financial crisis
The New Hidden Eurozone Risk
By Sasha Cekerevac for Investment Contrarians | May 16, 2013
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
Why the Eurozone Recession Is Important for America
By George Leong for Investment Contrarians | May 1, 2013
George Soros knows a thing or two about making money from big bets. In 1992, Soros made a $10.00 short wager on the British pound and walked away with a billion dollars in profits.
Soros is now convinced Germany needs to rethink its strategy toward the sustainability of the eurozone and, in a draconian manner, believes the country should leave the euro.
Of course, should this happen, the 17-country eurozone would collapse, triggering a massive economic Armageddon and financial crisis in Europe that would ultimately generate chaos for the global economy.
Now, I doubt Germany or France—the two pillars integral to the eurozone—will exit the euro, but the reality is that the situation in the economic zone remains in a financial crisis with little hope of revival.
The problem is that the eurozone is firmly in a financial crisis and recession, trying to find its way out.
Greece, Portugal, Spain, and Italy are a drag on the ability of the eurozone to get out of its financial crisis. The unemployment rate in Greece and Spain is over 25% and worsening.
Italy just formed a new government, but there’s tons of work left for that debt-ridden country before it can exit its own financial crisis that has been building for years.
With all of this bad news, it’s not surprising to see people in the eurozone feeling the despair. According to the European Commission, economic morale in the eurozone remains weak after declining in March and April. (Source: Emmot, R., “Economic mood in euro zone sours again in April,” Reuters, April 29, 2013.)
And it appears that the solution will again … Read More
Why Today’s Weak Durable Goods Numbers Foreshadow Low Confidence
By George Leong for Investment Contrarians | Apr 26, 2013
Consumers appear to be holding back on buying non-essential goods, and this could impact the economic recovery.
The durable goods orders contracted a dismal 5.7% in March, according to the United States Census Bureau, representing the largest decline in seven months—a far cry from the 4.3% rise in February and well below the Briefing.com estimate calling for a four percent decline.
Taking out the volatile transportation portion, durable goods fell 1.4%, versus the Briefing.com estimate of -0.1%, equaling the second straight month of declines.
The durable goods readings have largely been inconsistent, as reflected in the chart below, and suggest the economic recovery may be at risk.
Chart copyright © Lombardi Publishing Corporation, 2013;
Data source: United States Census Bureau, April 25, 2013
When consumers are more confident, they tend to spend more on major purchases in the retail sector, such as homes, vehicles, furniture, appliances, and travel. This will impact the economic recovery, gross domestic product (GDP) growth, and the ability of companies to expand their businesses.
But whether it’s the added taxes or the fragile confidence from the lack of strong jobs growth, the decline in the demand for goods that are deemed non-essential should be a red flag that not everything is proceeding along smoothly, which could affect the economic recovery.
The fact remains that jobs creation is fragile and not expected to ratchet higher until 2014 and 2015, due to the slow economic recovery.
The recent 88,000 jobs created in March was weak, so it will be interesting to see what happens with the April non-farm payrolls reading due next Friday.
Retail sales have also been … Read More
Eurozone Could Collapse Sooner Than Many Think
By George Leong for Investment Contrarians | Apr 12, 2013
The eurozone and the euro are still around, but the more I see what is happening in that region, the more I think something must be done, given the financial crisis.
You have the eurozone in a recession and a financial crisis specifically driven by turmoil in Spain, Italy, Portugal, Greece, Cyprus, and Ireland.
Greece is broke, and it could take decades to recover from its financial crisis. Heck, Greece may have to go and ask for another round of bailout money if the financial crisis in the eurozone holds.
The financial crisis in Cyprus is a red flag that needs to be watched. And despite the small size of Cyprus’ economy, the country is a mess, with no recourse but to seek more bailout funds or risk a default and exit the euro.
The two pillars of the eurozone, Germany and France, are stalling. Germany contracted 0.6% in the fourth quarter and is another negative quarter away from a recession. France is in a similar predicament and will need to wrench its way out of its potential financial crisis.
Even big-time investor George Soros, who knows a thing or two about economies in trouble having made a billion dollars shorting the pound decades ago, is pretty convinced that Germany needs to rethink its strategy and consider leaving the euro to avoid its own financial crisis.
The problem that arises is that Germany is the major reason why the eurozone is still intact, when it maybe should have looked at kicking out Greece and Cyprus.
But as long as Germany is staying in the eurozone, the probability of survival, in … Read More
Danger: Market Sentiment Too Bullish in This Sector?
By Sasha Cekerevac for Investment Contrarians | Apr 11, 2013
One of the most dangerous periods for an investor is when they become too complacent. As the combined view of all investors, market sentiment ends up becoming overly bullish, running far ahead of the fundamentals. This has now occurred in several sectors, but one that investors should be aware of is in bank stocks, especially in Europe.
Bank stocks around the world have risen tremendously, pushed higher by a wave of positive market sentiment. The general consensus is that following the financial crisis over the last few years, the worst is over. I would caution investors that there are still significant hurdles for many global bank stocks.
Recently, the Bank of England stated that many investors are underestimating potential risks. As we all know, the global economy is still weak, yet share prices have soared, including bank stocks. Market sentiment has shifted from massively bearish to extremely positive over the past couple of years.
As the minutes of the Bank of England’s last meeting note, the committee recommended that bank stocks in the U.K. raise an additional $38.0 billion for potential pitfalls related to the euro area as well as their real estate exposure. (Source: Moshinsky, B., “BOE Says Investors May Be Taking ‘Too Rosy’ a View of Stresses,” Bloomberg, April 5, 2013.)
Investors have piled into bank stocks with positive market sentiment on the belief that the worst is over, especially in Europe. Many bank stocks within Europe are closely intertwined with other nations on that continent. As we’ve just seen from the recent Cyprus fiasco, there are still significant pitfalls ahead.
Market sentiment is clearly being pushed upward … Read More
Is the Only Safe Investment Your Piggy Bank?
By George Leong for Investment Contrarians | Apr 10, 2013
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
Commodity Price Cycle Bringing These Two Metals to the Forefront
By Sasha Cekerevac for Investment Contrarians | Apr 8, 2013
The U.S. economy is certainly not running at 100% capacity, but one sector that is operating at levels not seen since before the financial crisis is the automotive industry. In March, automotive sales increased substantially to an annualized rate of 15.3 million vehicles per year, compared to 14.1 million vehicles this time last year. (Source: Bennett, J., “March U.S. New Car Sales Jump,” Wall Street Journal, April 2, 2013.)
American carmakers contributed with substantial increases, including General Motors Company (NYSE/GM), reporting a 6.4% year-over-year increase in March, and Ford Motor Company (NYSE/F), reporting a 5.7% year-over-year increase in March.
Two derivatives of the strong automotive sector are the precious metals platinum and palladium. Generally speaking, platinum is used more for diesel engines, while palladium is used more often in gasoline engines. The increase in gasoline engines should, on the margin, increase demand for palladium versus platinum. With European vehicle sales slow, this should reduce demand for diesel engines.
One mistake many new investors make is investing with an all-or-nothing mentality. For example, an investor might be bullish on all precious metals, irrespective of the fact that certain commodities might be better investments than others in the precious metals sector.
