There continues to be mixed data regarding the strength of the economic recovery in America. This is creating an interesting divergence between the level of the S&P 500 and the growth rate of the economic recovery, which is far less than many had expected so far.
The Federal Reserve Bank of Philadelphia recently released its index of manufacturing activity, which dropped to -5.2 in May, versus a reading of 1.3 in April. (Source: “Business Outlook Survey,” Federal Reserve Bank of Philadelphia web site, accessed May 17, 2013.)
The survey shows no consistency over the past seven months regarding the current conditions of the economic recovery. The report indicates that the economic recovery has oscillated between positive and negative readings. Current demand for manufactured goods dropped substantially to -7.9 in May, from -1.0 in April. As well, the level of inventories increased to 4.1 in May, versus -22.2 in April.
This indicates that for the surveyed businesses during the month of May, there appears to be less demand for manufactured products, and inventories are piling up, which is clearly not a sign of strength. However, the S&P 500 continues to move higher. The question is: is this upward movement sustainable?
Obviously, no one can predict the future, but investors in the S&P 500 try to anticipate future shifts in the business landscape. While the economic recovery is currently weak, people who are now buying the S&P 500 believe that growth is close at hand. The current data do not support such a strong economic recovery; however, there is the possibility that such a recovery might occur.
One such data point that … Read More
There is simply nowhere else to put your money to work, which is why the stock market continues to edge upward to new record highs.
You can earn a yield of 0.23% on a two-year U.S. Treasury, 0.79% for five years, 1.90% for 10 years, and up to 3.13% if you extend it to 30 years. (Source: “United States Government Bonds,” Bloomberg, May 17, 2013.)
Of course, unless you have tens of millions of dollars to invest, I highly doubt you, or anyone for that matter, would be happy with these petty returns on bonds.
You could always go out and buy Spanish 10-year bonds yielding 4.29% as of Friday. Heck, you can do this out of your own kindness and help Spain out of its financial crisis, with an unemployment rate at over 25% and massive debt loads that will hinder the country for decades.
Or you can simply invest in higher-yielding U.S. blue chip companies, such as General Electric Company (NYSE/GE), Johnson & Johnson (NYSE/JNJ), and The Procter & Gamble Company (NYSE/PG), which all offer dividend yields of more than three percent.
The reality is that investors have been rushing into the stock market and not wanting to miss out on the Wall Street party, which appears to be attracting many party goers.
JPMorgan Chase & Co. (NYSE/JPM) is the party organizer and the biggest bull on Wall Street after coming out with a year-end target of 1,715 for the S&P 500. Now with over seven months left in the year and with the index already at 1,660 as of last Friday, another 55 points in this frothy … Read More
Bank stocks have been one of the strongest sectors in the market over the past year. Bank stocks have rallied sharply after many investors dumped shares on fears that the financial crisis might worsen. Those fears obviously never materialized, and many bank stocks have begun to resume paying dividends and generating profits.
There are two questions I am often asked: 1) is it too late to incorporate bank stocks into one’s investment strategy; and 2) if someone has already owned bank stocks over the past couple of years, is this the time for that investor to start taking profits?
Since the fall of 2011, an index of bank stocks has almost doubled in value. Clearly, an investment strategy that owns a number of bank stocks has seen significant gains in this sector. But no one can rationally expect this type of return to continue forever.
Part of my cautious view on bank stocks, in terms of reducing the sector weighting in an investment strategy, is the fact that there is a limit to upside capital appreciation in every sector. A big question when developing an investment strategy: what is the future outlook for the sector?
Obviously, the low-hanging fruit has already been picked when it comes to bank stocks. Regardless of what was thought about bank stocks in the past, as an investor you are only interested in the potential for growth in earnings and revenues. Large gains have already been realized; now we need to consider how bank stocks fit into an investment strategy over the next decade.
Large concerns for bank stocks shareholders are increased regulation and a … Read More
With the aggressive monetary policy plan implemented by the Federal Reserve in place, it’s not just retirees who are seeking yield and can’t find it; large institutional funds are in the same predicament.
I believe that one of the goals of the Federal Reserve in enacting its current monetary policy plan is to entice investors into assets other than cash. Simply having cash sitting idle cannot help the economy. However, yields are so low that many investors are hunting for income in dangerous places.
Just this past Tuesday, the yield on Barclays U.S. Corporate High Yield index (junk bonds) dropped below five percent. This represents a record low and is the first time in its history of 30 years that the junk bond index has seen rates fall to such low levels. (Source: Burne, K., “Yields on Junk Bonds Reach New Low,” Wall Street Journal, May 8, 2013, accessed May 9, 2013.)
In addition to this record-breaking threshold, this junk bond index yielded six percent only this past January, which shows the massive amount of capital being put to work. The monetary policy by the Federal Reserve is leaving institutions with so much demand for yield that they are piling into any marginal investment, which could end up costing investors.
Even more esoteric, investors are moving into emerging markets such as Cote d’Ivoire, which has seen yields on its eurobonds (bonds denominated in U.S. dollars outside of America) cut in half over the past year. (Source: “Africa’s bond markets: Kings of the wild frontier,” The Economist, March 2, 2013.)
Risks are substantial for investors hunting for yield in this environment … Read More
Pop the champagne; it’s time to rejoice and toast this month’s jobs numbers, isn’t it? The S&P 500 edged up to another record high above 1,600, while the Dow is seriously eyeing 15,000.
I did think those targets for the two indices were achievable, but not this early in the year.
You can thank the Federal Reserve and the astounding job creation for the high jobs numbers—of course, I’m being sarcastic to a degree.
According to the United States Department of Labor, job creation tallied 165,000 jobs in April, better than the Briefing.com estimate of 135,000. The March reading was also revised upward to 138,000 new jobs from the previous muted reading of 88,000. The 165,000 new jobs is decent, but let’s be realistic: that number is no reason for the S&P 500 to be trading at a record high. The truth of the matter is that we need to see a higher job creation number.
The unemployment rate fell to a four-year low of 7.5%, much better than the Briefing.com estimate of 7.7%. Again, great, but I think the drop has more to do with job seekers leaving the search.
Yes, the job creation numbers are a myth as far as the real strength of the labor market.
The Labor Department estimates there are 11.7 million people unemployed, but in reality, it is probably twice that because many workers have quit looking for work out of frustration.
In fact, a closer examination of the job creation numbers from the Labor Department tells us another story—not what is in the headlines and not what the government wants you to know…. Read More
Home prices are heating up, as the flow of new homes and permits continue to steadily increase and the attraction of historically low mortgage rates motivates buyers.
The buyers that are driving up the housing market are not only the buyers of principal homes, but also the investors who are attracted to the relatively lower home prices and cheap financing.
What is interesting is that we are seeing major buying from not only the smaller investor who may dabble in an investment property, but also the large institutions and hedge funds that are getting into the swing of things, gobbling up hundreds and thousands of properties at lower prices.
