pushing up income levels, and increasing the global demand for jewelry.
Here in the U.S., the economic recovery is faring well. The better-than-expected U.S. gross domestic product (GDP) growth, revised up to 2.7% for the third quarter, along with other encouraging economic data are also adding some optimism of economic renewal. China is offering some hope of a turnaround, but the stagnant condition in the eurozone and Europe remains an issue.
As I said, while gold is considered more of a pure-play hedge against risk, any sign of industrial recovery helps, as silver, unlike gold, is used in numerous industrial applications.
As you can see on the chart, silver is caught in a sideways channel, largely between $30.00 on the support side and $35.00 on the top of the channel. Silver is currently testing its 50-day moving … Read More
One of the most frustrating things for economists around the world has been the lack of economic growth and job creation. The real estate bust in America has had a cascading effect on the economy. The real estate crash and many market sectors were interrelated, causing economic growth to not only stall, but also decline significantly, leading to massive layoffs.
While there have been some positive signs that the housing and automotive sectors are starting to rebound, job creation has only been moderate. Economic growth needs to accelerate for a substantial amount of job creation to develop.
Some of the latest data regarding manufacturing certainly are not a positive step toward economic growth or job creation.
The Federal Reserve Bank of New York recently issued its general economic index, which fell to -7.8 in January, down from a revised -7.3 in December. This is the sixth month of contraction in the New York area. Not only was this number set lower than the previous month, but it also missed expectations substantially. Fifty-four economists surveyed by Bloomberg had a median estimate of zero. (Source: Woellert, W., “Manufacturing in New York Region Contracts for Sixth Month,” Bloomberg, January 15, 2013.)
While manufacturing accounts for only 12% of the U.S. economy, it is still a substantial component of economic growth and job creation.
These data were followed by the Federal Reserve Bank of Philadelphia’s January 2013 Business Outlook Survey. The survey of manufacturing conditions declined to -5.8 in January from 4.6 in December. New orders declined to -4.3 from a December reading of 4.9. Labor conditions further deteriorated to an index of -5.2 … Read More
The key to the global economy is a rise in consumer spending. My view is that the emerging markets will continue to be an excellent place to invest some capital, whether it’s the BRIC countries (Brazil, Russia, India, and China) or the Southeast Asian “Little Tigers,” comprising Hong Kong, Singapore, South Korea, and Taiwan. I’m bullish on this area of the world. My reasoning is that the newfound wealth and growing middle class in these markets will drive consumer spending and economic growth.
Famed technical analyst Louise Yamada is looking positively at the emerging markets and believes they can outperform the U.S. market. (Source: Macke, J., “Emerging Markets Set to Outperform the U.S. Says Yamada,” Yahoo! Finance web site, January 17, 2013.)
A good indicator of global consumer spending patterns is MasterCard Incorporated (NYSE/MA), since the company has a presence in over 210 countries. In a third-quarter press release, MasterCard reported that its worldwide purchase volume surged 12% in the third quarter on a local currency basis. In the press release, MasterCard President and CEO, Ajay Banga, also noted that emerging markets continue to provide opportunities for growth. (Source: “MasterCard Incorporated Reports Third-Quarter 2012 Financial Results,” MasterCard Incorporated web site, October 31, 2012, last accessed January 21, 2013.)
What is interesting is the emergence of credit in the emerging markets, where cash has long been king. In these growth regions, the per-capita income is rising, helping to drive consumer spending and economic growth.
Just take a look at the iShares MSCI Emerging Markets Index (NYSEArca/EEM) chart that shows the stock market rally since mid-November 2012.
Chart courtesy of www.StockCharts.com
The … Read More
At the end of 2008, the financial crisis in America was so severe that the Federal Reserve began a historically significant and unprecedented monetary policy program, which has continued to this day, dramatically altering the financial and economic landscape.
Considering the extent and breadth of this huge monetary policy program by the Federal Reserve, two questions linger: why hasn’t the economy recovered as many economists had expected, and what is the downside?
Monetary policy is an extremely complicated initiative, with the end result not easily quantified or predictable. One of the most common complaints has been the lack of income from savers due to the lowered interest rates.
There is some validity that a massive amount of income has been foregone from savers because of these lower rates, due to easy monetary policy by the Federal Reserve and other central banks around the world.
According to The Economist, personal interest income has declined at an annual rate of $432 billion since 2008, more than four percent disposable income. This was interest income that was not generated and, ultimately, not spent in the economy. (Source: “Savers’ Lament,” The Economist, December 1, 2012, last accessed January 7, 2013.)
However, the situation is far more complex, as there are two sides to every coin. The lowered interest rates due to easy monetary policy by the Federal Reserve have also decreased the costs of borrowing.
