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
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
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
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 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
In my previous commentary, I discussed the ongoing financial mess in the eurozone and its negative impact on the gross domestic product (GDP) growth of the 17 countries in the region. Yet, with the eurozone in a recession that could last another few quarters, the negative impact on the global economy should also be considered when you are looking at foreign investing opportunities.
The current stalling in China could be linked directly, in part, to the situation in the eurozone, and I expect this will continue to be the case as long as the eurozone struggles.
At the same time, the areas most at risk from the eurozone crisis will be the emerging regions in Eastern Europe; they will be much more at risk than Asia simply due to the proximity of the markets.
Russia, the largest economy in Eastern Europe, is estimated by the World Bank to report GDP growth of 3.5% in 2012, down from GDP growth of 4.3% in 2011. (Source: “World Bank Keeps Russia’s GDP Forecast at 3.6% in 2013,” RIA Novosti, January 16, 2013.) However, the report is estimating that the country’s GDP growth will slowly rally to 3.9% in 2014 and 3.8% in 2015, which is still below the five-percent-plus readings from 2003 to 2007. (Source: “Data,” The World Bank web site, last accessed February 20, 2013.) Of course, the actual rate of the recovery will largely depend on whether the eurozone can recover from its mess.
Poland, the second-largest economy in Eastern Europe, is really struggling. The negative impact from the eurozone has wreaked havoc on the Polish economy and its GDP growth. … Read More
When it comes to developing and creating a long-term investment strategy for your portfolio, one of the more difficult aspects is maintaining a focus on the horizon. What this means is that sometimes one needs to look past the short-term aberrations and focus on where the economy and stocks will be in the future.
The topic of mining stocks has come up quite often lately. Initially, when one talks about mining stocks, many people automatically gravitate toward gold and silver companies.
I would suggest that there are data showing that other commodity mining stocks might offer strong long-term potential capital appreciation.
Professionals know that the market price of a stock offers far more information than any one data point. If the price of a stock or commodity is moving, this is certainly an indication of where people are placing their funds through their own investment strategy.
While some might have an investment strategy primarily in mining stocks, I would urge diversifying away from any one commodity in this sector, creating a more diversified portfolio in general.
Getting ahead of the curve over the retail public is a difficult but attainable investment strategy. I would suggest that, in addition to looking at economic data in forming one’s own analysis, one should look to the price charts and see what’s happening on the ground.
Recently, we’ve seen a recent breakout in one commodity that might surprise a lot of people: copper.
“Doctor Copper,” as the commodity is often called due to its ability to predict economic growth, has just broken out of its downtrend. While many are focusing on the recent negative … Read More
In April 2011, when silver was trading at $50.00 an ounce, Bank of America Merrill Lynch was extremely bullish and suggested $80.00 was possible. (Source: “Prospect of silver hitting $80 shakes up stock, ETF markets,” International Business Times, May 1, 2011, last accessed January 22, 2013.) Of course, this hasn’t been the scenario, as the metal faces tough resistance at $35.00. Until there is a strong breakout here, I doubt the $40.00-level will be achievable.
While the majority of investors focus on gold, I feel silver could actually have more price upside, given its more speculative nature as more of a trading commodity.
In reality, the buying in the white metal is generally in line with the global economic growth, driving the demand for industrial goods that use silver as a raw material, pushing up income levels, and increasing the global demand for jewelry.
Here in the U.S., the economic recovery is faring well. The better-than-expected U.S. gross domestic product (GDP) growth, revised up to 2.7% for the third quarter, along with other encouraging economic data are also adding some optimism of economic renewal. China is offering some hope of a turnaround, but the stagnant condition in the eurozone and Europe remains an issue.
As I said, while gold is considered more of a pure-play hedge against risk, any sign of industrial recovery helps, as silver, unlike gold, is used in numerous industrial applications.
As you can see on the chart, silver is caught in a sideways channel, largely between $30.00 on the support side and $35.00 on the top of the channel. Silver is currently testing its 50-day moving … Read More
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
Japan, under newly elected Prime Minister Shinzo Abe, will aggressively try to get the country’s economy back on track after more than two decades of economic stalling, but it will not be easy. Armed with a new stimulus spending of $116 billion, the hope is that the stimulus spending will drive consumer spending and help revitalize an economy that has been in a comatose state. (Source: “Japanese government approves $116bn stimulus package,” BBC News, January 11, 2013.)
Abe is looking to add significant stimulus, including a whopping $2.4 trillion over the next 10 years to try to drive Japan’s gross domestic product (GDP) growth to spur its comatose economy. (Michael Schuman, “Will Japan’s New Prime Minister Start a Debt Crisis?,” Time, December 17, 2012, last accessed January 14, 2013.) But it will not be easy, as the past decades have shown.
Japan entered a technical recession in the third quarter of 2012, with its GDP growth contracting 0.9% and continuing to be impacted by decades of stagnant growth. In fact, from 1980 to 2010, Japan’s average GDP growth was a minuscule 0.6%.
The new stimulus sounds great, but there’s a problem, as the country’s debt levels represent 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% in 2011—the worst in the world, according to the International Monetary Fund. Greece, with its financial crisis, is comparatively better at 161%, and the U.S., with its crippling debt levels, is relatively strong at 103% in 2011. (Source: “List of Countries by Public Debt,” Wikipedia … Read More
China is beginning to show renewed growth. The country is driving stimulus spending and easy monetary policy to get its economy back on track and drive consumers to spend.
And while there has been talk of an asset bubble in China’s housing market, my view is that the short-term risk is high, but there’s also excellent long-term growth potential in the Chinese housing market.
Investment in the country’s housing market surged 61.7% from January to November, according to the National Bureau of Statistics in China.
The conditions bode well for the country’s housing market. Consider that there are over 300 million middle-class consumers in China, and as a group, they are hungry for a lifestyle like we have in the West. Real estate investments are a key goal for the Chinese.
Standard & Poor’s analysts believe the housing market in China is stabilizing with buyers returning while home prices are stabilizing.
Moreover, in an ironic twist at a time when California’s housing market is struggling, the state’s California Public Employees’ Retirement System (CalPers), a pension fund, announced it would be investing about $530 million in two new China real estate funds managed by ARA Asset Management, which is positive longer-term.