Recently, the Chairman and CEO of Stillwater Mining Company (NYSE/SWC), Francis McAllister, stated that he believes it is highly probable that palladium will increase in price relative to platinum. Currently, palladium trades at approximately 48% of the price of platinum, up from 30% in 2003. McAllister believes palladium will rise to 65% of the value of platinum. (Source: Hill, L., “Stillwater CEO Sees Palladium Outperforming Platinum,” Bloomberg, March 21, 2013, last … Read More
Why Japan’s Aggressive Money Tree Is Disastrous
By George Leong for Investment Contrarians | Apr 8, 2013
The world is going gangbusters, printing money to drive the economies and growth. Yet despite the bailouts in the eurozone and easy monetary policy in Europe, Asia, and the U.S., there’s a sense a financial crisis could surface down the road. China is facing a potential real estate crash that could implode, given the speculative buying and the rise in property values. The reality is that the world—not just America—is extremely busy printing money, especially due to record-low interest rates. The easy money is a pretty good short-term strategy, and it’s much needed—but what a potentially explosive national debt!
And there’s no guarantee all of this easy money will save the eurozone from a deeper recession. In America, the easy money has amounted to a massive national debt that will need to be increased and bankruptcy in many municipalities.
Japan just announced an extremely aggressive monetary policy last Thursday that could see the Bank of Japan pump up its money printing presses and double its government bond holdings within two years. (Source: Ranasinghe, D., “Bank of Japan Unveils Aggressive Monetary Policy,” CNBC, April 4, 2013.) This all sounds so familiar.
I hate to sound repetitive, but the easy money strategy could blow up as interest rates rise.
Japan is a great example of how low interest rates have done very little to help the economy. I’m not saying the United States is in a similar situation, but there’s an eerie resemblance.
The Japanese stock market may be the top-performing market in the world in 2013, but much of the upward push has been driven by government spending and the promise … Read More
Headlines Say America’s Getting Richer—But We Know Otherwise
By George Leong for Investment Contrarians | Mar 28, 2013
Stocks are at their record highs, driven by a soaring stock market rally. The housing market is well off its lows, with sales and home prices edging higher.
The end result is that the overall wealth and optimism in America is higher.
According to the “CNBC All-America Economic Survey,” 33% of Americans felt the price of their homes will ratchet higher, up nine points since the previous survey in November 2012 and the high point since December 2007. The survey in March also suggested 48% of Americans believed it was a good time to invest, given the stock market rally; this number is up from 31% in November and it’s the highest since December 2009. (Source: Liesman, S.,“CNBC, American Dream Is Back; CNBC All-America Economic Survey,”CNBC, March 26, 2013.) So all is good, right?
As I previously commented, the stock market rally has made more people rich. A total of 300,000 newly minted millionaires werecreated from the current multiyear stock market rally, according to Spectrem Group. (Source: Frank, R., “CNBC, US (and Booming Market) Adds 300,000 New Millionaires,” CNBC, March 14, 2013.)
But hold on. The reality is that there continues to be a mass of Americans collecting food stamps, around 48 million, according to USDebtClock.org, and they don’t care about the stock market rally.
While the media’s headlines are commenting on how America is becoming richer, it’s a myth, of course—unless you don’t care about the other 95% of Americans who are just getting by and the bottom rung of this group who are considered America’s poor, making minimum wage.
In my view, the growing disparity between the rich … Read More
If Cyprus Fails, So Will Your Investments
By George Leong for Investment Contrarians | Mar 26, 2013
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
America Today: The Rich Get Richer, the “Working Poor” Become Problematic
By George Leong for Investment Contrarians | Mar 21, 2013
The Dow is at a record high, and there is rejoicing on Wall Street in reaction to the stock market rally. In fact, the stock market rally appears to have made more people rich. A total of 300,000 newly minted millionaires were created from the current multiyear stock market rally, according to Spectrem Group. (Source: Frank, R., “US (and Booming Market) Adds 300,000 New Millionaires,” CNBC, March 19, 2013.) This is great news for the new members of the $1.0-million club (excluding primary residence), but the reality is that there continues to be a mass of Americans collecting food stamps—around 48 million according to USDebtClock.org—and they have not reaped any rewards from the stock market rally.
The headlines commenting on how America is becoming richer are myths; that is, unless you don’t care about the other 95% of Americans who are just getting by and the bottom rung of this group who are considered America’s poor, making minimum wage.
What is also alarming is the low saving rate, which shouldn’t be a surprise, given that income levels have flattened out and declined over the past decade. 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, aside from their homes. (Source: Greene, K. and Monga, V., “Workers Saving Too Little to Retire,” Wall Street Journal, March 19, 2013.) The survey also reported that 28% of respondents expressed no confidence that they would have sufficient money to retire in a comfortable manner. Trust me when I say this group doesn’t care about the stock market … Read More
Fed’s Easy Money to Cause Next Financial Meltdown
By George Leong for Investment Contrarians | Mar 14, 2013
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
Dow at Record Highs, but U.S. Economy Continues to Worsen
By George Leong for Investment Contrarians | Mar 12, 2013
The Dow Jones Industrial Average is firing on all cylinders, trading at a record high. The S&P 500 is also close to its all-time record. Technology and small-cap stocks are blazing along. The amount of new stock market wealth created in the first week of March and in 2013 has been great. Add in the better-than-expected jobs numbers and a decline in the unemployment rate to 7.7%, and you would think that the U.S. economy is back, loaded and ready to go. But we may be closer to a financial crisis than most think.
Here’s the problem: the creation of stock market wealth is heavily weighted with the institutional money and the top one to five percent of the wealthiest Americans. (I use the wider range of the top earners, since you have to be doing fairly well to be in this group.)
There’s an old saying—“Money makes money.” But let me put it another way: making money on $1.0 million is a lot easier than making money on $1,000. Earn two percent on $1.0 million, and you’d have an extra $20,000. Make two percent on $1,000, and you only have $20.00, just enough for a dinner for two at McDonald’s Corporation (NYSE/MCD). All I’m saying is don’t be fooled by the new headlines talking about how well America is doing, as a financial crisis is still possible.
The housing market is booming, but we all know that the rally in prices is partially due to rich investors and institutions buying cheap properties from those who had to sell or be foreclosed on due to a lack of funds to … Read More
Banking Sector Isn’t in a Downturn
By George Leong for Investment Contrarians | Mar 5, 2013
Bank stocks are providing excellent leadership this year. In fact, if it weren’t for the credit crisis that surfaced in 2008, financial institutions, such as banks, credit, and insurance companies may still be playing Russian roulette on their balance sheet as far as risk.
It now appears that bank stocks are cutting down on the amount of risk that they are willing to take on. The Goldman Sachs Group, Inc. (NYSE/GS) is now at a point where the potential loss that can occur from trading is at a seven-year low. The other major Wall Street banks are also seeing a reduction in their risk. (Source: LaCapra, L.T., “Goldman trims risk-taking to lowest level in 7 years,” Reuters, March 1, 2013.)