The Bank of England conducted a study showing that between 2008 and 2012, the lowered interest rates ended up costing savers 70 billion pounds in lost income, but households saved 100 billion pounds in interest expense. (Source: The Economist, … Read More
There is a crisis in America, relative to the widening income gaps between the rich, the middle class, and the poor. This ultimately impacts consumer spending.
In the fiscal cliff talks, President Obama decided to compromise on the Bush-era tax cuts after raising income taxes on those individuals earning in excess of $400,000 annually and over $450,000 for married couples. These groups account for roughly the top one percent of income earners, according to the Tax Policy Center. (Source: “Fiscal Cliff Deal Will Raise Taxes On 77 Percent Of Americans: Tax Policy Center Analysis,” Huffington Post via Associated Press, January 2, 2013.)
The World Economic Forum suggested the widening of the income gap will have a global impact. (Source: “Income disparity, debt lead risk list,” Yahoo! Finance via Associated Press, January 8, 2012.)
The failure to achieve tax increases for all income earners making over $250,000 was a disappointment to President Obama, and it further increases the widening gap between middle-class America and the top one percent. With the income gap between the rich and poor widening, this is becoming more of a major issue that will need to be addressed, as it impacts consumer spending.
In my view, this is an issue that needs to be dealt with, as there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as an avenue for income distribution needs to be looked at. This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with … Read More
Well, the doom and gloom of the fiscal cliff was averted in the nick of time, which in turn, pleased Wall Street and gave stocks a boost to begin the new year.
While the deal was a nice compromise between the two parties on the tax issues, there is a lot of work ahead for President Obama, as the statutory national debt limit of $16.4 trillion nears. As of this morning, the national debt balance used for the limit stood at a superlative $16.39 trillion. The headline national debt of $16.43 trillion is actually already above the limit, but don’t worry, the Treasury Department said it will be able to pay its debt payments and bills. Of course, we know this will also hold until the extended deadline on March 1.
The bottom line is: President Obama needs money to operate his plan to save America. Obama has asked for increased power to increase the national debt limit without Congress, but we all know this will never happen under the Republican-controlled House.
So while I view fiscal and monetary strategies as critical to keeping economic growth going, I also understand that the government needs to be tough and do something to the staggering national debt or risk deepening the financial crisis down the road for generations.
The problem is that if too much spending is cut, the impact on the economic recovery could be enough to send America back into another recession and financial crisis this year.
The question is concerning where some of the budget cuts will originate from.
Defense will likely lose a big chunk of its budget, … Read More
When it comes to looking for a long-term investment opportunity, sometimes it pays to look at a market sector that might not initially seem bullish. While I have pointed out several structural impediments to economic growth in America, there are a few areas that do provide a long-term investment opportunity.
One of the strengths in America is the growth in resurgence of the energy market sector. This is clearly not the result of any government initiative; rather it is due to private enterprises realizing the long-term investment opportunity in the energy market sector by creating revolutionary technologies in extracting natural gas.
New techniques for hydraulic fracturing have enabled the American energy market sector to become a global leader. This has sent prices plummeting when compared to not only domestic but also global history.
The investment opportunity for many firms is to use this abundance and cheap input for production, attracting numerous firms to set up facilities in America. While the U.S. economy is still sluggish, many might seem surprised to find such a strong investment opportunity that’s attracting firms worldwide to our shores.
There are copious areas of the economy that benefit from low natural gas prices, including the chemical market sector, the steel market sector, and the fertilizer market sector, just to name a few.
Companies see a long-term investment opportunity in building multi-million-dollar facilities to benefit from the comparative advantage of a low-priced input. As an example, Nucor Corporation (NYSE/NUE), a U.S.-based steelmaker, is about to construct a $750-million facility in America. Voestalpine AG, a steelmaker based in Austria, stated that it is looking at building a $661-million … Read More
One of the main drivers for economic growth and, ultimately, job creation is innovation. New companies designing innovative products and technologies have always been the main drivers of economic growth. This economic growth will naturally lead to job creation. This should be the goal for every government, to stimulate and incentivize companies and people to innovate and start businesses.
America, however, seems to be going in the opposite direction. In the past, one of the biggest advantages for America has been that the nation was a magnet for talented immigrants who come to this country and build new products, innovative technologies, and, ultimately, businesses, which all results in job creation. This has been the basis of America’s success since the beginning.
An interesting fact: 40% of companies in the Fortune 500 were founded by immigrants and their children. However, America has been creating large obstacles and hurdles for talented immigrants to come to this nation and build businesses. As an example, visas for skilled workers are now at approximately 65,000 per year, down by half over the past decade. (Source: “The Chilecon Valley Challenge,” The Economist, October 13, 2012, last accessed December 15, 2012.)