To play China’s housing market, you can take the more conservative approach and buy the Guggenheim China Real Estate (NYSEArca/TAO) exchange-traded fund (ETF) with a year-to-date return of 58.8% as of December 30, 2012. The fund holds mainly large value-oriented Chinese real state stocks.
Chart courtesy of www.StockCharts.com
To take a more speculative and potentially higher return opportunity, an emerging small-cap Chinese real estate company that I like longer-term is … Read More
Gold is currently in a holding pattern at below $1,700 an ounce, but one thing is for sure: in spite of what some pundits are saying, it’s not time to sell yet. In an interview on CNBC, Marc Faber, also known as “Dr. Doom,” suggested that gold could correct 10% or more to as low as $1,550 or $1,600. (Source: “‘Dr. Doom’ Faber Sees Possible 10% Gold Correction,” Yahoo! Finance via CNBC, January 8, 2012.) While I’m not as negative, I do believe gold could retest support between $1,600 and $1,625 in the near term. Failure to hold could see a sub-$1,600 price.
In my view, gold continues to be a place to park some capital, and for this reason, I feel the metal will likely continue to hold above $1,500 after 11 straight up years.
For instance, if we assume the global economy will weaken, especially in the eurozone, the impact on global gross domestic product (GDP) growth would be negative. Stock values would fall, so you would need a safe haven to park your capital, which many of you know is in gold.
There’s been plenty of talk around here regarding whether the precious metal is heading for $2,000. In my view, the current global risk will support and drive gold higher.
The chart shows sideways trading around the 50-day moving average (MA) with weakening technical indicators, based on my technical analysis. I view downside moves as an opportunity to accumulate the precious metal, given the current macro situation.
Chart courtesy of www.StockCharts.com
I continue to like gold going forward, given the massive financial distress and recession in … Read More
There has been so much focus on the fiscal cliff that I feel traders are ignoring the problems of slowing growth in corporate America.
The fourth-quarter earnings season begins tomorrow with Alcoa Inc. (NYSE/AA), the first DOW stock to report in this earnings season. Alcoa is one of the world’s top aluminum makers; the stock is also a good indicator for the global economy, as aluminum is used in many industrial applications, including aircraft, automobile, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications.
In the third-quarter earnings season, Alcoa beat on Thomson Financial consensus earnings, but its revenues are an issue, which will likely be the situation with many U.S. companies. For Alcoa, revenues are estimated to fall 6.3% in the fourth-quarter earnings season, followed by a 1.3% rise in the 2013 first-quarter earnings season, according to Thomson Financial.
For the fourth-quarter earnings season, the overall revenue growth is estimated to be three percent, according to FactSet (Source: “Earnings Insight,” FactSet, December 14, 2012, last accessed January 4, 2013.) This is simply not what you would expect if the economy was healthy. And while there is some hope and optimism for the fourth-quarter earnings season, I expect disappointment.
Based on the current estimates, earnings for the S&P 500 are estimated to rise three percent in the fourth quarter, according to FactSet. So far for the fourth quarter, 79 S&P 500 companies have issued negative earnings-per-share (EPS) guidance, versus only 30 companies reporting positive guidance.
The top-performing earnings growth predicted for the fourth-quarter earnings season is in the financial sector, according to FactSet.
The … Read More
When it comes to making an economic forecast for the U.S. economy in 2013, a huge stumbling block was the uncertainty prior to the deal to avert the fiscal cliff. The just-announced new deal to avert the fiscal cliff is absolutely pathetic and will not accomplish what many were hoping for; a comprehensive long-term deal to lower the U.S. budget deficit and create an environment that will foster long-term gross domestic product (GDP) growth.
The level of uncertainty has recently started to impact consumers. The impact on consumer confidence was noted during the latest Conference Board Index in which consumer confidence fell six percent to 65.1 in December from November, the lowest since August 2012. (Source: “The Conference Board Consumer Confidence Index® Declines,” The Conference Board, December 27, 2012.)
GDP growth is heavily dependent on consumer confidence. Since the majority of the U.S. GDP growth is based on consumer spending, any pullback in consumer confidence is a worrying sign, with its potential for lowering an economic forecast for 2013.
An interesting dynamic was that consumers assessed that current conditions improved in December from the previous month. Business conditions rose to 17.1% from 14.6% the previous month; however, expectations for business conditions over the next six months declined to 17.6% from 21.3%.
This might seem contradictory, but it really shows that while the current economy is somewhat improving, the political grandstanding and ineptitude to avert the fiscal cliff have been increasing concerns for the future GDP growth of the American economy. This type of uncertainty will certainly put a damper on any economic forecast.
This new compromised deal has plenty of … Read More
The U.S. House of Representatives is planning to throw out a “Hail Mary” in the ongoing “fiscal cliff’ discussions, but I really doubt it’s going to work. Frustrated by the lack of a resolution to the pending automatic budget cuts and income-tax hikes, the Republican-controlled House is looking to push forth what they call “Plan B,” which extends the Bush-era tax cuts to those making less than $1.0 million.
This is no secret development that will resolve the fiscal cliffhanger and budget cuts, but the Republicans are proposing that their tax plan be passed in the House to try to avoid the fiscal cliff. The problem is that Plan B will not get approval in the Democratic-controlled Senate, so it will fail. President Obama has moved the threshold for the tax cuts to $400,000, up from the U.S. presidential election talk of $250,000, but we all know there needs to be some compromise.
Moreover, besides the tax cuts, the two parties are also divided on the budget cuts to Medicare and Social Security, the two largest components of the mounting $16.3-trillion national debt. The legal limit is $16.4 trillion, hence the need for the budget cuts.
As I have said in the past, we need to get the country working and back on its path as the world’s dominant economy and superpower. Of course, to achieve this status, the United States had to spend trillions on defense, another major area that will see budget cuts.
I love capitalism, and the idea that you can generate unlimited wealth to drive consumer spending. This is the reason why the United States is … Read More
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
The fiscal cliff is causing a drag on the economy and, in particular, consumers’ desire to spend, due to the uncertainty of how the budgetary cuts and tax increases will impact income. If the fiscal cliff is allowed to proceed—and it will to some degree—the reality is that taxes will rise. I’m not sure if the middle class and those who earn less than $250,000 will be spared, but I do feel there will be a compromise made on the income tax increases.