The S&P/Case-Shiller index, comprising the 20 largest U.S. metropolitan cites, increased a better-than-expected 9.3% in February, representing the 13th straight up month for prices.
While the housing market is far better than it was a few years ago, when the sub-prime mortgage crisis crushed the housing market and left a trail of destruction, my view is that there may be a bubble building as much of the current surge in prices is due to the cheap money.
Just consider the S&P/Case-Shiller index and notice the major jump in home prices in the housing market. For example, home buyers in the Phoenix housing market saw home prices surge 23% year-over-year, while those living in San Francisco reported an 18.9% surge in home prices.
My problem is that much of the buying in the housing market is being triggered by low-financing costs that can inevitably get homeowners in trouble once interest rates begin to ratchet higher—and they will go higher. For instance, carrying … Read More
The latest meeting by the Federal Reserve was quite significant regarding its monetary policy program, and many economists will now need to revise their analyses.
The key sentence in the Fed’s statement was, “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” (Source: Board of Governors of the Federal Reserve System web site, May 1, 2013, last accessed May 2, 2013.)
Why is this so significant? For the past few months, many economists and analysts have been expecting that the Federal Reserve would begin to discuss when it would be appropriate to begin reducing its aggressive monetary policy program, specifically the monthly $85.0 billion bond-buying level.
Many were thinking that at this meeting the Federal Reserve would indicate that at some point in the future it would begin reducing its aggressive monetary policy stance. While the Fed did indicate that it might be prepared to reduce bond buying and lower monetary policy measures, this is the first mention in its press releases that an increase is possible.
In my opinion, this indicates that the Federal Reserve now believes that additional monetary policy might be necessary, whereas we all had been hoping that the U.S. economy would begin to improve. Clearly, the recent data has shown otherwise.
Job creation remains very weak, and various sectors, such as manufacturing, do not indicate that they will increase their level of production anytime soon. Internationally, we are also seeing continued weakness in many countries, which can only put downward pressure on our own economy.
With … Read More
Small business is the backbone of America’s economy. While large multinational companies tend to get all of the attention, it’s the small companies that are critical to the country’s economy.
From your local “mom and pop” shop to the independent watering hole around the corner to the small manufacturing company making widgets, small companies are critical to the economy.
These are the companies that tend to fare better than other companies when coming out of a recession or a slowdown, due to their ability to make quick decisions in response to rapidly changing business variables.
While large companies could take months to adapt to a changing business environment, small companies could take only days or weeks to adjust, which is why their activity should be monitored.
An interesting measure on how well small companies may be doing can be linked to the amount of loans taken out. The thinking is: the higher the loans, the more the business is growing.
The Small Business Lending Index (SBLI), developed by Thomson Reuters and PayNet, is a good benchmark on small business lending. The SBLI is based on the volume of new commercial loan and lease originations from the major lenders in the U.S. given to small companies.
In March, the index fell to 98.5 from 105.4 in February.
The SBLI chart shows the pattern of the loans from 2005. You will notice the dip in loans when the recession surfaced, followed by the steady rise in loans to small companies up until the present time. Also note the recent big dip in loans to small companies.
This recent decline may prove to … Read More
Economist Nouriel Roubini, also known as Dr. Doom, is finally on board with the stock market upswing; in fact, he believes the stock market can go even higher over the next two years.
Now, if you are familiar with the often bearish opinions of Roubini, you’ll know that his hawkish view of the stock market is somewhat bizarre, but you’ll also understand why he thinks this way.
The thinking behind Roubini’s view is similar to my own view on the stock market. Roubini believes that the concerted move by the world’s central banks to provide easy access to money via aggressive monetary policy is helping to drive the current buying in the stock market.
“In the short-term, it’s great for assets,” said Roubini about investors riding the bubble higher. (Source: Farrell, M., “Dr. Doom: Buy stocks while you still can,” CNNMoney.com, April 30, 2013.)
As many of you know, I have long been a critic of the Federal Reserve’s money-printing operations, along with the easy money flow from the world’s other banks.
Roubini predicts that the stock market will move higher over the next two years—as long as the Federal Reserve continues its aggressive stimulus strategy.
Of course, Roubini is aptly named Dr. Doom for a reason: he believes a period of reckoning is coming. And I’m on the same page.
As interest rates edge higher, investors will exit the stock market, and there will be a subsequent backlash.
I refer to this cause and effect as the impending economic Armageddon—it’s coming.
Interest rates will inevitably move higher. The low or near-zero interest rates are currently enticing investors to look … Read More
One of the common questions I get asked is: where are the long-term opportunities for growth? We all know that the American economy is growing extremely slowly, yet most people don’t realize how international many of the S&P 500 companies really are.
As an example, while we all think of Kentucky Fried Chicken (KFC) and Pizza Hut as American restaurants, the parent company, YUM! Brands, Inc. (NYSE/YUM), has a growth plan that is not based domestically and is instead focused on the Chinese economy.
Because S&P 500 companies are increasingly focusing on growth potential around the world, the one economy that has seen consistent increases in gross domestic product (GDP) has been the Chinese economy.
However, recent data are showing signs that the Chinese economy might be slowing down. According to the National Bureau of Statistics, industrial profits in March increased by 5.3% year-over-year, but it marks a drop from the 17.2% increase in industrial profits recorded during January and February. (Source: Orlik, T., et al., “Chinese Industrial Profit Growth Slows,” Wall Street Journal, April 28, 2013.)
Earlier this year, we received information that the Chinese economy did post a lower-than-expected GDP increase of 7.7%, down from 7.9% during the fourth quarter of 2012. The leadership in China is trying to engineer a slower Chinese economy to prevent bubbles.
So, what does this mean for S&P 500 companies?
Many S&P 500 stocks are looking toward the Chinese economy as the next great growth generator. YUM! Brands opened almost 2,000 restaurants in 2012, of which 889 were based in China. (Source: “YUM! Staying the Course: China and a Whole Lot More, … 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
With the market hitting all-time highs, many investors are wondering how investor sentiment can be so positive when job creation is still not as strong as it should be. This divergence between the financial markets and the real economy cannot last forever.
Investor sentiment has been propped up by the Federal Reserve, which is trying to prime and ignite the U.S. economy. While job creation is certainly better now than it was a few years ago, there is still much more work that needs to be accomplished.
One very visible sign that the economy is not running at 100% capacity was the recently released retail sales data. For March, retail sales decreased by 0.4%, although this did follow a very strong February that showed a one-percent gain. A survey of 85 economists by Bloomberg had a median forecast of zero (unchanged) from March. (Source: Kowalski, A., “Retail Sales in U.S. Declined by Most in Nine Months,” Bloomberg, April 12, 2013.)
Job creation obviously plays a very important role when it comes to retail sales. And remember that like most developed nations, a vast majority of the U.S. economy is based on consumer spending.