An in-depth report by The Economist cited several examples of difficulties for immigrant businesspeople. One company called Fame Express, a creator of games for Facebook, Inc. (NASDAQ/FB), had a successful business, employing people within America and paying over $250,000 in taxes over two years. However, its management’s visa application was denied, and it was forced to move back to India. This is the exact opposite of job creation, taking a successful business and pushing it off … Read More
We are coming into an interesting time; America’s budget deficit has gotten too large and needs to be reined in. The problem is that this can be a delicate matter, because too much restraint in combating the budget deficit could slow economic growth.
The larger the budget deficit grows, the bigger the nation’s total outstanding debt. This can lead to massive financial problems over the long term, ultimately stifling economic growth under the weight of the budget deficit.
This is not news to anyone, and we are all aware of the dangers of a massive budget deficit. The problem is that during periods of strong economic growth, politicians continue spending during the good times, when they should be paying down the budget deficit and debt accumulated during bad times. With the economy still weak, many are worried that economic growth can be hurt due to overly aggressive tactics in attempting to reduce the budget deficit.
One of the themes from the latest presidential election was tax policy. President Obama has repeatedly stated that the top income earners don’t pay enough in taxes, and this is the main reason why America’s budget deficit is so large.
To start with, I want to emphasize that I personally believe people and corporations should pay taxes, according to the law. We don’t want to become a society like Greece in which many, if not most, people evade their taxes, which leads to a shortfall in revenue and a large budget deficit.
Let’s take a look at two areas of taxes: personal and corporate. The National Taxpayers Union looked at data from the Internal Revenue … Read More
This weekend, I will have my eyes turned toward Japan and the Japanese economy, as the nation holds its elections on Sunday. The reason for my interest is that the Liberal Democratic Party, led by Shinzo Abe, has repeatedly called for an ultra-hyper monetary stimulus package to be used in attempting to kick-start economic growth within the Japanese economy.
The Japanese economy has been mired with lackluster economic growth for decades, even though monetary stimulus has been applied. The problem, according to the Liberal Democratic Party, is that monetary stimulus has been too weak, and the tap needs to be opened to flood the system by printing more of its currency, the yen.
However, not all economists believe this monetary stimulus plan will lead the Japanese economy to higher economic growth levels in the future. Stephen Roach, the esteemed Yale University senior fellow, stated on CNBC, “I don’t think it’s going to work. QE (quantitative easing) is good at containing the downside, addressing crisis and disruptive markets, but it definitely doesn’t give you traction in regenerating demand in the real economy.” (Source: “Aggressive Easing Wrong Medicine for Japan: Roach,” CNBC, December 13, 2012.)
It’s easy to fall into the habit of looking toward easy monetary stimulus as a way to kick-start economic growth. This is one problem with America’s crop of politicians who are expecting the Federal Reserve to continue monetary stimulus as a way of generating economic growth, as opposed to applying real structural reforms to the economy.
At the very least, America has made some improvements in its economy over the last five years. Banks are far better … Read More
With the lack of economic growth around the world, more nations are looking at expanding their monetary policy strategies in an effort to kick-start their economies. The latest country showing a decrease in economic growth is Japan.
Reports out of Tokyo indicate that economic growth, as measured by the country’s gross domestic product (GDP), declined at an annual rate of 3.5% in the third quarter. This follows a revised second-quarter decline in economic growth by 0.1%, indicating the nation is in a recession. (Source: “Japan Sinks Into Recession as Abe Calls for More Stimulus,” Bloomberg, December 10, 2012.)
An important date for Japan is December 16, which is when the next election for that nation will be held. The leader of the main opposition party in Japan, Shinzo Abe, currently leading in the polls, has repeatedly stated that if elected, he will demand a massive increase in monetary policy to try to stimulate Japan’s economic growth. He has called for unlimited monetary policy easing, meaning endless money printing. (Source: “Japan Sinks Into Recession as Abe Calls for More Stimulus,” Bloomberg, December 10, 2012.)
Many companies in Japan have been hurt by the country’s strong currency, the yen; increasing monetary policy would be a step toward decreasing the value of the currency. This is yet another example of the race to the bottom in currency devaluations around the world.
Japan has been mired with decades of deflation. While many people fear inflation, deflation is extremely dangerous. Many are calling for the Bank of Japan’s inflation targets to be increased from one percent to the range of two to three percent. In … Read More
When it comes to forecasting economic growth, one has to pay close attention to consumer confidence. For developed nations, domestic spending makes up a large portion of an economy. If consumer confidence becomes troubled, this will certainly impact economic growth going forward.