In the meantime, consumers are likely to be hesitant to spend in the retail sector. The headline retail sales reading rose 0.3% in November, which was below the Briefing.com 0.6% estimate but up from -0.3% in October. The ex-auto reading was flat, lower than the Briefing.com 0.2% estimate. While the November numbers don’t translate into December, I’m sensing the uncertainty of the fiscal cliff will impact consumer spending in this key shopping season for the retail sector.
We are heading into the heart of the holiday shopping season. I’m sure the retail sector is anxiously praying for consumers to spend. A strong shopping season in the retail sector will also go a long way to helping the economic recovery, while also giving the stock market good news.
The two recent jobs reports added some optimism to the retail sector; albeit, I doubt it will be enough to drive consumers to the malls and online to spend. We need to see progressive and stronger job creation going forward to instill some confidence in shoppers. In the best-case scenario, if job creation rises, this would likely translate into higher … Read More
Federal Reserve Chairman Ben Bernanke has spoken, and to no one’s surprise, the printing of money in America will continue and intensify under the soon-to-be newly launched “Quantitative Easing 4” program, or “QE4.” So now we have had several Federal Reserve programs to keep the flow of money going, and now it looks like there will be more money printing.
Under this aggressive money printing strategy, the Federal Reserve will pursue a more aggressive stimulus strategy in September that will involve the additional monthly buying of $45.0 billion in longer-term treasuries on top of the existing $40.0 billion monthly buying of mortgage-backed bonds under QE3. (Source: Press release, Federal Reserve, December 12, 2012.) The concern is that the additional buying of bonds will add another trillion dollars to the Federal Reserve’s balance sheet in 2013, driving the amount up to $4.0 trillion and keeping the money-printing machine going.
While the aggressive move by the Federal Reserve is needed to make sure the U.S. economic recovery doesn’t falter, many are concerned that the easy money will drive inflation higher. Of course, this has yet to happen, as consumers appear more worried about paying down debt levels than spending. The Federal Reserve suggests it would keep interest rates near zero as long as the unemployment rate hovers above 6.5% and inflation remains manageable.
The market view on the Federal Reserve appears to be unfavorable, based on the initial reaction following the announcement of QE4. Based on the Federal Reserve’s assessment, there’s concern that the U.S. jobs picture and economy may be worse than we expect. “Although the unemployment rate has declined somewhat … Read More
Silver continues to hold strong on the charts, with a possible upcoming move at the tough $35.00 resistance level and potential retest of the $40.00 level. The aggressive upward move has largely been driven by the move in gold, along with speculative trading.
Buying in the white metal is generally in line with global economic growth, which drives the demand for industrial goods that use silver as a raw material, while it also pushes up income levels and the global demand for silver and gold jewelry.
Here in the U.S., the economic recovery is faring well. The better-than-expected U.S. gross domestic product (GDP) growth revised up to 2.7% for the third quarter, along with other encouraging economic data, is also adding some optimism of economic renewal.
While gold is considered more of a pure-play hedge against risk, any sign of industrial recovery helps, as silver—unlike gold—is used in numerous industrial applications.
The price of silver has had some bull legs on the chart since its breakout in August, based on my technical analysis.
As you can see on the chart below, the upward move in prices for March contracts above the 50- and 200-day moving averages (MAs), which is bullish. The March silver is also showing a bullish golden cross with the 50-day MA of $33.09 above the 200-day MA of $31.06.
The MA convergence/divergence (MACD) is also quite bullish, but it may be approaching a top. The risk is that the run-up appears to be overextended and vulnerable to some near-term selling pressure with resistance at around $35.00. For the white metal to advance, we need to see a … Read More
The historic and unprecedented action by the Federal Reserve in enacting extremely loose monetary policy is an attempt to stimulate the economy. I’ve always felt that a central bank should have one mandate: the stability of the currency. The Federal Reserve has a dual mandate; in addition to keeping inflation in check, the American central bank also is attempting to lower the unemployment rate through monetary policy, a task not easily achieved.
Over the last couple of years, we have clearly seen that, while the economy has started to improve, it is far below potential gross domestic product (GDP) growth levels. Even with the historic monetary policy initiatives, the Federal Reserve is limited in what it can and cannot do. While the Federal Reserve may have good intentions, there are serious consequences due to unintended outcomes.
Through monetary policy action the Federal Reserve is attempting to increase the wealth effect by increasing asset prices. The thinking is that the wealthier people become through the increase in their assets, the more likely it is that they’ll be willing to spend. This action is one reason why we’re seeing gold prices go up, as well as the stock market and home prices since 2009.
Recently published data show that at least this part of the plan by the Federal Reserve is working, as the net financial wealth for Americans increased by $1.7 trillion to $64.8 trillion for the third quarter 2012. According to the Federal Reserve, this is the highest level of net worth by U.S. households since 2007. (Source: “U.S. household wealth rises to near 2007 high,” Reuters, December 6, 2012.)… Read More
The labor picture remains precarious. On one hand, Citigroup, Inc. (NYSE/C) announced it was cutting 11,000 jobs worldwide, as the financial services sector continues to be hard hit; while on the other hand, Apple Inc. (NASDAQ/AAPL) announced it would produce at least one of its computer products in the United States.
Wall Street was relieved last Friday after the much-anticipated jobs readings offered much-needed hope that job creation in America continues to be on track.
Job growth is showing signs of wanting to edge higher, as the unemployment rate made a surprising decline to 7.7% in November; 146,000 workers managed to find full-time work, which was well above the 80,000 jobs estimated by Briefing.com.
And while I’m pleasantly surprised with the drop in the unemployment rate and continued job creation, the decline in the unemployment rate was attributed to fewer people looking for work, according to the Labor Department. Many people during Hurricane Sandy did not search for work.
Let’s take a closer look at the unemployment rate based on data from the Bureau of Labor Statistics. The November reading was the lowest reading since a 7.3% unemployment rate in December 2008, but the number remains well below the four-percent level we saw during 2006 and 2007. On the plus side, the unemployment rate has improved from the recession high of 10.0% in October 2009, which was the highest level since the 10.8% during the December 1982 recession.