The major bank stocks all closed 2012 near their respective 52-week highs and have started 2013 with a bang, with the KBW Bank Index up 5.8%, slightly below the comparative return of the S&P 500 and the Dow, but above the NASDAQ. The attraction to the bank stocks has been driven by an improving banking industry that is assuming less risky businesses while shoring up their balance sheets and producing stronger units.
The chart of the Philadelphia Bank Index below shows the upward move of bank stocks from their 2011 bottom. Bank stocks staged a nice rally but retrenched in March to May 2012 on the European bank concerns, and Moody’s Investor Services downgraded the sector. The group has since staged a rally back above the 50- and 200-day moving averages (MAs). But there was some topping on the charts, followed by the recent selling, as indicated by the blue … Read More
What Can You Do with Your Bank Stocks?
By Sasha Cekerevac for Investment Contrarians | Feb 22, 2013
One of the strongest market sectors in the stock market over the past year has been the financial market sector. Bank stocks have been on a tear, moving up massively since the lows in June. Looking at the entire market sector through the Financial Select Sector SPDR (NYSEArca/XLF) exchange-traded fund (ETF), the index is now up almost 36% from the lows in June.
Bank stocks have benefited from several factors. Low Treasury yields make the dividend yields from bank stocks highly attractive; the entire market sector has also reduced its risk profile, while eliminating costs. The end result has been a group of companies that offer significant upside.
However, the hunt for safety by average citizens might hurt bank stocks going forward. The latest data by Credit Suisse Group AG shows that for the top-eight banks, the average loan-to-deposit ratio fell in the fourth quarter 2012 to 84%, compared to 87% during the same time period in 2011. In 2007, the loan-to-deposit ratio was 101%. (Source: Dexheimer, E., “JPMorgan Leads U.S. Banks Lending Least of Deposits in 5 Years,” Bloomberg, February 20, 2013.)
The loan-to-deposit ratio shows how much of the deposits bank stocks have lent out. Bank stocks are having trouble lending due to several reasons. These include a lack of demand as well as an increase in regulations to try and reduce risks.
For investors in the financial market sector, this is a double-edged sword. On the one hand, it is positive that bank stocks are being more selective in who they are doing business with. This means that any loans that have been issued over the past … Read More
How to Get Rich off the Eurozone Recession
By George Leong for Investment Contrarians | Feb 19, 2013
Traders appear to have forgotten the massive economic mess happening across the Atlantic in the eurozone. Remember Greece? The European debt crisis took Greece down with two separate bailouts. It has been so dire for this beautiful country on the Mediterranean Sea that Greece required a second bailout to make the payments on its first emergency loan.
The reality is that the eurozone financial crisis is still around; the eurozone problem is not going away.
Consumer confidence in the eurozone came in at -23.9 in January, which was an improvement over the -26.5 in December, but the region has a long road ahead. (Source: European Commission web site, last accessed February 15, 2013.) The problem with the eurozone is not only tied to the massive debt loans that have impacted Greece, Spain, Ireland, Portugal, and Italy; it’s also tied to the ongoing recession and high unemployment rate.
The eurozone has recorded three straight months of contraction in its economy, contracting 0.6%, or about 2.5% on an annualized basis, in fourth quarter 2012, according to data from Eurostat. What was also a red flag were the economies of the eurozone’s two largest members: Germany, which shrunk by a worse-than-expected 0.6% in the fourth quarter, and France, whose economy contracted by 0.3% in the fourth quarter. My major concern is that the mess in the weak countries is driving down growth and pushing up the unemployment rate in France and Germany, the two pillars holding up the eurozone. Capital Economics suggested France and Germany will face another recession in 2013.
At the same time, a major issue is the region’s super-high unemployment … Read More
Portfolio Protection Against the Collapse of the U.S. Dollar
By John Whitefoot for Investment Contrarians | Feb 12, 2013
When it comes to the state of U.S. politics and the economy, you can’t believe everything you read or hear.
Example 1: In 2003, President George W. Bush famously gave a speech aboard the aircraft carrier USS Abraham Lincoln, during which a banner behind him proclaimed, “Mission Accomplished.” It wasn’t then, and it still isn’t.
Example 2: Who can forget these wise words from former Federal Reserve Chairman Alan Greenspan in 2007: “The worse is over for the U.S. housing market, and there will be no economic spillover effects from the poor housing market.” It wasn’t then, and it still isn’t over.
Example 3: Here’s more dubious wisdom coming from the world of finance. Published in the pages of the Saudi Gazette, a January 28, 2013 article announced, “Global ‘economic crisis over,’ say Davos pundits.” Courtesy of Philly.com, a February 6, 2013 article headline proclaimed, “Financial crisis officially over, proceed into stocks with caution.” Again, it wasn’t then, and it still isn’t.
Why do some think the global crisis is over? Because the stock market is doing well. The Dow Jones index recently rose above 14,000 for the first time since October 2007. And the S&P 500 is trending near its all-time high. So, what more proof do you need? Well, for one, how about looking at those who are not liquid enough to participate in the stock market?
Frankly, I’m not sure how anyone can declare an end to the global economic crisis when the eurozone continues to report record unemployment and a bleak economic outlook. Here in America, the unemployment rate remains stubbornly higher and economic growth projections … Read More
Mining Company Turns Shania Twain into Gold
By John Whitefoot for Investment Contrarians | Feb 7, 2013
Since hitting a low of $253.70 in July 1999, gold prices have surged over 650%, topping $1,921 per ounce in September 2011. Currently trading at more than $1,660 per ounce, gold has logged 13 consecutive years of positive returns. While some economists think gold’s historic run will come to an end, others are not so sure.
The overarching driver of the price of gold will continue to be the global financial crisis, ongoing tensions in the Middle East, weaker currencies, and the potential for faster inflation. As a result, some analysts believe gold will rise above $2,200 an ounce in 2013.
At the other end of the spectrum are those bears who think gold is in for a big correction. Greater-than-expected U.S. growth, a stronger U.S. dollar (in spite of the Fed’s printing presses running overtime), and the end of the crisis era could pull gold down to as low as $1,200 an ounce.
Try telling that to Russia, Brazil, Korea, China, Kazakhstan, Turkey…
To stave off the negative impact of the global crisis, the National Bank of Ukraine raised the percentage of gold in its reserves in 2012 to 7.7% from 4.4% a year ago, reaching 1.1 million troy ounces. (Source: Chanjaroen, C., “Russia, Kazakhstan Expand Gold Reserves as Central Banks Buy,” Bloomberg, January 28, 2013, last accessed February 6, 2013.)
Brazil doubled its gold holdings in two months, buying 17.2 metric tons in October and 14.7 metric tons in November. And in August and September, Iraq increased its gold reserves to 31.1 metric tons from 5.8 metric tons.
The Bank of Korea increased its gold reserves by 20% … Read More
New Cracks Appear in the Eurozone From One Small Source
By Sasha Cekerevac for Investment Contrarians | Jan 23, 2013
For the past few months, the eurozone financial crisis has significantly subsided, at least on the surface. However, because of the fragility within the eurozone, it won’t take much for a new financial crisis to be sparked.
There are new questions arising about the future of the eurozone, and these begin not with the giant nations of that union, but with tiny Cyprus.