Recently released data from Thomson Reuters/University of Michigan and their consumer sentiment index shows a decrease to 74.5 for December, as opposed to an estimated reading of 82 from a survey conducted by Bloomberg. November’s reading for consumer confidence was 82.7. The decrease in consumer confidence was the weakest in four months. (Source: “Michigan Consumer Sentiment Declines More Than Forecast,” Bloomberg, December 7, 2012.)
While economic growth has been weak for most of 2012, spending by consumers was relatively strong. However, I believe the increased discussion regarding the fiscal cliff issue and the constant bickering and ineptitude of politicians in averting drastic changes to fiscal policy is now weighing down consumer confidence. This increased awareness of the potential for a massive decrease in economic growth in 2013 will certainly continue to weigh down consumer confidence.
While various parts of the economy are helping consumer confidence, including increasing home prices and some job growth, albeit still tepid, the implementation of the fiscal cliff will have an extraordinary impact on economic growth. I believe that for a long time, most Americans were unaware of how severe the situation might be in 2013. Now that more news organizations are making Americans cognizant of the dire circumstances, consumer confidence is being negatively impacted.
According to the National Retail Federation, the four-day Thanksgiving weekend generated $59.1 billion in sales, an increase of 13% … Read More
I realize many people might be getting tired of hearing about the eurozone and the lack of economic growth in that union; however, we must be aware that what does occur in the eurozone and the trajectory of its economic growth can and will have an impact on the American economy. The global economy is more closely tied together now than ever before, and a lack of economic growth in one area could spread into another nation.
As I wrote several days ago in my article “Global Recession Fears Grow as Strong Nations Weaken,” Finland is showing signs of extremely weak economic growth. On Friday, we had more reports from the eurozone that economic growth is far below what is acceptable.
Germany’s central bank, the Bundesbank, announced that its estimate for economic growth in 2013 will only be 0.4%, a huge decrease from earlier estimates in June for economic growth in 2013 to be 1.6%. Austria’s central bank also slashed its 2013 estimates to 0.5%, as compared to previous estimates of economic growth of 1.7% in 2013. (Source: “German, Austrian central banks see grim 2013 as crisis bites,” Reuters, December 7, 2012.)
The level of adjustment in economic growth rates for both of these central banks is massive, and it’s a sign that the eurozone is far weaker than anyone previously thought. A good example of how weak economic growth is in Germany, the core country within the eurozone, is the statement by the Bundesbank that “The cyclical outlook for the German economy has dimmed. Enterprises are cutting back their investment and hiring fewer new staff.” (Source: “German, Austrian central … Read More
Silver continues to hold strong on the charts, with a possible upcoming move at the tough $35.00 resistance level and potential retest of the $40.00 level. The aggressive upward move has largely been driven by the move in gold, along with speculative trading.
Buying in the white metal is generally in line with global economic growth, which drives the demand for industrial goods that use silver as a raw material, while it also pushes up income levels and the global demand for silver and gold jewelry.
Here in the U.S., the economic recovery is faring well. The better-than-expected U.S. gross domestic product (GDP) growth revised up to 2.7% for the third quarter, along with other encouraging economic data, is also adding some optimism of economic renewal.
While gold is considered more of a pure-play hedge against risk, any sign of industrial recovery helps, as silver—unlike gold—is used in numerous industrial applications.
The price of silver has had some bull legs on the chart since its breakout in August, based on my technical analysis.
As you can see on the chart below, the upward move in prices for March contracts above the 50- and 200-day moving averages (MAs), which is bullish. The March silver is also showing a bullish golden cross with the 50-day MA of $33.09 above the 200-day MA of $31.06.
The MA convergence/divergence (MACD) is also quite bullish, but it may be approaching a top. The risk is that the run-up appears to be overextended and vulnerable to some near-term selling pressure with resistance at around $35.00. For the white metal to advance, we need to see a … Read More
President Obama is on a fiscal cliff campaign to show why middle-class America really needs the help. Of course, Republicans want the Bush-era tax cuts to also apply to the top two percent of income earners. This is the major sticking point holding up a deal.
I love capitalism and the idea that you can generate unlimited wealth to drive consumer spending. This is the reason why the United States is one of the richest countries in the world, with its gross domestic product (GDP) growth driven by consumer spending. Yet despite the ability to create wealth, the income gap between the rich and poor has been widening, which ultimately impacts consumer spending. In my view, this is an issue that needs to be addressed, as there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as an avenue for income distribution may need to be fixed.
This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the Great Recession that began in 2008. Lower income levels impact consumer spending and economic growth.