The trend of the unemployment rate shows the improvement since August 2011, when over nine percent of Americans were officially unemployed.
It took close to five years for the unemployment rate to … Read More
President Obama is on a fiscal cliff campaign to show why middle-class America really needs the help. Of course, Republicans want the Bush-era tax cuts to also apply to the top two percent of income earners. This is the major sticking point holding up a deal.
I love capitalism and the idea that you can generate unlimited wealth to drive consumer spending. This is the reason why the United States is one of the richest countries in the world, with its gross domestic product (GDP) growth driven by consumer spending. Yet despite the ability to create wealth, the income gap between the rich and poor has been widening, which ultimately impacts consumer spending. In my view, this is an issue that needs to be addressed, as there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as an avenue for income distribution may need to be fixed.
This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the Great Recession that began in 2008. Lower income levels impact consumer spending and economic growth.
The median family income plummeted to an inflation-adjusted $45,800 in 2010 compared to $49,600 in 2007, according to the Survey of Consumer Finances, a publication of the Federal Reserve. The survey also indicated that the top 10% of households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into less consumer spending by the middle class as income levels fade…. Read More
I’m tired of reading and talking about the so-called “fiscal cliff,” but it could spell dire consequences for the economy if it is allowed to go through (and even if not). The reality is that America needs to stop printing money with no regard for the massive national debt load. Allowing the debt to continue to rise will punish the country’s future generations.
If we assume that the global economy will weaken, especially in the eurozone, the impact on global gross domestic product (GDP) growth would be negative. Stock values would fall, so you would need a safe haven to park your capital, which many of you know is in gold.
There’s been plenty of talk around here regarding gold and whether the precious metal is heading for $2,000. In my view, the current global risk will support and drive gold higher.
For any gold investor, the question is whether to buy the physical bullion or gold mining stocks. For the average investor, I favor gold stocks over the higher risk of other options.
The mining sector continues to be an excellent place to make money. An investment strategy would be to buy a mixture of exploration-stage gold mining stocks along with small to large gold producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers.
For exchange-traded fund (ETF) investors, the SPDR Gold Trust ETF (GLD) is worth a look and is currently trading in a sideways channel above the 50- and 200-day moving averages (MAs).
Chart courtesy of www.StockCharts.com
If you are looking at … Read More
With the world economy slowing, it is possible that we could see a global recession in 2013. Gross domestic product (GDP) growth for many countries has significantly declined in the third quarter of 2012. While some countries experienced an increase in GDP growth in the first part of the year, it’s quite apparent going into the third quarter that, for most nations, the estimates were far too high.
One recent example of the economic decline that’s occurring in various nations around the world is Brazil’s mere 0.6% GDP growth in the third quarter, compared to a survey conducted by Bloomberg of 54 economists that had estimated a 1.2% increase in GDP growth. (Source: “Brazil GDP Growth at Half Forecasted Pace as Investment Dives,” Bloomberg, November 30, 2012.)
Two interesting points are apparent. First, the significant decline in Brazilian GDP growth increases the possibility of a global recession in 2013; and second, the country’s economy has some similarities with America that we should be cognizant of.
In America, retail sales, including car sales, have remained somewhat resilient, even though the economy has been weak. In Brazil, the situation is quite similar, as retail sales increased 8.5% in September from the same time in 2011. Yet industrial production in Brazil fell 2.8% in the third quarter, as compared to the same quarter in 2011. (Source: “Brazil GDP Growth at Half Forecasted Pace as Investment Dives,” Bloomberg, November 30, 2012.)
While America certainly has larger issues, our third-quarter GDP growth was 2.7%, versus an annualized GDP growth rate for Brazil of only 2.4%. A big issue for both countries is not the willingness … Read More
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
China appears to have avoided a much-feared “hard landing” via aggressive interest rate cuts, heavy infrastructure spending, and a climate of promoting consumer spending to drive gross domestic product (GDP) growth.
The most recent evidence of the economic reversal was an expansionary HSBC Flash Purchasing Managers Index of 50.4 in November, the highest reading in 13 months. While the index needs to continue to deliver positive readings, it’s a good start and it suggests that the Chinese economy and the country’s GDP growth are mending, on their way to better times ahead.
China’s industrial production surged 9.6% in October, up from 9.2% in September. The key retail sales reading showed sales increasing 14.5% in October versus 14.2% in September. (“Data shows Chinese economy expanded in October,” China Economic Review, November 12, 2012.) And in another positive reading, the country’s trade surplus of $32.0 billion in October represented a four-year high. (“China trade surplus hits four-year high,” China Economic Review, November 12, 2102.)
The task of helping China to solidify its identity as the world’s next big economic superpower lies with the new President Xi Jinping and Premier Li Keqiang, who will take control in March 2013.
To say these are not exciting times for China is an understatement as this could be a special decade for the country. The world and China will welcome the next more youthful leaders at a time when China’s political and economic role has intensified on the world stage.
For China, the change at the helm comes at a critical juncture, as the country is attempting to turn its economy around following years of explosive … Read More
Japan continues to be in an economic abyss, void of any gross domestic product (GDP) growth. There’s minimal growth and the country is mired in a multi-decade-long comatose state; it 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 appears set for another recession since GDP growth is estimated to fall in the fourth quarter. (“Japan Economy Shrinks 0.9% in Third-Quarter, Points to Recession.” CNBC via Reuters, November 12, 2012.)
The problem is that Japan’s government has pushed expansive fiscal and monetary policy to try to re-ignite what used to be the pearl of the orient; but so far, it has probably helped to prevent a deep recession, rather than drive GDP growth.
The country’s interest rates are already at zero, so there’s little space to maneuver. Given that interest rates have been at zero percent since 2010, the failure of the country to rebound is puzzling. Consider that the high point for interest rates since 2005 was a rate of just over 0.5% in 2007. (Source: “What is the Japanese yen (JPY)?,” GoCurrency, last accessed October 22, 2102.) That’s seven years with extremely low interest rates and not much has improved with the country and GDP growth.
Some argue that Japanese banks could be looser in their lending policies, but this could lead to some potential credit issues down the road. Just think of what happened here.