In this case, investor sentiment might have become too bullish on retail-oriented stocks. If job creation does not accelerate, we could see a further impact on discretionary spending, which would break down investor sentiment throughout this year.
However, this recent retail sales data might have been a blip, as the trend is still fairly strong. Remember that one data point does not make a trend. Following stronger-than-expected data earlier in the year, a pullback was expected due … Read More
Central banks around the world have opened the floodgates with massive levels of quantitative easing in an effort to try to stimulate their respective economies. Turning on the quantitative easing tap is easy; putting the genie back in the bottle will be extremely difficult for central banks globally.
I am not alone in sharing this opinion, as the governor of Denmark’s central bank, Lars Rohde, has voiced similar concerns. In a recent interview, Rohde stated, “The risk is we stay in this climate too long and that the carpet bombing of liquidity spurs inflation… How do we exit this without killing whatever nascent recovery there might be at that time?” (Source: Levring, P. and Schwartzkopff, F., “Liquidity Carpet Bombs Fueling Asset Bubbles, Rohde Says,” Bloomberg, April 8, 2013.)
While central banks around the world are using quantitative easing in an effort to revive the global economy, the long-term consequences, as I’ve mentioned before, could prove to be extremely costly. I certainly welcome the honesty that Denmark’s central bank’s governor is displaying in voicing his concerns about how all of this quantitative easing might have serious long-term risks.
With Japan just now unveiling a massive new quantitative easing program in addition to the Federal Reserve’s asset purchase program, the floodgates continue to be wide open. However, central banks around the world have embarked on an aggressive quantitative easing policy since the great recession began, yet little has changed in terms of global unemployment.
Many nations around the world still suffer from extremely high levels of unemployment. It appears that quantitative easing did have an impact in certain asset prices, namely stocks … Read More
I think maybe it’s time to start putting your money in the piggy bank to avoid any major investor mistakes.
With the Dow and the S&P 500 at record highs, I’m trying to find reasons to want to buy in this market. However, I’m finding it difficult to even want to buy, as I still feel a stock market correction is on the way.
I’m sorry, but I can’t tell you when this will happen or by how much. All I know is that you need to be careful to avoid possible investor mistakes.
We have the first-quarter earnings season that started on Monday, and if you believe the early estimates, there will not be many happy traders and investors out there.
FactSet estimates earnings will contract by 0.7% in the first quarter, followed by an overly optimistic second half, predicting an explosive earnings rally of 10.1% and 15.6% for the third and fourth quarters, respectively. I’m not sure why FactSet is this giddy, but in my view, for these growth metrics to emerge, all of the stars will have to align.
I’m still not convinced corporate America is set for another growth spurt. The Federal Reserve knows this. Based on the recent non-farm payrolls reading showing a dismal 88,000 new jobs, I just can’t comprehend how the country is set to achieve revenue growth.
I may sound like a downer, but I consider myself more of a realist who wants to avoid investor mistakes.
And Main Street has also appeared to have forgotten the debt, while the government and Congress are still battling it out to come up with … Read More
The stock market finally did the right thing last Friday after the disastrous non-farm jobs market reading. Now there are some who suggest the extremely poor jobs market reading forces the Federal Reserve to maintain its controversial bond-buying program and maintain record-low interest rates, driving the flow of easy money—but the jobs market numbers were horrendous. I sure wouldn’t be buying jobs-related stocks at this time.
A mere 88,000 new jobs were created in March, according to the United States Department of Labor. (Source: “Economic News Release: Employment Situation Summary,” Bureau of Labor Statistics web site, April 5, 2013.) Briefing.com had estimated the country would generate 185,000 new jobs in March, so we were short by nearly 100,000 jobs.
This is not something to push aside. In February, an upwardly revised 268,000 jobs were created, some 180,000 more than in March. You don’t have to be an economist to figure out something is wrong with the jobs market picture, but then you would realize this, as I have been bearish towards America’s jobs market despite the optimism that was surfacing.
The 88,000 new jobs were so bad that it was well below the monthly average of 169,000 over the past 12 months, based on data from the Bureau of Labor Statistics.
The unemployment rate edged lower to 7.6%—but you can ignore this, as more workers decided to stop looking for work, which was the reason for the decline.
The Department of Labor says there are 11.7 million unemployed, but readers of Investment Contrarians know that this number is not realistic, but erroneous. In reality, there are likely over 20 million … Read More
It’s almost that time again, corporate earnings season. Starting next week, American firms begin reporting their corporate earnings for the first quarter of 2013. Considering how high the S&P 500 is, many analysts and investors will be closely watching the results.
According to estimates from Bloomberg, earnings for the S&P 500 firms are expected to drop by 1.9% for the first quarter. This represents the first decrease in corporate earnings since 2009. (Source: Rupp, L. and Gammeltoft, N., “U.S. Stocks Fall as Energy, Financials Tumble on Economy,” Bloomberg, April 3, 2013.)
We’ve seen a decrease in estimates for earnings just over the last couple of months. In January, according to Bloomberg, the average corporate earnings estimate by analysts for S&P 500 companies was a growth of 1.2% for the first quarter. This follows the fourth quarter of 2012, in which corporate earnings for these companies grew by eight percent.
According to FactSet Research Systems Inc., so far for the first quarter 2013, 86 S&P 500 firms have issued negative earnings guidance, while 24 have issued positive guidance. (Source: “Earnings Insight,” FactSet Research System, Inc. web site, March 28, 2013.)
With one-year forward earnings estimates at $114.08 for the S&P 500, this makes the forward price-to-earnings (P/E) ratio 13.7. This certainly doesn’t make the market expensive, but it’s not cheap either. To put this in context, historically, the trailing P/E ratio is usually in the range of 10 to 25, with certain periods both below and far above this range.
One sector to watch out for is technology, which according to FactSet is predicted to have corporate earnings drop by 3.7% … Read More
The impact of the Federal Reserve’s low interest rates and easy monetary policy can be seen everywhere. The housing sector is seeing another boom thanks to the Federal Reserve. So is the retail sector and consumer spending, in spite of the fact that jobs growth is not at pre-recession levels. The Dow and the S&P 500 also achieved more records on Tuesday. Again, the stock market wealth and all of the 300,000 or so newly minted millionaires have the Federal Reserve to thank.
On Tuesday, the automobile sector joined in on the fun, as easy money and cheap financing rates for new vehicles helped to drive up sales to the highest levels since 2007.
At Ford Motor Company (NYSE/F), sales increased six percent to 236,160 vehicles sold in March, while at General Motors Company (NYSE/GM), sales jumped 6.4% to 245,950 in March.
You can get a 60-month financing term for a new vehicle for as little as 2.24% at the Bank of America Corporation (NYSE/BAC) and 2.69% at Capital One Financial Corporation (NYSE/COF). (Source: “Auto Loan Rates,” My Bank Tracker web site, last accessed April 2, 2013.) The average 60-month rate is around 4.12%, according to Bankrate.com, down from 4.52% a year ago.