The median family income plummeted to an inflation-adjusted $45,800 in 2010 compared to $49,600 in 2007, according to the Survey of Consumer Finances, a publication of the Federal Reserve. The survey also indicated that the top 10% of households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into less consumer spending by the middle class as income levels fade…. Read More
It has been several years since the financial crisis within the eurozone erupted, resulting in weak and anemic economic growth that still eludes that union. The eurozone has been inundated with uncertainty and volatility in the financial markets. This has led to a loss in confidence by businesses and, ultimately, consumers.
It appears that the lack of economic growth within the eurozone is spreading to financially stronger nations. I have already mentioned that there are signs that Germany might be witnessing a slowdown in economic growth; now, we get a report from Statistics Finland that the recession has spread to that nation, as the country’s economy contracted by 0.1% in the third quarter from the second quarter of 2012. Compared to the third quarter of 2011, Finland’s economy shrank by 1.2% year-over-year. (Source: “Gross domestic product contracted by 0.1 per cent from the previous quarter and by 1.2 per cent year-on-year,” Statistics Finland, December 5, 2012.)
The volume of exports decreased by 1.8%, while imports decreased by 4.1% (both year-over-year figures). With the lack of economic growth within the eurozone now seeping into the stronger countries, this raises serious questions as to the possibilities of a continuation of financial strain on that economic union and a spreading of the financial crisis worldwide.
One serious worry is the 4.4% decline in investments year-over-year. For the eurozone countries, economic growth needs a certain level of business investment. If businesses don’t feel that there is a strong possibility for economic growth in the future, this will lead to lower levels of capital expenditures, which will reduce the long-term economic growth potential.
The fear … Read More
The results of PNC Wealth Management’s annual Christmas Price Index were recently released, and it’s not looking good for consumers. If you want to financially re-create “The Twelve Days of Christmas,” in which a rich lover goes to town on a shopping spree, you’ll have to shell out a little bit more this year.
According to the 29th annual survey, it will cost $25,431.18 to purchase one set of each of the gifts given in the song. That represents a 4.8% increase from last year, a 3.5% increase in 2011, and a 9.2% increase in 2010. This year also represents a 101% increase over the $12,623.10 price tag from the original 1984 survey results.
Now granted, the Christmas Price Index is not a serious economic indicator, and the average consumer is not going to throw down cash for eight maids-a-milking, five golden rings, or a partridge in a pear tree…but it does go to show the disconnect between the inflation rate and what consumers are really paying.
Considering the modest economic growth we’ve had, the increase is a little unexpected. The Christmas Price Index would have been even higher in 2012, except that minimum wage hasn’t increased.
At 4.8%, the 2012 Christmas index significantly outpaced the government-tracked Consumer Price Index (CPI), which rose 2.2% in October from the year-earlier period. (Source: News release, “Consumer Price Index – October 2012,” Bureau of Labor Statistics, last accessed November 30, 2012.)
Digging a little deeper, month-over-month, the shelter index increased 0.3%, its largest increase since March 2008; the food index increased 0.2% in October, with the index for food-at-home rising 0.3%, its largest … Read More
The only people crying “Y2K” back in 1999 were information technology (IT) professionals looking for job security. Even without their help, disaster was averted, the rising sun greeted the world on January 1, 2000, and life was good.
Fast-forward to 2012, and the doomsayers are at it again. Except this time, it’s the members of the U.S. government wailing about an “economic Armageddon” if the fiscal cliff isn’t averted come January 1, 2013. Unlike Y2K, the fiscal cliff is a real issue that needs to be addressed; but the end result will be the same: at the last second, disaster will be averted.
Unfortunately, as we make our way to the end of the calendar year, indecisiveness and political jockeying are spooking the global investing community and wreaking havoc on the markets. At a time when the international community needs the U.S., the world’s largest economy, to show confidence, it’s the political infighting capturing the spotlight.
In spite of all the wailing and gnashing of teeth, the fiscal cliff will be avoided and life as we know it will continue. And that’s when the real problems begin. With the centric fiscal cliff stealing all the limelight, it’s been tough for investors to focus on the fact that America’s economic rebound is contingent on a financially strong international community. Domestic economic growth cannot be stimulated in isolation.
In January 2013, investors will see that the real underlying factor affecting the stock market is the global economy and its impact on corporate earnings.
On November 15, it was announced that the collective economies of the eurozone fell by 0.1% between July and … Read More
The U.S. is still recovering from the Great Recession, which has substantially lowered America’s economic growth levels. This lack of economic growth is preventing job creation and leading to a persistent and sustained elevated level of unemployment. In spite of the current weak economy and the ineptitude of politicians to take concrete actions in building a solid economic foundation, I believe that one of the main drivers for economic growth over the next several decades will be a derivative of oil prices.