The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) came in … Read More
Global networking giant Cisco Systems, Inc. (NASDAQ/CSCO) beat on revenues and earnings estimates in its 2013 fiscal first-quarter on Tuesday. What was interesting, but not a surprise, was the company’s good performance from its Asia-Pacific and EMEA (Europe, the Middle East, and Africa) regions; albeit, it was mostly because of the Middle East and Africa regions, as the Europe division continues to be a drag on the stock’s growth due to economic contraction in the eurozone.
The Asia-Pacific and EMEA regions now account for 41% of the company’s total revenues. (Source: “Cisco Reports First Quarter Earnings,” The Network, November 13, 2012.) The results demonstrate the growing importance of the non-U.S. markets, particularly Asia, and the emerging markets to Cisco among other multinational companies.
Take a look at the recent results from global credit card provider MasterCard Incorporated (NYSE/MA). Consumer spending is on the rise; at least via credit cards. MasterCard is a good global barometer on consumer spending, as the company has a presence in over 210 countries. In a third-quarter press release, MasterCard reported that its worldwide purchase volume surged 12% in the third quarter on a local currency basis (“MasterCard Incorporated Reports Third-Quarter 2012 Financial Results,” Yahoo! Finance via BusinessWire, October 31, 2012, last accessed November 14, 2012.) MasterCard President and CEO, Ajay Banga, said, “Additionally, emerging geographies and governments continue to provide great opportunities for growth.”
Again the interesting point to note is the growing use of credit in the emerging markets where cash was king in consumer spending. MasterCard clearly sees new markets in these growth regions where the per capita income is rising, helping to … Read More
With investor confidence still relatively weak, many are looking for any signs of a rebound in the global economy. One area many are looking to is the Chinese economy. Not only has the Chinese economy become a greater force within the world economically, but many U.S.-based companies are generating a significant amount of earnings from that nation. Investor confidence is partially being predicated on the hope that the Chinese economy can offer some glimmer of optimism, as opposed to the still anemic gross domestic product (GDP) growth levels in America.
Recent data from China offers a bit of a mixed picture. Exports in October rose at the fastest pace in five months, coming in 11.6% higher than the previous year. This compares to 9.9% year-over-year growth for September. That is certainly a good sign for the Chinese economy, and some investor confidence might be rallied off such figures. (Source: “China Exports Exceed Estimates in Sign of Global Pickup,” Bloomberg, November 10, 2012.) However, the sky is not all clear yet.
The head of the National Development and Reform Commission, Zhang Ping, stated that he believes the Chinese economy must be prepared for increased turmoil from various nations around the world. In addition, domestic issues still are quite serious. (Source: “China Exports Exceed Estimates in Sign of Global Pickup,” Bloomberg, November 10, 2012.)
This is a difficult way to build up investor confidence. On the one hand, there are some signs the Chinese economy and the global economy might be moving upward off the floor. However, there are still numerous indicators pointing to the fact that things could quickly unravel and … Read More
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
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
We are at a major point in the history of China as the country gets ready to welcome its new leadership group that will dictate what China does, especially with its economic growth, for the next decade. Moreover, it will be critical for President Obama to establish a stronger relationship with whomever will run China during his second term in office, as it could set up how the world looks in 10 years.
The world’s two top economies have similar economic growth goals: to expand their economies, drive income levels higher, and push consumer spending.
The 18th National Congress of the Communist Party of China, which began yesterday. will set in motion the transfer of power in the communist party that occurs every 10 years. There is yet to be an announcement on the new appointments, but the good money is betting on Xi Jinping, the vice-president of China, becoming the next president, replacing Hu Jintao. Li Keqiang, the vice-premier, will then become the next premier, replacing Wen Jiabao.
Already there are questions regarding what type of people the new leaders will be. The consensus is that the relative youth and moderate stance of Xi Jinping and Li Keqiang could make China more in tune with the modern world, which could see the development of better relationships with its key trading partners, including the United States, and could drive economic growth.
For China, the change at the helm comes at a critical juncture, as the country is currently facing stalling economic growth following years of explosive gross domestic product (GDP) growth that propelled the country to overtake Japan as the … Read More
When it comes to the latest presidential election, the central focus for many U.S. citizens has been the lack of gross domestic product (GDP) growth for America. Since the Great Recession began several years ago, GDP growth has remained far below potential, leaving millions of people unemployed and looking for work. During this time, the global economy has also slowed. While President Barack Obama has made large claims about what he can do to help increase GDP growth, let’s take a look at the most likely scenario.
During a presidential campaign, all politicians will make grandiose claims about how they can solve all of the country’s problems and kick-start GDP growth. Of course, we all know that the president does not create jobs in the private sector, but creates a structure that can either help or hinder job creation. With the global economy continuing to slow, many Americans are hoping that President Obama’s second term is far more business-friendly than his first.
Because the president faces a House of Representatives that is controlled by the Republican Party, the fear of political gridlock is now becoming a reality once again. With the fiscal cliff issue looming on the horizon, this divided political structure will surely slow the decision-making process. All hurdles to GDP growth should be avoided by both political parties. As much as it is rare to see, both sides should come together to help create the foundation for America’s GDP growth to increase to acceptable levels. With a sluggish global economy, America cannot look to other nations to help pull it out of this trough.
This is the reason … Read More
Investors bid up stocks prior to the presidential election on Tuesday, when President Barack Obama won his second term. Investor confidence was due to some uncertainty eliminated with the election, but the nervousness quickly resurfaced on Wednesday morning, impacting investor confidence; stocks plummeted on the realization that Obama still has many hurdles to overcome and the fact that the global economy, namely in Europe and China, may be prone to more weakness that will negatively impact investor confidence.
I’m sure President Obama is relieved that the election is over; but I can tell you, it’s only the beginning of some difficult times ahead that will challenge his patience and fortitude, while also impacting investor confidence.
While the uncertainty of the election is over, there is a lot of work ahead for Obama, as he now needs to immediately deal with the pending fiscal cliff. This will not be an easy feat, but it must be done to instill some investor confidence in the equities market.
The major problem is that President Obama must be careful, as he will need to cut and control the deficit and national debt of over $16.0 trillion, while at the same time not allowing the full extent of the $607.0 billion in broad budget cuts to take place on January 1; if he doesn’t balance the two, he will likely kill the economic recovery, 2013 and 2014 gross domestic product (GDP) growth, and investor confidence.