You can also thank President Obama for helping to save the auto sector, as the move is apparently paying dividends.
While the renewed spending across America is good for the economic recovery, you kind of have to wonder about the ramifications down the road, when interest rates begin to ratchet higher.
Some members of the Federal Reserve are already beginning to voice their opinion to start reducing … Read More
It’s that time again. On Monday, aluminum maker Alcoa Inc. (NYSE/AA) will once again grace us with its presence, as the bellwether gets set to tell how the global economy is feeling when it gets the first-quarter earnings season going. The company has long been a staple for the earnings season, as aluminum is used in numerous industrial applications globally and represents a decent barometer on the condition of the global economy. From automobiles to aircraft, packaging to building, and construction to consumer electronics, a strong report from Alcoa this earnings season will keep the current rally going.
Yet a few weeks ago, there were some early warning signs. Bellwether shipping company FedEx Corporation (NYSE/FDX) and farm equipment seller Caterpillar Inc. (NYSE/CAT), both considered to be barometers of the global economy, suggested some global stalling.
The first-quarter earnings season is expected to see earnings fall 0.7%, but growth is estimated to return to 10.3% in the third-quarter earnings season and 15.6% for the fourth-quarter earnings season; clearly there are some optimistic estimates, according to FactSet. (Source: “Earnings Insight,” FactSet Research Systems Inc. web site, March 22, 2013, last accessed April 2, 2013.) The contraction in the first-quarter earnings season is not a big deal, but the optimistic growth expectations going forward appear to be somewhat too optimistic and could result in a market letdown.
According to FactSet, about 84 S&P 500 companies have warned of lower-than-expected earnings, versus 24 companies that provided positive guidance.
The sectors issuing the worst forecasts include materials, health care, and consumer staples, so you may want to stay away from these sectors.
The top-performing earnings … 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 dangerous situations is when an investor attains a false sense of confidence. With the Federal Reserve enacting such an aggressive monetary policy stance, this has led to reduced levels of volatility and an uncanny calm in the financial markets.
Because the Federal Reserve has stepped into the financial markets with such a large level of support through their monetary policy program, this has led to bond prices that remain elevated and yields that are at very low levels. Not much has occurred over the past few years in terms of shocks to the system.
The danger occurs when investors believe this situation will remain in place forever. Nothing lasts forever and one should always prepare for the future.
So far, the net result from the monetary policy action by the Federal Reserve has been higher home prices, an increase in car sales, higher asset prices in general, such as stocks, and a general calm in the financial system.
What happens when the Federal Reserve starts to reduce its monetary policy stance? I think it will hit many sectors, but it will especially affect the bond market.
The President of the Federal Reserve Bank of New York, William Dudley, recently stated that the accommodative monetary policy stance needs to remain for the time being, due to continued weakness in employment growth. However, he did add that the Federal Reserve should begin adjusting monetary policy as the economy improves. (Source: Zumbrun, J., “Dudley Sees ‘Very Accommodative’ Policy on Weak Job Market,” Bloomberg, March 25, 2013.)
The U.S. economy still has not employed all those who lost their jobs … Read More
One of the most often stated arguments for the current aggressive monetary stance by the Federal Reserve has been that if asset prices can begin to recover, this will help the overall economy.
With the spectacular rise in the stock market over the past couple of years, it would be natural to think that many Americans have seen an increase in their wealth, leading to an increase in corporate earnings for companies that cater to people who might be investors.
The jewelry market sector is a good indication of this sentiment for clients who might have seen their wealth increase through asset appreciation. However, corporate earnings in this market sector do not appear to follow this logic.
Tiffany & Co. (NYSE/TIF) recently came out with its corporate earnings, which revealed some interesting information regarding the jewelry market sector.
For the Americas, total sales rose only two percent, with its flagship New York store seeing a three percent drop in sales. The New York store for Tiffany makes up approximately eight percent of the company’s total business. Tiffany’s stores in Japan, another country that has seen a recent rise in the stock market due to an aggressive monetary policy stance, also witnessed sales declining by six percent. (Source: Warner, M. and Talley, K., “Tiffany Projects a Rough Start but a Brighter Finish for Its Year,” Wall Street Journal, March 24, 2013.)
While it is true that Tiffany’s Asia-Pacific division did well, as sales rose 13%, the real question is: if this recent rise in the stock market in America, which has been far larger than many had predicted, is failing to … Read More
As the S&P 500 continues marching higher, all eyes will be on corporate earnings for the next quarter and the rest of the fiscal year. While much of the move in the S&P 500 can be related to the Federal Reserve’s easy monetary stance, ultimately, corporate earnings need to rise to justify current price levels.
One company that is quite involved in not only the American economy but also the global economy is FedEx Corporation (NYSE/FDX). The latest corporate earnings report by FedEx indicates that perhaps the underlying economy is not as strong as many people believe.
FedEx reported a 31% decrease in corporate earnings for the third quarter. It is interesting to note that international export volume did increase during the quarter by four percent; however, a large number of shippers moved away from priority services to cheaper options. (Source: Morris, B. and Sechler, B., “FedEx Customers Like Slower and Cheaper,” Wall Street Journal, March 20, 2013.)
While revenues did increase, the hit to corporate earnings is an indication that other companies don’t see a large amount of end-user demand building up. The reason I say this is because if you were a business and had a large number of clients, you would be willing to pay for priority shipping to ensure the sale. However, with a growing number of businesses choosing the cheaper options, this tells me that demand is not as strong as many believe.
FedEx is a company that deals with many of the S&P 500 firms, and this could be an early sign that corporate earnings might be weaker than expected for the next quarter…. Read More
On the surface, the Federal Reserve’s objective is to make sure America doesn’t fall into ruins. Following an aggressive strategy of monetary easing, the end result is interest rates at nearly zero percent and an endless flow of easy money. As I have already stated many times in these pages, the Federal Reserve has created an artificial economy.
Yet, if you think about it, the Federal Reserve’s push for low interest rates has helped the economic recovery—but it has also made life difficult for many Americans. The Federal Reserve’s low finance rates tend to make consumers buy more, enticed by the low carrying charges. This means more buying in homes, furniture, cars, clothes, or whatever goods and services that can be financed at cheap rates. But therein lies the problem. What happens when the Federal Reserve begins to raise interest rates? It’s going to get ugly.
There will be massive debt loads that will be subject to higher carrying charges and greater hardships for many consumers as wages for many continue to be flat.
And with the low interest rates due to the Federal Reserve, people are reluctant to save. Making less than one percent at the bank is not exactly an incentive to deposit money. In my last article, I discussed this issue of low savings. According to the Employee Benefit Research Institute (EBRI), a staggering 57% of workers surveyed said they had less than $25,000 in combined household savings and investments, excluding their homes. (Source: Greene, K. and Monga, V., “Workers Saving Too Little To Retire,” Wall Street Journal, March 19, 2013.) The problem is that the low … 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
The Federal Reserve is intent on keeping this Fed-induced stock market rally intact for perhaps another few years.