Let me explain. While politicians bicker on both sides, American ingenuity has led the world in technological innovation when it comes to energy extraction; so much so, that the International Energy Agency (IEA) has just come out with a report stating that by 2017, the United States will be the top oil producer in the world, replacing Saudi Arabia. In that same report, by 2015, the U.S. will be the top gas producer in the world. When people around the world think about gas and oil prices, they will look to America as the world leader in technological innovation that is driving this commodity sector. (Source: “U.S. to overtake Saudi as top oil producer—IEA,” Reuters, November 12, 2012.)
Economic growth is spurred by many factors. Two of the most important factors are the competitive advantage worldwide and technological advancements. The increase in oil prices we’ve seen over the past couple of decades has led American firms to develop world-leading, technologically sophisticated methods of extracting both oil and natural gas from beneath the ground. This has resulted in massive increases of both oil and natural gas production in America…. Read More
Global networking giant Cisco Systems, Inc. (NASDAQ/CSCO) beat on revenues and earnings estimates in its 2013 fiscal first-quarter on Tuesday. What was interesting, but not a surprise, was the company’s good performance from its Asia-Pacific and EMEA (Europe, the Middle East, and Africa) regions; albeit, it was mostly because of the Middle East and Africa regions, as the Europe division continues to be a drag on the stock’s growth due to economic contraction in the eurozone.
The Asia-Pacific and EMEA regions now account for 41% of the company’s total revenues. (Source: “Cisco Reports First Quarter Earnings,” The Network, November 13, 2012.) The results demonstrate the growing importance of the non-U.S. markets, particularly Asia, and the emerging markets to Cisco among other multinational companies.
Take a look at the recent results from global credit card provider MasterCard Incorporated (NYSE/MA). Consumer spending is on the rise; at least via credit cards. MasterCard is a good global barometer on consumer spending, as the company has a presence in over 210 countries. In a third-quarter press release, MasterCard reported that its worldwide purchase volume surged 12% in the third quarter on a local currency basis (“MasterCard Incorporated Reports Third-Quarter 2012 Financial Results,” Yahoo! Finance via BusinessWire, October 31, 2012, last accessed November 14, 2012.) MasterCard President and CEO, Ajay Banga, said, “Additionally, emerging geographies and governments continue to provide great opportunities for growth.”
Again the interesting point to note is the growing use of credit in the emerging markets where cash was king in consumer spending. MasterCard clearly sees new markets in these growth regions where the per capita income is rising, helping to … Read More
It would appear that Spain is still somewhat delusional regarding its ability to avoid having to ask the European Central Bank (ECB) and International Monetary Fund (IMF) for emergency capital. I previously discussed this issue after Spain’s finance minister, Luis de Guindos, said, “Spain doesn’t need a bailout at all.” (Source: “Spain FinMin’s ‘No Bailout’ Remark Causes Laughter,” CNBC, October 5, 2012, last accessed November 12, 2012.) Yet, the country is still being unrealistic in its view and is now facing a financial crisis that will likely worsen.
Maybe Spain doesn’t realize that when one of every four of your citizens has no job to go to, there’s a problem. The ECB’s buying of troubled and overpriced Spanish bonds in an effort to reduce the financing charges represents a bandage solution to a financial crisis. Spain talks about the lower yields. Yes the 10-year yields on Spain’s bonds are no longer over 10.0%, but at the current 5.9%, these yields are still comparatively high and not sustainable. Now, if Spain can get its yield down below three percent, then maybe the bond-buying will help; but until that happens, I’m not convinced, and Spain will continue to walk on a tightrope and see its financial crisis deepen.
Spain doesn’t want money, as it knows that emergency funds also come with strings attached: being told what to do with its budget, spending, and austerity measures.
Yet something must be done or Spain’s financial crisis will worsen. The problem is that Spain, like the United States, is facing muted growth, and a tough austerity program would bind Spain’s spending and would impact its … Read More
We are at a major point in the history of China as the country gets ready to welcome its new leadership group that will dictate what China does, especially with its economic growth, for the next decade. Moreover, it will be critical for President Obama to establish a stronger relationship with whomever will run China during his second term in office, as it could set up how the world looks in 10 years.
The world’s two top economies have similar economic growth goals: to expand their economies, drive income levels higher, and push consumer spending.
The 18th National Congress of the Communist Party of China, which began yesterday. will set in motion the transfer of power in the communist party that occurs every 10 years. There is yet to be an announcement on the new appointments, but the good money is betting on Xi Jinping, the vice-president of China, becoming the next president, replacing Hu Jintao. Li Keqiang, the vice-premier, will then become the next premier, replacing Wen Jiabao.
Already there are questions regarding what type of people the new leaders will be. The consensus is that the relative youth and moderate stance of Xi Jinping and Li Keqiang could make China more in tune with the modern world, which could see the development of better relationships with its key trading partners, including the United States, and could drive economic growth.