Finance ministers from the eurozone countries are hotly debating much-needed bailout funds for the tiny island of Cyprus. One organization missing from these talks in Brussels is the International Monetary Fund (IMF).
As it stands, funds from the 700-billion-euro European Stability Mechanism (ESM) can only be dispersed if the IMF agrees to the cash payments. However, the IMF is disagreeing with some European nations as to the viability of Cyprus being able to pay back its debt under the current restructuring agreements. (Source: Pauly, C., et al., “Troika Travails: Split Emerges Over Cyprus Bailout Package,” Der Spiegel, January 21, 2013.)
Clearly, the financial crisis within the eurozone is not over if a nation like Cyprus is expected to have its debt load at 140% of its gross domestic product (GDP) by 2014—a clearly unsustainable level. This is the conclusion that the IMF has determined, and it is demanding that creditors of the banks within Cyprus incur a haircut in their principal or a decrease in their total claims.
Another serious worry for eurozone members is that Cyprus has a reputation of money laundering. With the financial crisis still a worry for many, especially the super-rich, having funds in accounts across the eurozone is clearly a problem. All … Read More
Why Government Bailouts Actually Lower GDP Growth Potential
By Sasha Cekerevac for Investment Contrarians | Jan 17, 2013
What does it take to create and sustain long-term gross domestic product (GDP) growth in an economy?
One of the most important factors is a high level of investor confidence.
Investor confidence throughout the economy can help support the formation and expansion of businesses and the development of new technologies and ideas.
GDP growth, as we all know, does not originate from government-led initiatives, but from businesses creating new innovations and technologies.
One of the problems with government intervention is that GDP growth is actually stifled and reduced due to a misallocation of resources. This misallocation of resources occurs when weak firms are supported or bailed out due to poor management decisions.
The funds allocated to support weak or underperforming companies are then unable to flow into stronger corporations that can expand, innovate, and make the economy fundamentally stronger, lowering GDP growth potential and ultimately weakening investor confidence.
Over the last few years following the financial crisis, many have thought about ways to prevent such an outcome. One of the more original writers of our time is Nassim Nicholas Taleb.
Author of the famous books Black Swan and Antifragile (both of which I highly recommend), Taleb recently suggested several ideas, with which I completely agree, to reduce the possibility of another financial crisis, while helping restore investor confidence.
One of the most interesting ideas I’ve heard to restore investor confidence is to remove the incentive for firms to become too big to fail. Instead of forcing companies to be broken up, Taleb suggests that any firm deemed “too big to fail” should pay its staff no more than a corresponding … Read More
Open Fort Knox! The Ink at the Money Printing Press Is Dry
By George Leong for Investment Contrarians | Jan 17, 2013
The government needs money fast. The problem is that the bank vaults are closed for the time being, and unless they are opened by early March, America could face a cash crunch.
The intense battle between Congress and President Barack Obama, who is requesting an immediate increase to the current national debt limit of $16.4 trillion, is ongoing, but it needs to be resolved soon, as the current national debt subject to the limit is $16.39 trillion. Obama is threatening possible delays to Social Security and veterans’ benefits, along with an impact on the government payroll, if the cash doesn’t come. (Source: Lee, C.E., and Hook, J., “Obama Escalates Debt Fight,” Wall Street Journal,January 14, 2013.)
Failure to raise the national debt limit would mean the government accessing emergency funds to avoid a potential default.
The issue is that the Republicans in Congress want to see more budget cuts and cost control before they look at raising the national debt limit. Rating agency Fitch has warned that if the debt limit is not increased in a “timely” manner, America’s debt rating could be downgraded. In the article, Fitch said the use of the debt ceiling was “an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible.” (Source: Ahmed, S., “Fitch Warns of US Downgrade Over Debt Fight,” CNBC, January 15, 2013.)
Moody’s Investors Service has already warned it may cut America’s triple-A debt rating … Read More
What’s Needed for Higher Wages?
By Sasha Cekerevac for Investment Contrarians | Jan 14, 2013
Sometimes it is interesting to get a different perspective by looking at other nations around the world and how they are dealing with their economies.
The U.S. economy is certainly not booming, although the latest data have shown some contradictory indications. On the one hand, job creation is not occurring at an extremely fast pace; however, there are signs of an economic recovery in certain sectors, including housing, vehicle sales, and energy.
Germany, on the other hand, has had a lot of success, even though its neighbors have been embroiled in a large amount of economic stress due to their financial crisis. The economic recovery of Germany goes back many years, with structural reforms, made over a decade ago, that have prepared its economy to be extremely competitive internationally. The decrease in the euro has only helped the country’s economic recovery.
According to the German Federal Statistics Office, exports for the first 11 months during 2012 grew 4.3% to $1.3 trillion. This includes a 10.4% increase in exports to non-European Union (EU) countries. In another report, conducted by the Federation of German Wholesale, Foreign Trade and Services, export growth is expected to increase by five percent in 2013. (Source: “Booming Sales Beyond Europe German Exports Seen Hitting New Record in 2012,” Der Spiegel, January 8 2013.)
These are record levels of exports for Germany. Clearly, that nation has been able to engineer a decent economic recovery in spite of its weaker European partners. Job creation throughout the financial crisis has been quite strong, as Germany currently employees over 41 million citizens, the highest level ever recorded.
Much of the problem … Read More
The Dangers of the Current Monetary Policy Program
By Sasha Cekerevac for Investment Contrarians | Jan 10, 2013
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
The Next Financial Ticking Time Bomb
By Sasha Cekerevac for Investment Contrarians | Jan 9, 2013
While many eyes are focusing on Europe and America when it comes to the next financial crisis, one sector that people aren’t focusing on is the bond market in Japan. Many investors might not realize it, but Japan might be the next financial ticking time bomb.
How does a financial crisis in the bond market affect the average person? On a basic level, the bond market prices move based on supply and demand, which affect interest rates. With greater demand in the bond market, this pushes up prices and lowers interest rates. A lower interest rate obviously helps prevent a financial crisis from occurring, as it takes less money to pay off the debt—much like a credit card interest rate being reduced.
Conversely, if investors are worried about their funds in the bond market, this will cause selling or a reduction in purchases, a decline in prices, and a rise in interest rates. For countries that have a large amount of debt, higher interest rates will cause a financial crisis, as the funds available to maintain that debt are limited and could run out.
Much like a person who racks up very high credit card debt, at some point the income from the person’s job is not enough to make the minimum payment, let alone pay down the principal. The end result is a financial crisis.
Japan has a massive debt-to-GDP (gross domestic product) level of 211%, much higher than America’s or even Greece’s debt burden. (Source: Trading Economics, last accessed January 7, 2013.)
Even though Japan’s 10-year bond interest rate is only 0.79%, a full 25.0% of government revenue … Read More
Federal Reserve Shocks the Market; How to Protect Your Wealth
By Sasha Cekerevac for Investment Contrarians | Jan 8, 2013
According to the minutes from the Federal Reserve meeting on December 11–12, it now appears highly likely that the aggressive quantitative easing policy might end sooner than most people had expected. This is a shock to many market participants who had expected an extended period of time under the current quantitative easing policy by the Federal Reserve.