Moreover, any agreements or decisions made by President Obama will need to be agreed upon by the House. This will be problematic, given the continued political gridlock, as the Republicans … Read More
By the time you are reading this, either Barack Obama or Mitt Romney will have won the race to be the 45th President of the United States.
Yet I will remind the winner that there’s not much time to rejoice in the victory, as there’s plenty of work ahead, which will dictate the direction of America over the next four years in relation to debt, job creation, economic growth, and foreign policy.
Whoever has won, they need to work on job creation at a much stronger rate than the current pace. All those promises that were made during the election campaign must now be acted upon. We need to create strong job creation and sustained jobs growth, while lowering the unemployment rate. The Federal Reserve is cautious about job creation into 2013. Obama and Romney have different strategies for lowering the unemployment rate and increasing job creation. But the reality is that unless Americans are put back to work, the economic recovery will likely stall and add to a possible financial crisis.
The most immediate concern for the next president will be what to do about the pending fiscal cliff on January 1, 2013, which calls for $607.0 billion in automatic budget cuts to avert a financial crisis. The Congressional Budget Office (CBO) recently warned that the U.S. economy could contract in 2013 if the spending cuts are allowed, which would impact job creation. (Source: Congressional Budget Office, last accessed November 6, 2012.) I expect the same.
At a round table meeting of the Group of Twenty Finance Ministers and Central Bank Governors (G-20), there was talk of the U.S. … Read More
I recently discussed the upcoming key holiday shopping season that officially begins with the critical Black Friday on November 23 and its importance to the retail sector.
Discounter Target Corporation (NYSE/TGT) reported a slower rise in sales in October and will be betting on the holiday shopping season when some retailers can generate up to 40% of the company’s total annual sales. (Source: AP, “Target October sales figure rises,” Yahoo! Finance from The Associated Press, November 1, 2012.)
Consumer spending drives the retail sector, economy, and gross domestic product (GDP) growth.
Retail sales for October, excluding drugstores (comprising of 18 national retailers polled by Thomson Reuters), surged a better-than-expected 4.7% versus the estimate of 4.3%. (Source: “Retailers Report an Upbeat October,” The New York Times, November 1, 2012.)
The pickup in the retail sector is encouraging; and with the current decline in gasoline prices, the pickup in jobs, and the growing strength in the housing market and prices, retail sales could be strong.
I believe the department stores and some of the specialty retailers will fare well; the key for success in the retail sector is selective picking.
My advice is to continue to stick with the leading discount bellwether retail stocks. In the large-cap retail sector area, the top companies are Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST).
Costco reported a seven-percent jump in its key same-store sales reading in October, as reported on its web site. The results continue to show steady growth; but for that extra bit of growth, you should look at the smaller discount companies in the retail sector.
Costco, … Read More
The key holiday shopping season is closing in fast. With the critical “Black Friday,” November 23, a month away, the retail sector will be anxious to see if consumers deliver.
The recent jobs report added some optimism to the retail sector; albeit, I doubt it will be enough to drive consumers to the malls and online to spend. We need to see progressive jobs creation, rather than the single reading, and we want to see a positive pattern. If jobs continue to rise, this would likely translate into higher sales in the retail sector.
Thanksgiving weekend, beginning with Black Friday, is important, as you can see in the chart below. Retail sales have increased in three straight years and the hope is for 2012 to be a banner year. The National Retail Federation is optimistic and estimates this holiday shopping season will generate sales of $586 billion, up from $563 billion in 2011. (Source: “Holiday FAQ,” National Retail Federation, accessed October 19, 2012.)
Copyright Lombardi Publishing 2012; data
source: National Retail Federation
The monthly retail sales numbers in the retail sector are showing some encouraging signs. The Thomson Reuters Same Store Sales Index (comprising of 17 U.S. chains) contracted 3.6% in September, which was in line with the estimate but well down from the 6.4% increase in September 2011. (Source: “U.S. retailers,” September sales up before holiday rush,” Reuters, October 4, 2012.) There’s a lot of work ahead for the retail sector
Consumer confidence in September was encouraging, with a reading of 70.3, above the estimate of 63.0, according to Briefing.com, and the upwardly revised 61.3 in August. Yet the … Read More
What happens in China will have an impact on the U.S. economy and the global economy. The linkage between economies worldwide has become more profound over the past decade. This is why, as an investor, you need to be fully aware of the situation across the Pacific.
The state of the Chinese economy continues to ramp up heated discussion specifically concerning the immediate need for further monetary stimulus to drive domestic consumption in China.
China’s inflation rate is currently manageable at 1.8%, which allows for added monetary stimulus. (Source: National Bureau of Statistics.)
China’s recent industrial production is a sore spot compared to the sizzling results from 2003 to 2006, as reflected on the chart; albeit, the number has risen in the past three straight years. Industrial output improved from 2008 to 2011, but the current year is heading for the lowest levels since 2008, when the global recession started and there was a need for monetary stimulus. According to China’s Ministry of Industrial & Information Technology, the country’s industrial production is estimated to fade to 10% in 2012 versus 13.9% in 2011, which is an ideal level for monetary stimulus.
Copyright Lombardi Publishing 2012; data source: Central Intelligence Agency (CIA), The World Factbook.
The World Bank predicts China may see its economic growth expand by a mere 7.7% this year and rebound to an optimistic 8.6%. But these metrics may not be easily achievable, especially given the financial crisis in the eurozone, hence the need for monetary stimulus in China.
The country’s gross domestic product (GDP) has declined over the past six straight quarters. GDP growth came in at … Read More
With the recent new monetary policy initiative by the Federal Reserve, one area that I’m becoming more worried about is the impact this will have on inflation. While inflation has declined from the highs in the 1970s, there is always the worry that monetary policy could ignite the flame of higher prices in the future.
The problem with inflation is that once it becomes imbedded within a society, it is extremely difficult to eradicate. While commodity inflation is troublesome, it’s not the biggest worry, as those prices can quickly adjust. It’s not difficult for the price of wheat to decline if there is a large crop, for example.