At the Federal Reserve monthly meeting this past Wednesday, the Federal Reserve reconfirmed its program of maintaining near-zero interest rates and its $85.0 billion monthly bond-buying strategy. As I recently discussed, the environment of low rates will offer little choice for investors who have to weigh low-yielding fixed-income investments against stocks. In other words, the equities market will continue to be driven, at least in part, by the cheap money. This will be great for the people who have the funds, but it will be horrific for those with lower income and who may be dependent on income from their investments. But for the government it’s great news, especially when it’s carrying so much debt—well, the government can thank the Federal Reserve.
Faced with the uncertainties in the jobs market and job creation, the Federal Reserve suggested it would maintain its record-low interest rates until the country’s unemployment rate falls to 6.5%. The problem is that the Federal Reserve predicts this will not occur until sometime in 2015, so that’s another two years of easy money and the building up of massive national debt. Remember what I said about the sequestration cuts and how they are well below the interest paid on the debt? Imagine the payments when interest rates ratchet higher! It’s not going to be pretty. The Federal Reserve has created this situation, which could inevitably blow up.
In reality, achieving an unemployment rate of 6.5% may not happen until after 2015, based on current job generation. According to the … Read More
As the rebound in home prices continues, many people are trying to determine what the best investment strategy is at this point in time.
Let’s take a look at what has happened and what is most likely to occur in the future for home prices to help create a long-term investment strategy.
At the end of 2012, due to the increase in home prices across the nation, 1.7 million homeowners, who were underwater (meaning their mortgage was worth more than the value of their homes) a year ago, had positive equity, according to CoreLogic. (Source: Gopal, P., “U.S. ‘Underwater’ Homeowners Regain Equity as Prices Rise,” Bloomberg, March 19, 2013.)
The rise in home prices continues, as January saw a 9.7% increase over year-ago levels. According to CoreLogic, if home prices rise by five percent more, an additional 1.8 million homes will return to positive equity.
Clearly, there is no doubt that the proper investment strategy over the past year has been to gain exposure to the real estate market, as home prices have increased substantially.
Part of the rise in home prices is due to institutional investors who also have foreseen this investment strategy and have set out to purchase thousands of homes to convert into rental units. Because of the low yields on government bonds, many institutional investors are attracted to the high margins from renting units out as an investment strategy.
As I’ve mentioned in these pages several times before and when the stock was trading much lower, The Blackstone Group L.P. (NYSE/BX) is a great company that has aggressively bought in excess of 20,000 single-family homes and … Read More
One of the biggest concerns I have regarding the current monetary policy program implemented by the Federal Reserve is the cost that will need to be paid once the program ends.
While the Federal Reserve believes it can bring monetary policy back to normal levels without severe adjustments in the market, I don’t believe this to be the case.
Don’t forget that when interest rates rise, bond prices decline. Investors clamoring for any yield will suffer a massive decline in the price of the asset, all in the hunt for that small yield. As an example, in 1994, when the Federal Reserve increased interest rates, the price of the 30-year bond declined by 24% in one year.
The hunt for yield is so strong due to the aggressive monetary policy program by the Federal Reserve and investors are so worried about the possibilities of inflation that Treasury Inflation Protected Securities (TIPS), which adjust with the inflation rate, have been in such high demand that they now offer a negative yield.
According to the Lipper unit of Thomson Reuters Corporation (NYSE/TRI), for the last week of February, there was a record amount of cash moving into mutual funds that invest in floating-rate loans. (Source: Wirz, M., “Preparing for day when rates rise,” Wall Street Journal, March 10, 2013.)
The aggressive monetary policy program by the Federal Reserve is creating distortions in the market. The real worry is when the monetary policy program begins to tighten, shifting away from the current easy money policies.
With the Federal Reserve’s meeting scheduled this week, it’s interesting to note that a survey by the Wall … Read More
The market appears to have another bull leg, with the Dow closing higher in 10 straight sessions, setting multiple record-highs in the process.
With the advance, there are now questions regarding the sustainability with arguments on both sides. Even former Federal Reserve Chairman Alan Greenspan went on CNBC and suggested the stock market did not show “irrational exuberance,” saying stocks were cheap. (Source: Belvedere, M.J., “Greenspan: No ‘Irrational Exuberance’ in Stocks Now,” CNBC, March 15, 2013.) There have been others also supporting the bull case, yet some pundits have also come out and suggested the market is set for a downfall.
While I’m encouraged by the recent rally to multiyear highs, I believe the rapid pace of the advance is not sustainable and stocks are priming for a setback, but I’m not sure when or by how much. I do believe 2013 will be positive for stocks, but at this time, you also need to be aware of the risk and vulnerability on the charts, especially with the S&P 500.
So while the global economy is improving, the catalyst for the upward move in stocks has largely been the easy monetary policy worldwide that has resulted in a low interest rate environment and the search for alternative investments to low-yielding bonds. Without the easy money, I highly doubt stocks could have risen at such a rapid pace.
At this time, you need to think about a viable investment strategy in case stocks falter.
One investment strategy would be to take some profits off the table, but then you may miss out on a potential stock market rally.
You can buy … Read More
When it comes to long-term investing, one factor that needs to be considered is that the dividend yield can provide a large portion of the total return. While everyone likes to pick the highflier that will move up a tremendous amount, the truth is that having a portfolio of stocks that continually increase their dividend yield can help increase total returns of a portfolio.
It is expected that for 2013, S&P 500 companies will pay out at least $300 billion in dividends. This is an even higher amount than the $282 billion paid in dividends for 2012. (Source: Demos, T., Russolillo, S., and Jarzemsky, M., “Firms send record cash back to investors,” Wall Street Journal, March 7, 2013.)
Long-term investing that incorporates companies issuing a stable and increasing dividend yield over time can help mitigate the gyrations of the market.
Not only are corporations flush with cash and looking to pay an attractive dividend yield as compared to U.S. Treasuries, but companies are also buying back record levels of shares.
According to Birinyi Associates Inc., in February, corporations announced a total of $117.8 billion in share buybacks, the highest monthly total since 1985.
Generally speaking, both share buybacks and issuing a dividend yield are positive for long-term investing. However, I do worry that companies are buying back shares at levels that are elevated.
I think it would be far more beneficial for long-term investing if corporations had a flexible approach regarding paying back cash. Meaning, when the stock price declines, corporations should then accelerate share buybacks, and when their share prices are up significantly, corporations should increase their dividend yields…. Read More
The more I look at the size of the national debt, the more I get squeamish. With the national debt at $16.7 trillion and growing, something needs to be done, as the Federal Reserve continues to print money, creating the artificial economy that is making people think America is faring well and forgetting about the national debt.