The minutes of the Federal Reserve meeting show that several members stated they believe that the current quantitative easing policy will end, “well before the end of 2013.” Other Federal Reserve members expressed their opinion that this quantitative easing policy will need to be completed by the end of 2013. Many market participants expected this current quantitative easing policy to last well into 2014, perhaps even into 2015. (Source: “Minutes of the Federal Open Market Committee,” Federal Reserve, January 4, 2013.)
The reason this statement is so important is that multiple Federal Reserve members voiced concerns and were of the opinion that the current quantitative easing policy needs to be reduced or completed sooner rather than later. While there was one Federal Reserve member who stated at a meeting before that no further bond purchases are needed, one voice is not enough to alter the opinion of an entire committee. But now, there are many Federal Reserve voices raising concerns.
Because this is the first real evidence that a large number of Federal Reserve committee members are voicing the opinion that the current quantitative easing policy will need to end relatively soon, one must take note. This is a pivotal point for potential change in monetary policy.
With this in mind, if the … Read More
Fiscal Cliff Averted, but the Massive Debt Will Limit Government Flexibility
By George Leong for Investment Contrarians | Jan 8, 2013
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
Why Japan May Be Headed for a Financial Abyss
By George Leong for Investment Contrarians | Dec 18, 2012
Japan just elected in Shinzo Abe of the Liberal Democratic Party as Prime Minister, and based on what we are hearing, Abe is looking to spend significant stimulus, including a whopping $2.4 trillion over the next 10 years to try to boost the country’s gross domestic product (GDP) growth and drive Japan out of its comatose economy. (Michael Schuman, “Will Japan’s New Prime Minister Start a Debt Crisis?,” Time, December 17, 2012.) While this all sounds great, there’s a problem. Japan’s debt levels are some of the highest in the world and make the U.S. situation seem like a cakewalk.
Japan’s debt as a percentage of its GDP was a humongous 208.2% in 2011, the worst in the world, according to the International Monetary Fund (IMF). Greece, with its financial crisis, was comparatively better at 160.8%, and the U.S., with its crippling debt levels, was relatively strong at 102.9% in 2011. (Source: “Country Comparison: Public Debt,” CIA World Factbook, last accessed December 17, 2012.)
The problem is that the newly elected Liberal Democratic Party appears to want to spend the country into a financial abyss in order to pump up the country’s GDP growth.
Japan continues to be in an economic abyss, void of any GDP growth.
Along with its minimal growth, the country is mired in a multi-decade-long comatose state that requires major resuscitation. Despite producing some of the top brands in the world in electronics and cars, along with an efficient workforce and technological innovation, Japan’s GDP growth contracted 0.9% in the third quarter, or 3.5% on an annualized basis; and it appears set for another recession, given … Read More
What the New Federal Reserve Monetary Policy Plan Means for Your Investments in 2013
By Sasha Cekerevac for Investment Contrarians | Dec 14, 2012
The Federal Reserve concluded its latest meeting on Wednesday by enacting additional monetary policy measures and a historic change in the way the central bank communicates its intentions.
With “Operation Twist” ending this December, the Federal Reserve decided to continue its monetary policy program of purchasing $45.0 billion of long-term treasuries each month. This is in addition to the ongoing monetary policy program of purchasing $40.0 billion of mortgage-backed bonds per month. (Source: Press release, Federal Reserve web site, last accessed December 12, 2012.)
This action by the Federal Reserve is not really a new monetary policy initiative, but a continuation of the existing plan, Operation Twist. The Federal Reserve still sees a weak American economy that it believes needs additional stimulus.
What is new for the Federal Reserve is that this $45.0 billion per month will not be financed by selling short-term debt, but will be outright purchases of long-term treasuries. Instead of sterilizing the bond purchases, this will now be outright money printing.
Another change for the Federal Reserve is that it no longer uses a calendar for an end date; it now looks for quantitative metrics based on which it will look to end its monetary policy programs. The guidelines they set out are for easy monetary policy “…at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s two percent longer-run goal, and longer-term inflation expectations continue to be well anchored.” (Source: Press release, Federal Reserve web site, last accessed December 12, 2012.)
Since the … Read More
Global Recession Fears Grow as Strong Nations Weaken
By Sasha Cekerevac for Investment Contrarians | Dec 6, 2012
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
Time’s Running Out; Fiscal Cliff Needs a Resolution
By George Leong for Investment Contrarians | Dec 6, 2012
America is fast approaching the $16.4-trillion limit in national debt that is legally allowed under the current debt ceiling. With the current debt at $16.24 trillion, time is running out, which is why we need to either resolve the fiscal cliff or, as the President wants, hike up the national debt ceiling in order to allow the government more flexibility in its spending. Failure to raise the national debt limit would mean that the government would need to access emergency funds to avoid a default and initiate the fiscal cliff cuts and tax increases in some form.
So far, the talks between House Speaker John Boehner and President Obama have resolved little. Just last week, Boehner offered up a new 10-year, $2.2-trillion strategy that entailed adjustments to Medicare and Social Security benefits but also avoided a return to higher taxes for the nation’s top income earners. In response, the President is willing to look at reviewing the highest tax rate for the rich, but at the same time, he wants to cut loopholes.
With just over three weeks left in the year, something will need to be done. In the event that a resolution is not achieved, the government will have to access emergency funds until a deal is agreed upon. This is the dilemma that we are at now; but something has to be done, or America could be leaving a much worse financial mess for the generations ahead, including a possible recession and massive national debt.
Moody’s Investors Service warned it may cut the U.S. triple-A debt rating for a second time in 2013, should the government not … Read More
32 Days: Countdown to the Fiscal Cliff
By George Leong for Investment Contrarians | Nov 30, 2012
There were two winners of the Powerball lottery jackpot of $588 million Wednesday night. I was wondering if there was any chance they could help out with paying down some of the country’s burgeoning $16.2 trillion in national debt, its out-of-control deficit, and its runaway spending. Hey, isn’t that what the fiscal cliff is all about?
With 32 days remaining in the year to resolve this financial crisis, President Barack Obama and Republican House Speaker John Boehner are hard at it, trying to come to a compromise.
The reality is that, like many of you, I’m growing weary of hearing the “FC” term: financial crisis. Let’s just deal with the financial crisis stalemate and work out a deal that makes both parties happy, and slows down the frivolous printing of money that has allowed America to spend endlessly and create the financial crisis that is now lurking.
When I think about it, the government is operating a Ponzi scheme. They’re printing money and using it to pay for the undisciplined spending; when the money runs out and payments are due, they go out and print more money to cover them, and so on. This Ponzi scheme must be halted.
Just take a look at the market action. We are seeing a ridiculous number of U.S. companies declaring “special dividends” to try to help investors avoid higher dividend taxes in 2013 if the fiscal cliff is allowed to move forward.