For China, the change at the helm comes at a critical juncture, as the country is currently facing stalling economic growth following years of explosive gross domestic product (GDP) growth that propelled the country to overtake Japan as the … Read More
By the time you are reading this, either Barack Obama or Mitt Romney will have won the race to be the 45th President of the United States.
Yet I will remind the winner that there’s not much time to rejoice in the victory, as there’s plenty of work ahead, which will dictate the direction of America over the next four years in relation to debt, job creation, economic growth, and foreign policy.
Whoever has won, they need to work on job creation at a much stronger rate than the current pace. All those promises that were made during the election campaign must now be acted upon. We need to create strong job creation and sustained jobs growth, while lowering the unemployment rate. The Federal Reserve is cautious about job creation into 2013. Obama and Romney have different strategies for lowering the unemployment rate and increasing job creation. But the reality is that unless Americans are put back to work, the economic recovery will likely stall and add to a possible financial crisis.
The most immediate concern for the next president will be what to do about the pending fiscal cliff on January 1, 2013, which calls for $607.0 billion in automatic budget cuts to avert a financial crisis. The Congressional Budget Office (CBO) recently warned that the U.S. economy could contract in 2013 if the spending cuts are allowed, which would impact job creation. (Source: Congressional Budget Office, last accessed November 6, 2012.) I expect the same.
At a round table meeting of the Group of Twenty Finance Ministers and Central Bank Governors (G-20), there was talk of the U.S. … Read More
The eurozone financial crisis has been an ongoing topic of discussion for quite a long time. I can appreciate why some readers might be tired of hearing about the eurozone and the lack of economic growth within that union; however, I would remind Americans that what happens in the eurozone will certainly have an effect here at home.
The latest data have been a disappointment, as it appears that economic growth continues to elude the eurozone. The Purchasing Managers’ Index (PMI) survey, run by the financial information company Markit, is a great gauge to understand the true level of economic growth around the world. Currently, PMI data is available for 32 countries, not just the eurozone.
The latest eurozone PMI composite index came in at 45.8 for October, a drop from 46.1 in September. This represents the lowest PMI composite reading in 40 months. While the service sector PMI was up marginally to 46.2 for October, as compared to 46.1 in September, the manufacturing PMI declined to 45.3, as compared to 46.1 in September. (Source: Markit, October 24, 2012.)
There are two things to remember about the PMI readings: a number above 50.0 represents economic growth, and a number below 50.0 represents a decline in economic growth; and secondly, the trend is important. While the number below 50.0 represents declining economic growth, if the trend was improving, it would be a positive sign for the future. However, the worry within the eurozone is that these numbers are generally weakening, especially in manufacturing, which will weigh down the chances of economic growth.
Another worry for future economic growth within the eurozone … Read More
When it comes to job creation, the key is to drive economic growth. With the current presidential election unfolding, we not only get to hear about what candidates plan to do over the next four years, but we can also see a historical record of what each party has done. To be honest, both parties have their faults. What surprises me, though, is that President Obama talks about his administration’s ability to be a factor in job creation when there is plenty of evidence around the world that suggests the administration appears to be on the wrong track.
I firmly believe that economic growth stems from supporting businesses, which leads to job creation. Supporting businesses is crucial, considering they’re doing the hiring. Looking at polls of business leaders around the nation, many are worried and concerned about the future; it’s no surprise that there’s a lack of job creation. You will constantly see that business owners are uncertain regarding regulations (including health care) and the “fiscal cliff.”
I do believe both political parties are responsible for not dealing with the fiscal cliff issue. It is unconscionable to me that they can’t come to an agreement and are holding the American public hostage for their political maneuvering. I believe the fiscal cliff is a huge issue holding back economic growth for both large and small businesses, and there is no reason why it should be left to the last minute.
However, for long-term economic growth one should look at what drives business and job creation. Instead of discussing an opinion, let’s look at some facts. The tiny nation of Belarus is … Read More
Have you read or heard the recent economic data from China? Chinese exports for September grew 9.9% from the same period last year, almost double what the investment community expected.
The Chinese economy is extremely dependent on exports while it’s slowly developing its domestic economy. To get a better gauge of global economic growth, if China’s exports are indeed improving, then some economies around the world also must be improving, as the Chinese economy has grown to become a significant part of the global economy over the past decade. China makes up a large portion of many industries, and supplies numerous products to many parts of the world. Regardless of what one thinks about the Chinese economy, there is no question that it has a large influence on worldwide economic growth.