The sequestration program will help, but will it hold as the two parties continue to argue about where the cuts should be from and alternative revenue sources? Budget cuts due to the sequestration are already at $17.2 billion and running (source: U.S. Debt Clock web site, last accessed March 14, 2013), but as I have said on numerous occasions, $85.0 billion a year will likely do very little to tackle the mounting national debt. Just the interest on the national debt is already around $223 billion, so the national debt will continue to expand in spite of the sequestration cuts. I wonder if the government gets it. You have $17.2 billion in cuts as of March 14, but $223 billion in interest costs. Something just doesn’t add up here.
The U.S. national debt as a percentage of the country’s gross domestic product (GDP) stood at 102.9% in 2011. (Source: “List of Countries by Public Debt,” Wikipedia, last accessed March 15, 2013.) This was just below the massive 208.2% in Japan and the 160.8% in Greece, according to the International Monetary Fund (IMF).
Translation: America is in a financial mess, and it will not be easy to get out of it.
And despite the national debt burden, the Federal Reserve has its hands tied. … Read More
The Federal Reserve may be responsible for the biggest financial meltdown yet to come. In fact, this meltdown could be even bigger than the subprime mortgage crisis in 2008.
Let me explain. We all know the Federal Reserve has created an artificial economy that has been built on the availability of easy access to cheap money due to near-zero interest rates. There is no argument here. Via its aggressive quantitative easing programs, the Federal Reserve has produced an economy that is dependent on cheap capital.
Some would argue the Federal Reserve didn’t have a choice; if they didn’t introduce monetary policy, the housing market and banking system may have collapsed. I agree to that extent, but with the economy now in recovery, you kind of wonder why the Federal Reserve continues to allow the flow of easy money.
Recently at its January Federal Open Market Committee (FOMC) meeting, the Federal Reserve suggested that it would have to review the possible stoppage or slowing of its $85.0 billion in monthly bond purchases. The market reacted by selling stocks. Federal Reserve Chairman Ben Bernanke then came out and said that the central bank was committed to its monthly bond buying as long as the economy and employment remain fragile. So which is it? The Federal Reserve needs to really think about reining in its easy monetary policy and reducing the amount of the M2 (all money in circulation, plus savings deposits, time-related deposits, and market-money funds) money supply in the system.
Here’s the dilemma:
The climate of historically low interest rates has driven a false sense of comfort. Consumers are buying more … 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
This won’t be the first time I’ve stated my opinion that the current Federal Reserve monetary policy is not only becoming greatly ineffective, but also dangerous to your investments.
And now, there are growing voices joining this cautious call. The surprising fact is that even the members of the Federal Reserve are now voicing concerns of the dangers inherent in the central bank’s current monetary policy program.
Charles Plosser, the current Federal Reserve Bank of Philadelphia President, stated in a speech that the Federal Reserve’s asset repurchase program needs to be reduced and eliminated by the end of 2013. His reasoning, like mine, is that the costs outweigh the benefits.
The most interesting statement by Fed President Plosser was, “…monetary policy is posing risks to the economy in terms of financial stability, market functioning and price stability.” (Source: Kearns, J. and Gage, C.S., “Plosser says Fed should taper QE as costs exceed benefits,” Bloomberg, March 6, 2013.)
When I think of the massive amount of money that the Federal Reserve has pumped into the U.S. economy, it is shocking that the Federal Reserve’s balance sheet is in excess of $3.0 trillion and yet the U.S. economy grew just 0.1% in the fourth quarter of 2012.
While cuts in the defense budget certainly explain a huge portion of the weak quarter, it is clear that the monetary policy program by the Federal Reserve has become ineffective. While there may be marginal improvements in certain sectors, the costs that I’ve been discussing previously, and which Plosser is now elucidating, will be very severe.
The scariest part of the Federal Reserve’s monetary policy … Read More
The latest monthly employment data had a positive headline; a stronger than expected job creation number. However, looking at the core information, there remain significant concerns regarding the U.S. economic recovery and job creation specifically.
For February, job creation for non-farm related payrolls totaled 236,000. This number was far higher than expected, giving a boost to the stock market. (Source: “Employment situation summary,” Bureau of Labor Statistics, March 8, 2013, accessed March 8, 2013.)
One might tend to think the economic recovery is going full steam ahead. I would urge caution, however.
To begin with, job creation data from the Bureau of Labor Statistics is notorious for large revisions. This latest report shows just how volatile this job creation data really is.
The Bureau of Labor Statistics has revised job creation data for January from 157,000, down to only 119,000. That is a huge revision in percentage terms, creating difficulties when calculating whether or not an economic recovery is occurring.
My biggest worry for a sustained economic recovery is the continued decline in the participation rate. This is the number of people who are active in the employment market. People who have given up looking for work drop out of this data, which is why this level continues to decline.
The current seasonally adjusted participation rate of working age people is 63.5%. This is the lowest level since September 1981. (Source: “Payrolls Surge as U.S. Jobless Rate Falls to Five-Year Low,” Bloomberg, March 8, 2013, accessed March 8, 2013.)
This means that a huge amount of people have given up looking for work and are not active participants in the … Read More
The media is harping on about how the U.S. is well on its way to recovery. Well, I don’t agree—the country’s economy is slowing. In the fourth quarter, gross domestic product (GDP) growth based on the second estimate expanded at 0.1%; this is above the -0.1% reading in the first estimate, but nonetheless, it’s below consensus, which estimated the economy would grow 0.5%. I’m not sure how the 0.5% growth was arrived at, but the concerns of the fiscal cliff in the fourth quarter clearly made consumers think twice about spending. Of course, the government also saw its spending curtailed due to the debt limit and pending sequester.
I’m not going to spin a good story for you to hear; I truly feel the country is in trouble. The sequester deadline last Friday came and went. The two parties have yet to iron out a strategy to cut the deficit, so the country will face a daunting $85.0 billion in annual cuts for a total of $1.2 trillion over the next decade. Of course, this will have a negative impact on economic recovery in America. The cuts will be focused on the defense sector and Medicare, so as an investor, I would stay away from these sectors. If the jobs market also stalls, I would be careful when looking at housing and retail stocks.
The nonpartisan Congressional Budget Office (CBO) estimates the automatic cuts to spending will reduce GDP growth by 0.6% this year and will result in the loss of 750,000 jobs. And while this is not what you want to see during these times, the sequestration is needed; … Read More
The day has arrived. Today will see the start of the much-anticipated $1.2-trillion decade-long budget cuts under the Sequestration Transparency Act of 2012 (394 pages if you want to read it), which represents America’s own austerity measures to cut the deficit. The proposed cuts will entail about $85.0 billion in annual budget cuts; and while it’s needed, given the runaway national debt of over $16.6 trillion, it will have a widespread impact on the state of the country and the economy, including program cuts, job losses, and chaos.