From the end of September to mid-November, Bloomberg reports that 59 companies belonging to the Russell 3000 Index announced special cash dividends, versus 15 companies in the same timeframe in 2011. … Read More
For the 50th Time, the Eurozone’s Digging Its Own Grave
By George Leong for Investment Contrarians | Nov 28, 2012
Greece finally received approval for its austerity measures and, in the process, will get another $70.0 billion or so in loans. The money is not earmarked for growing the Greek economy out of its deep recession; rather, it will be used to keep the lenders away as the country tries to get out of its financial crisis. What is happening in Greece and the eurozone is absolutely an economic farce that will likely take years to rectify. For Greece, the country will be stuck in its own economic abyss for years, even decades. The problem for Greece is that the deep budget cuts are occurring at a time of fiscal confusion, massive unemployment, and negative gross domestic product (GDP) growth. The deep cuts will hurt the country more in the short term, but they are needed to help Greece become a contributing member of the eurozone. As I said, it could take decades. Don’t believe me? Just take a look at the two-decade drought in Japan.
The Organisation for Economic Co-operation and Development (OECD) just suggested the global economy was on shaky ground again, with weakness in 31 of 34 member countries. (Source: Matt Nesto, “The Five-Year Funk: OECD Slashes Global Growth Estimates,” Yahoo! Finance, Breakout, November 27, 2012.) The report “Global Economy Facing Hesitant and Uneven Recovery” called for the eurozone to experience another two years of mild recession. GDP growth in the U.S. is estimated at a mere two percent for 2013, which is not unexpected, given the current conditions in America. Failure to resolve the fiscal cliff will make the growth worse.
The way I view it … Read More
Investments to Avoid for 2013
By Sasha Cekerevac for Investment Contrarians | Nov 27, 2012
When it comes to making money, one of the long-time leaders has been The Goldman Sachs Group, Inc. (NYSE/GS). Many people been having critical of Goldman Sachs due to its influence in nations around the world, which can lead to favorable terms for the company. Regardless of one’s opinion about the firm, its actions can be a good indicator of underlying trends.
Goldman Sachs is currently turning down the role of lead stock underwriter for firms located in the southern eurozone nations. If this firm that has been so successful at making money is so worried about the eurozone that it’s avoiding certain areas completely, then this is quite a negative sign. I would highly suggest following its lead and avoiding companies with exposure to the weaker eurozone nations.
There is much talk in the newspapers about a new deal for Greece, and attempts to keep the eurozone together. If the eurozone really was this close to a deal and this far away from a financial crisis, I’d think that Goldman Sachs would be jumping at the chance to be part of any underwriting deals. But because it would be liable to losses if the eurozone financial crisis were to worsen, and since it has far more access to information than you or me, its decision to avoid the region altogether is one in which I see a large amount of legitimacy and credence.
Goldman Sachs has rejected being underwriter in a $3.2-billion rights offering by Banco Popular Espanol SA (MCE/POP) due to concerns of potential losses. Again, if the eurozone was as strong as some politicians make it appear … Read More
Why Stocks Are on the Edge of an Abyss
By George Leong for Investment Contrarians | Nov 19, 2012
The market is moving lower, and there’s nothing that appears to be supporting it. The S&P 500 has lost nearly eight percent since its peak of 1,465 in September.
The fact that the S&P 500 failed to hold above 1,400 was not a surprise, based on my technical analysis. In May, the break at 1,400 was the S&P 500’s fourth top above 1,400 since 2008.
Since the election, the market has edged lower in six of seven sessions due to heightened stock market risk.
On average, only about 37% of U.S.-listed stocks are trading above their respective 200-day moving averages (MAs), versus 61% a month ago. The short-term weakness is even more prevalent with about 19% of stocks above their respective 50-day MAs, versus 61% a month ago.
What happened to what were supposed to be the best six months of the year for investment gains?
Based on historical records, investing in the six months from November to May has produced the best returns for stocks versus the June to October period, according to the Stock Trader’s Almanac.
So far, November has been horrible, with the key stock indices down more than four percent. But as I said when I previously discussed this pattern, things could be different this time around, given the abundant stock market risk, including the financial crisis in the eurozone, a stalling economy in China, tension in the Middle East, and the presidential election and upcoming fiscal cliff in the U.S.
We are seeing some selling capitulation in the market because of the abundant stock market risk and lack of any positive news that would encourage … Read More
Budget Deficit Soars in October; Do You Trust the Politicians to Solve This Looming Crisis?
By Sasha Cekerevac for Investment Contrarians | Nov 15, 2012
The U.S. Treasury Department recently released the budget deficit numbers for October, reporting a massive $120 billion deficit. This compares to a budget deficit in October 2011 of “only” $98.0 billion. While the U.S. economy is not growing at a rapid rate, it’s certainly not shrinking. So in the span of one year, with some growth in the U.S. economy, albeit slow growth, we’ve seen an approximate $20.0-billion monthly year-over-year increase in the budget deficit. I think this shows the true ineptitude of our political leaders.
One sign that the U.S. economy has shown some improvement is that receipts increased to $184 billion, compared to $163 billion this time last year. However, expenditures increased at a much faster rate. The monthly expenditures for October 2012 were $304 billion, a huge jump from approximately $262 billion in October 2011, which caused the rise in the budget deficit. Does anyone know where this money went?
While President Obama can talk about increasing taxes to generate more revenue, the truth is that receipts to the government are increasing. The government is taking in higher levels of revenue, as the U.S. economy has slightly improved. However, the spending side is growing at a far greater rate. I don’t believe Obama’s tax hikes can pay for the massive increases in expenditures. More likely, raising taxes to try and reduce the budget deficit will kill what little growth the U.S. economy is experiencing.
October is the first month of the fiscal 2013 year. The fiscal 2012 year has ended with another budget deficit in excess of $1.0 trillion. One trillion dollars is larger than the entire … Read More
Why the Fiscal Cliff Is Only One Problem Amongst Many
By George Leong for Investment Contrarians | Nov 14, 2012
There are 47 days left in the year, and I’m worried. Not about my holiday shopping, albeit the retailers might be, but about whether President Obama can get Congress to agree to his demand to extend the Bush-era tax cuts, while increasing taxes to the rich, cutting expenses, and avoiding a potential financial crisis.
Based on what has happened since the election on November 6, we are seeing a selling bias toward stocks, as there may be a shift to investors taking their profits now; investors are avoiding what will likely be higher taxes on capital gains and investments going forward in 2013 should the fiscal cliff be allowed to follow through without any modification.
We are at a standstill. A financial crisis may be at stake.
The Republican-controlled House wants the tax cuts extended to all taxpayers, while Obama said he would veto any bill that pushes for tax cuts to those earning over $250,000 annually. You can see the dilemma and the difficulty concerning the cliff and potential financial crisis.
Of course, the government needs to be tough and do something to the staggering $16.3 trillion in national debt, or risk deepening the financial crisis.
With every passing second, America is growing poorer, and it will continue to unless major changes are made to avert a financial crisis. At the core of the problem is the direction of the upcoming fiscal cliff and its impact on the economy, national debt, and the financial crisis.
If too much spending is cut, the impact on the fragile economic recovery could be enough to send America back into another recession and … Read More
Who’s to Blame for the Weak Global Economy?
By Sasha Cekerevac for Investment Contrarians | Nov 13, 2012
One of the most important things for all investors to remember is that the global economy is tightly tied together. Gone are the days when one country could, in isolation, remain immune to the effects of the global economy. With the problems that America has endured following the Great Recession, we certainly can’t look to the rest of the world to help our economy accelerate.