The European Union (EU) is a disproportionately large and important destination for the Chinese economy. With economic growth anemic within the EU, it was no surprise that exports to the Union fell 10.7% in September. This makes the overall increase of 9.9% that much more startling. It means that economic growth outside of the EU appears to be far stronger than anyone thought it would be so far.
Exports to America were up 5.5% for the September period as compared to year-ago levels. Neighboring South East Asian countries saw the biggest jump in exports at 25.5% for the month. This included Taiwan, up 19.9%, and South Korea, up nine percent. (Source: “China Sept. Exports Jump 9.9%, Imports up 2.4%,” The China Post, October 14, 2012.)
We will hear shortly from government officials regarding gross domestic product (GDP) numbers for … Read More
What happens in China will have an impact on the U.S. economy and the global economy. The linkage between economies worldwide has become more profound over the past decade. This is why, as an investor, you need to be fully aware of the situation across the Pacific.
The state of the Chinese economy continues to ramp up heated discussion specifically concerning the immediate need for further monetary stimulus to drive domestic consumption in China.
China’s inflation rate is currently manageable at 1.8%, which allows for added monetary stimulus. (Source: National Bureau of Statistics.)
China’s recent industrial production is a sore spot compared to the sizzling results from 2003 to 2006, as reflected on the chart; albeit, the number has risen in the past three straight years. Industrial output improved from 2008 to 2011, but the current year is heading for the lowest levels since 2008, when the global recession started and there was a need for monetary stimulus. According to China’s Ministry of Industrial & Information Technology, the country’s industrial production is estimated to fade to 10% in 2012 versus 13.9% in 2011, which is an ideal level for monetary stimulus.
Copyright Lombardi Publishing 2012; data source: Central Intelligence Agency (CIA), The World Factbook.
The World Bank predicts China may see its economic growth expand by a mere 7.7% this year and rebound to an optimistic 8.6%. But these metrics may not be easily achievable, especially given the financial crisis in the eurozone, hence the need for monetary stimulus in China.
The country’s gross domestic product (GDP) has declined over the past six straight quarters. GDP growth came in at … Read More
Elections are important, maybe even the cornerstone of a democracy; but sometimes voters are just too busy to listen to everything being said by the Obama or Romney camps. Thank heaven sound bites can sum up everything we think we need to know.
Here are some recent tidbits from Capitol Hill:
The U.S. Department of Labor recently said that unemployment plummeted in September to 7.8%—the first time the rate dropped below eight percent since February 2009. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, October 5, 2012.)
Auto sales rose in September by 13% from a year earlier to nearly 1.2 million. (Source: “September 2012 Auto Sales,” Automobile Magazine, October 9, 2012.) U.S. home sales jumped to their highest level in two years, and builder confidence has reached its highest level in more than six years. (Source: WRAPUP 2-U.S. new home sales dip, but prices scale 5-year high,” Reuters, September 26, 2012.) Consumer confidence jumped in September. (Source: “Consumer Comfort in U.S. Stayed Near Three-Month High Last Week,” Bloomberg, October 11, 2012.)
Yup, everything is rosy. The U.S. economy is picking up steam, the housing market is turning around, and the U.S. is creating jobs. The economic turnaround is in full swing, and Americans are happy.
But if you believe the economy is getting better, you must truly be the world’s greatest contrarian, despite the overwhelming evidence to the contrary.
I think it’s all about perspective.
The so-called “encouraging” news reminds me of that scene near the end of Titanic, where a deckhand fires off a rescue flare into the night; people onboard the sinking ship or in the lifeboats … Read More
The latest data regarding the economic growth rate of America came from the Commerce Department’s durable goods report, and the headline numbers weren’t good. The total orders for durable goods in the month of August fell 13%, primarily due to a massive drop in civilian aircraft.
This report, however, was not a surprise. While it may be a hit to investor confidence, the truth is that economic growth has been slowing and we’ve been aware of this from the numerous comments made by a large numbers of CEOs in interviews. The main concern is the “fiscal cliff.” The more people talk about the fiscal cliff and the more inaction by Congress, the less likely it is that businesses will expand. Would you increase your capital expenditures not knowing what will happen in just a few months? I certainly wouldn’t. This uncertainty is what’s really holding back jobs growth.
The economic growth forecast for next year without a deal to avert the fiscal cliff is bleak for America. Under such a scenario, jobs growth will continue to lag, as businesses have to adjust their projections of what is attainable with declining economic growth downward. A lack of economic growth will trickle down and affect many businesses. The continued lack of progress by Congress is clearly hurting the economy, and it has been for the last couple of months. As long as there is no deal in sight, I believe that we will continue to see worse economic data and a continued lack of jobs growth.
The largest impact on the durable goods number in August came from The Boeing Company (NYSE/BA), … Read More