The cuts will have a negative impact on the country’s fragile economic recovery, but it’s something that is required; otherwise, it’s more of the same in the way of money printing and pumping up the national debt just to keep afloat and avoid a crash. If not for the significant fiscal and monetary policies that focused on pumping liquidity into the economy, I’m pretty sure the country would have fallen into a depression.
The nonpartisan Congressional Budget Office (CBO) estimates the automatic cuts to spending will reduce gross domestic product (GDP) growth by 0.6% this year and will result in the loss of 750,000 jobs. And while this is not what you want to see during these difficult economic times, the sequestration is needed; without it, the ballooning national debt will continue to spiral out of control, hurting future generations.
While I doubt the budgetary cuts will drive the country into another recession, I do feel there will be negative impacts across the board.
The question is: where will some of the budget cuts be made?
Defense will lose a big chunk … Read More
Federal Reserve Chairman Ben Bernanke testified in front of Congress and faced a barrage of questions and criticisms regarding the central bank’s monetary policy initiative.
There are a growing number of critics voicing their concerns over the current monetary policy path set forth by the Federal Reserve. These critics aren’t only independent analysts such as myself, (I have been writing articles on the topic for some time now, including the article “Current Monetary Policy Unsustainable”), but economists who have worked closely with the Federal Reserve in the past.
The Federal Reserve chairman stated in his testimony to Congress, “Keeping long-term interest rates low has helped spark a recovery in the housing market and has led to increased sales and production of automobiles and other durable goods.” (Source: “Bernanke Affirms Bond Buying,” Wall Street Journal, February 26, 2013.)
Is he correct? Over the short term, the answer is yes, since the Federal Reserve has begun its aggressive monetary policy plan, home prices have gone up and car sales are strong once again. The real question is: what are the costs of accumulating $2.8 trillion of Treasury debt and mortgage-backed securities?
The real issue I have is the belief in fixing a burst bubble with yet another inflated stimulus plan. The previous high level of home prices was artificial and not sustainable. The resulting housing crash was inevitable, as all of the factors that went into creating the bubble were not structurally sound.
With the Federal Reserve pumping out monetary policy at full throttle, home prices are sure to move upward over the short term, but the long-term implications can be quite … Read More
When it comes to long-term investing, many focus solely on revenues and earnings. While clearly these are extremely important fundamentals when conducting a stock analysis, one rarely mentioned but critical variable is pension liabilities.
Pension liabilities are, by definition, crucial to long-term investing, as costs are spread out over many years. Many investors conduct a stock analysis on a very short-term basis—quarter to quarter. Successful long-term investing means conducting a stock analysis on the next five, 10, even 15 years.
Pension liabilities are a huge issue for many companies. A pension liability is the difference between the amounts of funds the company has in reserves versus the expected payments to retirees. At the end of 2012, American businesses had an estimated combined pension deficit of $347 billion, according to JPMorgan Asset Management. (Source: Monga, V., “Why the corporate pension gap is soaring,” Wall Street Journal, February 25, 2013.)
JPMorgan estimates that, on average, companies have promised $100.00 to retirees, yet they only have $81.00 in reserves. That is a massive gap that needs to be taken into account when conducting a stock analysis for long-term investing.
This is an unintended side effect of the low interest rate environment created by the Federal Reserve. While companies can take advantage of low interest rates when borrowing, they can also end up having a shortfall in the long-term returns on their investments.
Companies are attempting to bridge the gap by adding funds to make up the shortfall. If interest rates stay low for a number of years, as expected, a stock analysis must take into account the increased provisions of cash used to … Read More
Recently in these pages, I talked about how the government, the Treasury, and the Federal Reserve were creating an artificial economy that was supported by cheap money and low interest rates.
One of the major benefactors of this cheap money was the housing sector, which is now sizzling hot. The median price of an existing home in the U.S. was $173,600 in January, up 12.3% from an average of $154,600 a year earlier. (Source: United States Census Bureau web site, last accessed February 27, 2013.)
Driving the renewed buying in the housing sector has been the environment of near-zero interest rates. The Federal Reserve has been injecting additional liquidity into the economy and mortgage market via its $85.0 billion in monthly bond purchases. The problem is that the low interest rates and easy money have driven the excess buying of homes and investment properties, as speculators jump into the housing sector, looking for deals and driving up home prices.
My concern is that the buying may be creating another potential bubble in the housing sector. You may not believe it, but I view this as a possibility. Housing starts in January showed some stalling. And now, with the sequestration budgetary cut set to take effect tomorrow, the automatic $85.0 billion in annual budget cuts (the planned sequester will total $1.2 trillion over the next decade) could have a widespread impact on the country and the economy, including program cuts, job losses, and economic chaos. The Congressional Budget Office (CBO) has warned that the U.S. economy could contract by 1.3% in the first half of this year if the sequester is … Read More
The current Federal Reserve monetary policy initiative is truly historic in proportion. Not only has the Federal Reserve held interest rates at extremely low levels for an extended period of time, it has also embarked on an asset-purchasing program in the amount of $85.0 billion per month.
Clearly, this type of monetary policy program is unsustainable. While many people have been warning of the dangers, an interesting paper that will be presented at the upcoming U.S. Monetary Policy Forum will state similar concerns; however, what’s fascinating is who the authors are.
Amongst the four economists, one is a former Federal Reserve governor, Fredric Mishkin; two are former Federal Reserve economists, David Greenlaw and Peter Hooper; and the fourth author is James Hamilton, an economics professor at the University of California whose work has been used by Federal Reserve Chairman Ben Bernanke to justify certain monetary policy initiatives. (Source: Zumbrun, J., “Economists Warn Fed Risks Losing Control Amid Budget Deficits,” Bloomberg, February 22, 2013.)
These economists certainly have the kind of background, knowledge, and experience that can’t be ignored. Their assertion is that the explosion in the Federal Reserve’s balance sheet, in addition to the unsustainable fiscal policies, could result in a loss of control over the monetary policy system.
With the Congressional Budget Office (CBO) estimating at current projections for revenues and expenses, the government will run budget deficits of approximately $700 billion for the next 10 years. This type of irresponsible management of fiscal policy by Washington is inexcusable.
While the Federal Reserve is attempting to reduce the unemployment rate through monetary policy, Washington’s inability to get its fiscal … Read More
The money printing presses appear to be in jeopardy. The amount of liquidity that has been pumped into the U.S. economy and other global financial systems has been superlative; and as I’ve said before, it would only be a matter of time before the massive national debt levels accumulated by the governments in the U.S. and Europe would wreak havoc with the economic recovery.
Yet, it may have finally clicked for the Federal Reserve, as comments made Wednesday questioned the central bank’s $85.0 billion in monthly bond purchases and suggested that the buying be reduced or stopped to avoid facing losses. Could you imagine losses for an already cash-strapped central bank, given the national debt?