In addition to weak organic economic growth, the stimulus plans implemented by nations around the world have created massive levels of government debt. This government debt is pervasive throughout the global economy. While I’ve commented many times about U.S. government debt and the problems we will incur in the future, America is not alone. From Europe to Asia, the global economy is awash in huge levels of government debt.
The real trouble is that in spite of trillions of dollars of government debt, the global economy can’t accelerate. New data regarding the Japanese economy is quite clear in this matter. Japan’s economy decreased during the September quarter by 0.9%, which is an annualized rate of decline of 3.5%. (Source: “Japan’s economy shrinks, recession looms,” Reuters, November 12, 2012.)
The Bank of Japan has a policy meeting next week and another on December 19–20. Considering the trillions of dollars Japan spent over the last 20 years trying to revive its economy, the only result has been a massive increase in government debt. According to the International Monetary Fund (IMF), Japan’s government debt as a percentage of gross domestic product (GDP) is estimated for 2012 to be approximately 230%. This compares to the government debt as a … Read More
Enough Is Enough; Spain Needs a Bailout
By George Leong for Investment Contrarians | Nov 13, 2012
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
Eurozone Financial Crisis Spreading to Other Nations
By Sasha Cekerevac for Investment Contrarians | Nov 12, 2012
While many investors in America are focusing on domestic issues, we have to remember that we live in a global economy. What happens to other nations can certainly hit our shores. While some people have been optimistic that the financial crisis within the eurozone has turned the corner, new evidence points to the contrary.
The latest information from the eurozone shows just how weak the continent is and how much damage the financial crisis has done to its economic union. Germany’s industrial production in September fell by 1.8%, far worse than many economists have estimated. There was also a decline of 2.2% in intermediate goods and a 3.5% loss in capital goods in September on a monthly basis. (Source: “German industry output drops in Sept, manufacturing weighs,” Reuters, November 7, 2012.)
Germany has been the strongest member within the eurozone, holding up in the face of the financial crisis in the weaker periphery countries. Recent data points to the fact that even the strongest members of the eurozone are succumbing to the financial crisis as it spreads across the borders.
Germany’s Economy Ministry stated that it believes its nation will experience weaker economic conditions over the winter period. With output decreasing and exports to other eurozone members declining, the Ministry stated that it doesn’t believe Asian demand will be enough to counteract the weakness from the other eurozone members. (Source: “German Growth Set to Slow as Eurozone Crisis Hits Home,” Reuters, November 9, 2012.)
The backstop to the financial crisis in the eurozone has been the European Central Bank (ECB). However, the latest statements by ECB President Mario Draghi do … Read More
Why Europe’s a Bomb Waiting to Blow Up
By George Leong for Investment Contrarians | Nov 12, 2012
The doom and gloom on this side of the Atlantic is focused on the country’s pending “fiscal cliff,” but in Europe, it’s focused on the continent’s own financial crisis and how to escape it. You have six eurozone countries in a recession, with the whole region threatening to collapse into a recession in 2013. There’s barely any gross domestic product (GDP) growth while debt levels surge. You also have high unemployment and rallies on the streets of Athens and Madrid in response to the tough austerity measures put forth by Greece and Spain. You kind of wonder if Americans would flood the streets here if wages and pensions were suddenly axed.
Yet what makes the slowing of GDP growth in the eurozone a significant concern is its negative impact on the non-eurozone countries, including the Asiatic countries, such as China and Japan, which have seen their GDP growth affected.
We are seeing more cuts in GDP growth rates across the board for 2013. GDP growth in the United Kingdom (U.K.) was slashed to a mere 0.9% in 2013, down from the prior estimate calling for growth of 1.3%, according to research by the European Commission. The reality is that GDP growth could be even worse should the eurozone fail to sufficiently recover.
The European Commission is predicting a gloomy outlook, with the eurozone’s GDP growth contracting 0.4% this year and growing a muted 0.1% in 2013. Add in the massive debt loans and pressure to cut spending, and you’ll realize why I’m deeply concerned.
Of course, the problem is that the spotlight on the massive debt and bailouts of Greece … Read More
Dear Mr. President: Now It’s Time to Deliver on Your Promises
By George Leong for Investment Contrarians | Nov 7, 2012
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
Why the Next U.S. President Is Facing a Mess
By George Leong for Investment Contrarians | Nov 5, 2012
The election is finally here. We are all excited to see who will be the 45th President of the United States.
President Obama wants to stay at the White House, while challenger Mitt Romney wants to evict him. Whoever is the winner, there will be a slew of challenges for him to deal with. It may not be as bad as four years ago when the newly minted President Obama faced a massive subprime financial crisis, government bailouts of the big banks and auto sector, and a great recession, but there are still major obstacles to deal with.
If Obama holds on, you can expect a push to remedy the healthcare system and make it more efficient and cost-effective under the program coined “Obamacare.” Healthcare cost control is important as a means to control the mounting national debt and avoid a financial crisis. Over $752.0 billion is spent annually on Medicare/Medicaid, which is the second-biggest area of spending for the government following Social Security. (Source: U.S. Debt Clock, last accessed November 2, 2012.) Failure to rein in costs could create a financial crisis.
The $16.0-trillion national debt could grow to a whopping $22.7 trillion by the end of the next President’s term in 2016 if nothing is done, based on the current pace. (Source: U.S. Debt Clock, last accessed November 2, 2012.) This could lead to a financial crisis. By 2016, annual spending on Medicare/Medicaid could reach over $940.0 trillion if costs continue to rise and drive a financial crisis in health care. Social security in 2016 could surpass $1.1 trillion annually, and this is not sustainable. Those who are … Read More
Why Americans Should Worry About Weaker German Data
By Sasha Cekerevac for Investment Contrarians | Oct 31, 2012
With the recent steps taken by the European Central Bank (ECB) to stem the financial crisis within the eurozone, the situation will get worse before it gets better, as I have stated several times. One of the concerns for investors is the possibility that the financial crisis could spread to the strong nations within the eurozone. It appears that this is indeed the case, as new data from Germany show that unemployment is rising at a much faster rate than anyone expected.
The seasonally adjusted number of people unemployed in Germany rose 20,000 in October, which was higher than the 10,000 expected from a Bloomberg survey. The unemployment rate also increased from a rate in August of 6.8% to 6.9% in both September and October. (Source: “German Jobs Machine Falters For First Time in Three Years,” Bloomberg, October 30, 2012.)
Many international investors have been hoping that the German economy would be able to withstand the financial crisis that is spreading from the weaker eurozone nations and would pull that union up out of its trough. It appears that the massive level of weakness is pulling down the strong nations within the eurozone.
To put the data in context, Germany is still a strong economy. Unemployment there is still much lower than the rest of the eurozone, and even lower than in America. But we should all be aware of any changes in trends. Up until now, the situation was that Germany has been able to withstand the financial crisis stemming from the weaker eurozone nations. If the situation worsens, it could have a dramatic impact on worldwide markets.