The problem with monetary policy actions that are too easy for too long is that inflation starts to creep into wages. Once you have wage inflation, it is extremely difficult to remove from the system. While the price of wheat can decline 10% quite easily, wages cannot move in such a manner.
So far, wages have not moved at all. This is due to the slack in the economy. The slack denotes the difference between current and potential gross domestic product (GDP) growth rates. Monetary policy action is used to help decrease this gap, to adjust it to prevent inflation from occurring. The problem is that this is not an easy task.
The other question is: what happens if inflation is rising but the economy does not increase its pace of growth? Should monetary policy action remain accommodative? This is the current dilemma for the Bank of England.
The Bank of England has an inflation target of two percent. They, too, have … Read More
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
While Black Friday is another seven weeks away, there is already mounting speculation on how good the holiday shopping season will turn out to be for the retail sector.
A strong fourth-quarter for the retail sector could boost the country’s gross domestic product (GDP) growth, since consumer spending accounts for about 70% of the GDP. The second-quarter GDP (third estimate) reflected the current stalling in U.S. consumer spending, as the GDP growth of 1.3% was well below the estimate of 1.7%. This represented the slowest rate of growth since the third quarter of 2011. (Source: “Economic Calendar,” Yahoo! Finance.)
Given this, you kind of have to wonder about the underlying strength of the consumer spending. GDP is estimated to grow at 2.7% in the U.S. in 2013. (Source: “2013 Economic Statistics and Indicators,” Economy Watch, October 5, 2012.) This implies a slight rise in consumer spending.
The retail sector is showing improvement in sales, but consumer spending on durable goods was horrible in August, when spending on non-essential goods and services cratered 13.2% (source: U.S. Census Bureau News, U.S. Department of Commerce, September 27, 2012), versus the -5.0% estimate and the -4.1% in July (source: “Economic Calendar,” Yahoo! Finance). Even when you eliminate the transportation portion, consumer spending on durable goods fell 1.6%, again worse than the -0.2% estimate and revised -1.3% in July.
The reality is that America as a whole needs to spend and drive retail sales, but this is not happening. The poor reading indicates hesitancy in consumer spending in the retail sector on non-essential goods and services that, in my view, is a key component of … Read More
Alcoa, Inc. (NYSE/AA) will be the first Dow stock to report in the third-quarter earnings season, as it kicks off with its results on October 9. The company is one of the world’s top aluminum makers. The stock is also a good indicator for the global economy, as the metal is used in many industrial applications, including aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial.
In the second-quarter earnings season, Alcoa beat slightly on earnings but revenues are an issue, as will likely be the situation for many U.S. companies. For Alcoa, revenues are estimated to fall 12.7% in the third-quarter earnings season followed by a 5.0% decline in the fourth-quarter earnings season.
Overall revenue growth is estimated to be flat, down from 1.9% growth at the start of the third quarter, according to FactSet. This is not what you would expect if the economy was healthy. And while there is some hope and optimism for the third-quarter earnings season, I expect disappointment across the board.
Based on the current estimates, earnings for the S&P 500 are estimated to fall 2.6% in the third quarter, which would end the 11 straight months of earnings growth, according to FactSet (www.FactSet.com). So far for the third quarter, 82 S&P 500 companies have issued negative earnings-per-share (EPS) guidance versus only 21 companies reporting positive guidance.
The top performing earnings growth predicted for the third-quarter earnings season is in the financials sector at 10.4%, according to FactSet.
The two weakest areas of earnings growth in the third-quarter earnings season are predicted to be the energy and … Read More
There are the rich and then there are the mega-rich. A study showed that those with a net worth of at least $25.0 million tend to spend more lavishly on vacations and home renovations, compared to their spending on clothing, cars, and jewelry, according to the Spectrem Group. Then there’s the CEO of Oracle Corporation (NASDAQ/ORCL), Larry Ellison, who purchased the sixth largest island in Hawaii for a cool $500 million. When you are worth over $30.0 billion, dropping half a billion dollars on an island is not a big deal.
As I recently discussed, the income gap between the top one to five percent of income earners and the other 95%–99% is widening, which will likely present problems down the road. In 2009, the Internal Revenue Service pegged the adjusted gross income (AGI) level for the top one percent club at $343,917. To be included in the top five percent, the AGI was $154,643.
While the presidential candidates debate about the economy and monetary policy, one thing is sure—America is on fragile ground and needs a jump start to drive consumer spending in the economy.
Retail sales are showing improvement, but consumer spending on durable goods was horrible in August, when spending on non-essential goods and services cratered at -13.2%, versus the -5.0% estimate and the -4.1% in July. Even when you eliminate the spending in the transportation market sector, consumer spending on durable goods fell 1.6%, again worse than the -0.2% estimate and revised -1.3% in July. Of course, Ellison and the other top five percent aren’t concerned with a personal budget. The reality is that America as … Read More
I hate that “R” word, but here we go—recession.
Don’t worry too much about the economic recovery in the U.S.; the real threat, as I have said on many occasions, will be the inevitable deterioration of the eurozone. What happens in the eurozone will have a domino effect on the rest of the industrialized and emerging markets worldwide.
Credit ratings agency Standard & Poor’s lowered its growth forecasts for the eurozone and suggested that the findings “paint a bleak picture” for the region. This shouldn’t be a surprise to you; I have long been bearish on the eurozone despite the bailouts and bond buying.
Standard & Poor’s estimates the eurozone will see its GDP growth contract by 0.8% this year, down from the previous -0.7%, followed by no growth in 2013, versus the previous estimate of 0.3% growth.
Spain and Italy were highlighted as the trouble regions. Spain will see its economy contract 1.4% in 2013. The country is working on austerity measures that are expected to be introduced this week, as the country may be looking at resolving its own debt issues and recession before requesting money from the ECB and other lenders.
A tough austerity program would bind Spain’s spending and have an impact on its ability to climb out of this recession. The country’s economic strength is declining. The country’s economy has fallen to 12th in the world in 2011, according to the International Monetary Fund (IMF). Previously, Spain’s economy was the ninth largest, but with its continued financial crisis, it has since been surpassed by Russia, Canada, and India. Regardless, a collapse in Spain would be … Read More
Japan’s economy has been in a comatose state for over two decades, and the country continues to face hurdles that threaten the next several years. And just when Japan’s gross domestic profit (GDP) growth was showing some life, the eurozone mess surfaced and wreaked havoc.