What has been happening is the Fed’s bond-buying provided the mechanism to pump hundreds of billions of dollars of liquidity into the economy; it was meant to keep it going and avoid a worsening of the recession, but it added to the national debt. Not isolated to the U.S., other central banks around the world have been pumping cash into the fragile global economy. In the financially distressed eurozone, the European Central Bank (ECB) bought bad debt and provided easy monetary liquidity, in order to avoid a financial Armageddon. But this added to the national debt of the countries. Yet here we are: Greece is in shambles; Spain, Portugal, and Italy are broke; and the eurozone’s two powerhouses, Germany and France, are struggling with their own growth issues.
The problem is that the super loose monetary easing in the U.S. created an artificial economy that has been supported by the free-flow printing of money and … Read More
The major bank stocks all closed off 2012 near their respective 52-week highs; and they’ve started 2013 with a bang. Driven by an improving banking industry that is assuming less risky businesses while shoring up their balance sheets and producing stronger units, the KBW Bank Index is up eight percent, outperforming both the S&P 500 and the Dow Jones.
The subprime credit crisis that surfaced in 2008 and drove the U.S. and the global economy into a recession was not what we wanted to see; but in some sort of twisted way, the events have led to an industry that has restructured the way banks do business—more specifically, the amount of risk that is assumed by a bank via sophisticated strategies. So far, this shift in structure, coined the “Volcker Rule” because it was set in place by economist and ex-Federal Reserve Chairman Paul Volcker, appears to be capping the number of speculative trades made by the banks, which is good.
Banks have altered the way they do business, and they’ve shown positive strides along the way.
In my view, the operating results have been fairly good, and this indicates that the banks will be able to grow their business volume across the board during the U.S. economic recovery.
Moreover, with the housing market and the U.S. economy continuing to improve, I feel bank stocks will also see some gains.
Most of the big banks have paid back part or all of their government loans. Overall, bank stocks are showing promise and delivering better results.
While risk surrounding the bank stocks has declined, there are still issues that could hamper … Read More
The national debt ceiling debate was initially expected to be resolved by January 1; but when that date came around, it was extended to May 18, as the two sides continue to debate the budgetary cuts, the deficit, and the increase in the debt ceiling above the $16.4-trillion legal limit.
While something needs to be done, President Obama and Congress must also understand that major cuts in fiscal spending to lower the deficit, at this point, could hurt the current economic recovery, which has been showing encouraging signs over the past year. The housing market is hot, with rising construction and sales and home prices that are edging higher. The Federal Reserve’s buying of mortgage bonds and the existence of near-zero interest rates together were the catalyst.
The combination of fiscal and monetary policy is clearly helping the economy, so it would be a grave error to cut spending at this critical time. Taxes for those earning over $400,000 have jumped. Those earning less are also seeing some increases in taxes. The end result was a decline in the consumer confidence reading to 58.6 in January, well below the 61.0 estimate by briefing.com and the 66.7 reading in December. The numbers suggest that consumers may become more hesitant in wanting to spend, given the tax increases.
For the government, the current debt limit will be reached soon. Without the extension of the debt ceiling deadline, the government would have run out of money to pay its employees, support programs, and cover other key spending items.
Nobel Prize economist Paul Krugman is not in favor of cutting spending to curtail the … Read More
Many investors in gold bullion have become increasingly worried due to the lack of price appreciation lately. Even though there has been an aggressive monetary policy initiative by the Federal Reserve, gold bullion and mining stocks in the sector have declined.
Obviously, no one can predict the future; it’s impossible to know for sure where gold bullion, or mining stocks in general, will be in the future.
However, there are several things that individual investors can do to enhance their probability of success when it comes to investing in gold bullion mining stocks.
One metric that I watch is the debt level of a company. This doesn’t mean to avoid all mining stocks with high levels of debt; rather, one should only buy these companies at a discount, unless they are growing rapidly. Gold bullion mining stocks with high levels of debt are far more likely to be susceptible to negative shocks.
Because interest rates have been low for some time, gold bullion mining stocks with high debt have been able to get away with relatively low rates of financing. But over the next five years, we are certainly looking at a higher interest rate environment; this is one area of caution for investors.
One way to look at gold bullion mining stocks is in two general categories: low- or no-debt mining stocks and high-debt mining stocks. The companies with a high debt level should not trade at a premium when compared to gold bullion mining stocks with low levels of debt, unless their growth rate is above average.
Here are three stocks that are great examples.
One of the … Read More
One area that worries me most about the current Federal Reserve monetary policy action is the unintended, long-term consequences of the current program. Unintended consequences are the side effects that can sometimes be more harmful in the long run than the short-term benefit of the initial program.
Keeping monetary policy extremely easy in such an unprecedented manner for so long can have serious long-term ramifications.
The most obvious side effect is that, with the greater availability of easy money, funds are flowing into assets, driving up prices. The question is: will investors who are spending money on assets fueled by cheap money end up suffering significant losses down the road?
I am glad to see that some members of the Federal Reserve are beginning to voice their concerns regarding monetary policy. Recently, the Kansas City Federal Reserve President, Esther George, stated, “We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances.” (Source: Torres, C., “Fed Concerned About Overheated Markets Amid Record Bond Buys,” Bloomberg, January 17, 2013.)
One potential worry is that the low interest rate environment resulting from this monetary policy action is causing investors to search for yield in increasingly riskier assets.
One area that has seen a strong increase in demand is speculative-grade bonds, or junk bonds. According to Credit Suisse, an index of over 1,500 junk bonds is now yielding a record-low 5.9%. (Source: Ibid.)
The problem is that when the Federal Reserve begins to tighten monetary policy, many if not all of the investments made over the past couple of years might suffer significant … Read More
As corporate earnings season continues for S&P 500 companies, it is becoming quite evident that revenue growth is lacking across many sectors of the economy. However, we are continuing to see growth in corporate earnings per share.
How is this possible? One method is through share buybacks. S&P 500 corporations, which are generating very high levels of cash, are buying back shares and reducing the number outstanding, which increases the corporate earnings-per-share level.
From April 2011 through October 2012, S&P 500 companies bought back and retired approximately eight billion shares, according to FactSet. This has been a significant driver for corporate earnings over the last two years. (Source: Cheng, J., “Investors See a Way Forward: Buybacks,” Wall Street Journal, January 21, 2013.)
If this level of share buybacks for S&P 500 corporations continues this year, we can expect to see corporate earnings increase by between five percent and 10%, without any organic growth in corporate earnings and flat revenues.
Another driver for S&P 500 share prices will be that the dividend yield will still remain very attractive when compared to U.S. Treasuries.
While revenue growth needs to begin to increase substantially at some point, I think 2013 will be another year in which the combination of a strong dividend yield and modest corporate earnings growth will result in the continuation of investment funds rotating out of the bonds and into equities.
Personally, I think a lot of buybacks are ill timed. While I like to see corporate earnings increase, the problem with many S&P 500 companies is that they tend to buy shares at the wrong time.
When the S&P … Read More