Of … Read More
Many Wildcards That Could Throw a Wrench into the Economy
By George Leong for Investment Contrarians | Oct 30, 2012
In a week’s time, we will know who the next President of the United States will be; this will be critical, giving us an indication of where America is heading as far as policy and the impact on the economic recovery. The latest poll by CNN has the race to the White House in a dead heat, with Governor Mitt Romney slightly ahead at 48% of the votes and President Obama at 47%. In the key Ohio race, support for Obama has fallen from 52% on October 2 to the current 48%, according to CNN.
At this point, based on my unbiased view, I don’t really care who wins, but I do want something to be done about job creation, the $16.2 trillion in U.S. debt, and the pending “fiscal cliff.”
Whether you are a Democrat or a Republican, there is a commonality: we need to get the country fixed and get it going on the correct path to the economic recovery and jobs for all. The unemployment rate fell below eight percent in September, but the reading is well below the four percent level we saw in 2006 and 2007. The unemployment rate has improved from the recession high of 10.0% in October 2009, but needs to work its way lower for a sustained economic recovery.
What concerns me is the current lack of focus on the pending fiscal cliff on January 1, when the terms of the Budget Control Act of 2011 are scheduled to go into effect, resulting in automatic spending cuts across the board and tax increases that will threaten the economic recovery.
Of course, there … Read More
What this Important Reading’s Saying About the Eurozone
By Sasha Cekerevac for Investment Contrarians | Oct 25, 2012
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
Estimated Cost of Eurozone Break-up a Shocking $22.0 Trillion
By Sasha Cekerevac for Investment Contrarians | Oct 19, 2012
The financial crisis in the eurozone has continued for some time, and there is still no end in sight. What was once perhaps a nice theory on paper is currently crumpling under the strains of reality. It’s still a surprise to me that the founders of the eurozone did not realize the possibility of a financial crisis and the importance of having a fiscal union to go along with the monetary union. I’m sure every person knows that they shouldn’t cosign a loan with someone unless they can trust in that person’s ability to repay their debt. Instead, the eurozone has essentially given a blank check to the weaker nations, specifically the PIIGS—Portugal, Ireland, Italy, Greece, and Spain.
With this financial crisis unfolding, many are surprised that the eurozone is still holding together. So the question is: why would the wealthy northern part of the eurozone continue to support the poor and fiscally irresponsible countries during this financial crisis? Why not just break up the union? It appears that the costs associated with breaking up the eurozone might be far higher than most people realize. In fact, perhaps the eurozone members themselves know the true costs and are thus willing to throw in hundreds of billions of dollars to prevent the loss of trillions.
A new study by research company Prognos has come out with an estimate; if Portugal, Greece, Italy, and Spain were to leave the eurozone, in terms of growth, it would cost approximately 17.2 trillion euros, or US$22.3 trillion, by 2020. (Source: “Euro Exit by Southern Nations Could Cost 17 Trillion Euros,” Spiegel Online October 17, 2012)… Read More
Worried About America? You’d Better Watch China
By George Leong for Investment Contrarians | Oct 16, 2012
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
Why the Spanish Debt Downgrade Could Be an Opportunity
By Sasha Cekerevac for Investment Contrarians | Oct 12, 2012
The latest downgrade on Spain’s sovereign debt by Standard & Poor’s should not be a surprise to anyone following the financial crisis in the eurozone. Standard & Poor’s also stated that it has a negative outlook, meaning that there are still large risks to Spain going forward. Again, with what we’ve seen in the eurozone during this financial crisis, this is not a surprise to me.
With unemployment at approximately 25%, Spain is far from a recovery. The negative market sentiment, permeating through Spain and the eurozone, is directed toward the Spanish government’s unlikely ability to rein in their budget deficit and develop an economic structure that will return the nation to growth.
Let’s be honest; as I stated, this is not a surprise to anyone who has followed the eurozone over the last couple of years. With the continuing spread of the financial crisis from one country to the next, along with Spain’s lack of control over its spiraling budget deficits and its lack of a growth plan, the results were quite evident.
However, one might be surprised to hear that I view this, at least over the short term, as a potential bullish opportunity within the eurozone due to the financial crisis. The reason is that this is an additional push for the Spanish government to go to the European Central Bank (ECB) for help. The ECB is ready to initiate a Spanish bond-buying program, if Spain were to ask for aid. Spain is hesitant, as this would mean additional austerity measures.
For the short-term trader, having the ECB step in to buy bonds is obviously bullish, just … Read More
Why You Need to Be Looking at Mining Stocks
By George Leong for Investment Contrarians | Oct 11, 2012
Gold and silver continue to be bullish on the charts. I can see gold breaking to $1,800 an ounce, something that nearly materialized on October 5, when cash gold traded at $1,795.78 prior to slipping. The last time gold was above $1,800 was on November 8, 2011.
Silver is holding around $34.00 an ounce; but I’m not as bullish on the white metal, because the price is largely driven by the direction of the global economy.
I continue to like gold going forward, given the financial crisis in the eurozone—and, trust me, it is not going to get better anytime soon. It could take years. Moreover, with a recession expected to hit the eurozone in 2013, the crisis could deepen further.
Across the Pacific, you have the stalling in China and its impact on the other Asian countries, like South Korea and Japan, along with the smaller emerging Asian countries.
For those of you who took my advice to hold on and accumulate gold on weakness down to $1,600, it has been a nice ride. Major price weakness should be viewed as an opportunity to accumulate.
I favor the metal plays and continue to see opportunities, especially in the mining companies and junior gold miners.
China and India continue to be the world’s top buyers of gold, and this is expected to continue. China has also been buying mining companies around the world in an effort to increase its reserves. This is a reason why I like some of the smaller mining companies, especially those with a massive reserve of proven metals in the ground, waiting to be developed and … Read More
If You Don’t Believe the IMF, How About What the Multinationals Are Saying?
By George Leong for Investment Contrarians | Oct 10, 2012
The global economy is stalling, don’t let anyone tell you otherwise; and unless the eurozone and Europe can recover from the financial crisis, my prognosis for the global economy is not good.
Judging from what I’m currently witnessing in the market action, unless the third-quarter earnings season provides abundant upside surprises, which I doubt, stocks could be set for a shock in the upcoming quarters. The reality is that I continue to feel traders are lackluster in their assessment of the current global risk and the potential impact on stocks.
The International Monetary Fund (IMF) and World Bank are warning us. China saw its gross domestic product (GDP) growth for this year reduced to below the key eight-percent threshold to 7.7% by the World Bank. In China, there are clear indications of slowing economic recovery resulting from the lower demand for copper, cement, and energy. The World Bank also cut its GDP growth estimate to 7.2% this year for the East Asia and Pacific area. (Source: “Growth to Slow in East Asia and Pacific in 2012,” The World Bank, October 8, 2012.)
We also have a potential letdown in China’s neighbor, India, after the IMF cut GDP growth in this emerging market to 4.9% for this year compared to the previous 6.1% estimate. (Source: International Monetary Fund)
And if you don’t believe the IMF or World Bank, take a look at what the multinational companies are saying, many of which source much of their revenue flow from the global marketplace. These companies with worldwide operations have firsthand accounts of the business conditions and, therefore, should not be ignored.
Bellwether Caterpillar … Read More
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