From 1981 to 2010, Japan’s average GDP growth was 2.2% with a high of 9.4% in March 1988; but this seems to now be in the distant past, based on the soft projections going forward.
In the second quarter, Japan’s GDP growth was a meager 0.3%, well below the 0.6% estimate and the promising 1.3% in the first quarter. Over the past decade, Japan’s GDP growth expanded at a snail’s-pace average of 0.2% quarterly.
In the following chart, take a look at the comparative GDP growth over the past five years between China and Japan; notice the significant difference in GDP growth between the two countries.
Chart copyright Lombardi Publishing, 2012; data source: www.data.worldbank.org
Japan is blaming its stagnant GDP growth on the economic stalling in Europe, along with the high level of the yen and its impact on exports.
And just like the U.S., Japan relies on domestic private consumption, but that accounts for about 60% of Japan’s economy versus about two-thirds for the U.S.
Japan was the second largest economy in the world, before it was surpassed by China in 2010. The country has an unemployment rate of over four percent—something that was not a norm in the country’s boom days. In June, the unemployment rate was 4.3%, which is much better than the 8.3% in the U.S. but well below Japan’s long-term … Read More
I love capitalism and the idea that you can generate unlimited wealth. This is the reason why the U.S. is one of the richest countries in the world, with its GDP growth driven by consumer spending. Yet despite the ability to create wealth, the income gap between the rich and poor has been rising, which ultimately impacts consumer spending. In my view, this is an issue that needs to be addressed, because there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as a form of income distribution may need to be fixed.
This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the great recession that began in 2008. Lower income levels impact consumer spending and economic growth; therefore, lower income levels mean lower GDP growth and an extension of the current recession.
The median family income plummeted to an inflation-adjusted $45,800 in 2010, compared to $49,600 in 2007, according to the Survey of Consumer Finances published by the Federal Reserve. The survey also indicated that the top 10% of households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into lower consumer spending by the middle class as income levels fade.
What is worrisome is that the recession resulted in a greater disparity in incomes between the poor and the rich. It’s common for the chief executive officer (CEO) of a large company to earn multiples of regular workers. According to … Read More
The People’s Republic of China has a population of over 1.3 billion people and a rapidly growing consumable-hungry middle class of over 300 million people. The Goldman Sachs Group, Inc. (NYSE/GS), an investment bank, predicts China will become the largest economy by 2040.
The Organization for Economic Cooperation and Development (OECD) predicts China will grow its economy by 8.2% this year, but rebound to 9.3% in 2013. While China’s GDP growth is lower than the previous year’s, it is well above the global economic growth averages of 1.6% and 2.2% in 2012 and 2013, respectively. (Source: OECD, www.OECD.org/china.)
In my stock analysis, the rapid growth of the China’s middle class will be key. In a research finding, Credit Suisse predicted that the household wealth in China will double to $35.0 trillion by around 2015, based on achieving sustainable GDP growth at or near the current levels.
A strong area for growth investors will be the Internet sector in China, based on my stock analysis. This country is the epicenter of the Internet world, with online demand growing at a staggering pace. My stock analysis suggests there is strong potential in this area.
The number of Internet users in China is tops in the world, with 585 million on the Internet at the end of June, according to the China Internet Network Information Center (CNNIC). By comparison, the next four largest Internet countries were the U.S. (245 million), India (121 million), Japan (101 million), and Brazil (82 million), according to Internet World Stats.
Internet users commonly roam the Web via their smartphones. The number of mobile Internet users in China was … Read More
A eurozone recession is coming.
In Europe, all eyes will be focused on the European Central Bank (ECB) meeting today. The early betting line is that ECB President Mario Draghi will announce that the central bank will put in place a program of unlimited buying of government bonds with maturities of up to three years of eurozone countries that are struggling with high yields, such as Spain and Italy.
While the move is helping to lift the euro along with optimism, I consider the speculated ECB move a band-aid solution for a much deeper structural problem that has engulfed Europe. The move will help to control short-term interest rates and aid the debt-laden countries, such as Spain, Italy, Ireland, and Portugal; but in the longer term, the plan offers very little.
What I feel needs to be done is the eurozone needs to be restructured and rebalanced. You cannot continue to save the weak countries for the sake of keeping the eurozone intact. Greece has received hundreds of billions in aid and is nowhere close to being a net contributor to the eurozone. The same goes for the other debtor countries that continue to drag the eurozone down.
Spain’s recession picked up steam in the second quarter, with gross domestic product (GDP) contracting 0.4% quarter-on-quarter, according to the country’s statistical office. GDP growth in the first quarter fell 0.6% year-on-year. Spain is in a mess, hampered by its recession, high debt, surging and unsustainable high bond yields, declining growth, and its significant unemployment rate of close to 25%. Spain will likely require a full bailout to avoid a collapse in … Read More
The muted growth in Europe is far-reaching and negatively impacting the global economy…and the evidence for this is mounting.
Six eurozone countries are in a recession, and Germany and France could join in next year.
China, the world’s second largest economy, may still be heading for a hard landing, albeit, the government will likely do whatever it can to prop up its economic growth and make sure the growth is given help. The country’s 2012 gross domestic product (GDP) is estimated at a 7.5% GDP growth rate, according to Premier Wen Jiabao. This would be the lowest economic growth since 1990. Other pundits feel that China could still expand at over eight percent this year; however, much of the growth will be dictated by what happens with the debt crisis and muted economic growth in Europe and the eurozone, which has lessened the demand for Chinese-made goods.Japan, the world’s third largest economy, is also in an economic stalemate that is negatively impacted by the lack of economic growth in Europe.
But while the world’s top industrialized countries are at risk, the higher risk from the eurozone crisis will be on the emerging regions in Eastern Europe, much more than Asia and the United States. These emerging economies tend to be more driven by export demand.
Russia, the largest economy in Eastern Europe, is expected to see GDP growth of 3.5% for 2012, down from the previous 3.7% estimate, and 4.3% in 2011, according to internal government estimates. Inflation is also a mounting problem in Russia.
The second largest economy in Eastern Europe, Poland, reported GDP growth of 4.3% in 2011, … Read More