We all know that central banks around the world have taken a loose monetary policy stance, providing substantial quantitative easing measures to try and revive the global economy.
As I’ve written before, there are many long-term unintended consequences that could arise from such an aggressive monetary policy program. While quantitative easing has reduced the probability of a financial crisis occurring over the past couple of years, this does not eliminate such an event from happening at some point in the future.
One example of the impact of the current monetary policy initiatives is the global hunt for yield. Investors have been piling into all kinds of bonds regardless of the true long-term fundamental merit of the investment. France, as we all know, is suffering from a lack of growth, including downgrades by credit rating agencies. However, this has not stopped investors from piling into French bonds, which are up approximately 12% year-to-date.
Even though the economy is still weak, and there have been no real structural reforms within France to fix the economic potential of the nation for the future, investors have piled into bonds at such a rate that the 10-year French bonds are yielding approximately 1.7%.
I don’t know about you, but I would be more comfortable investing in a country or company that has the ability to grow revenue and run their economy or business efficiently. At this point, France is not that country.
This hunt for yield is one of the side effects of the current monetary policy program. Quantitative easing has pushed investors out of safe investments and into riskier assets. While this is creating … Read More
Don’t worry, folks, Federal Reserve Chairman Ben Bernanke is not going to take your money away anytime soon; the stock market is safe.
In his testimony to Congress on Wednesday, Bernanke made it clear that the central bank’s current aggressive $85.0 billion in monthly bond purchases will continue to move along.
The stock market surged upward on the news, which is exactly what I would have expected, given that the amazing run-up in stocks this year has largely been due to the flow of easy money into the U.S. economic system. So there’s no need to worry about the stock market and your assets—for now.
Bernanke emphasized the fragility of the jobs market and reinforced his view that it’s still too early to put an end to the stimulus. Allowing rates to creep higher would “carry a substantial risk of slowing or ending the economic recovery,” said Bernanke to Congress. (Source: Chairman Bernanke, B.S., “The Economic Outlook: Before the Joint Economic Committee, U.S. Congress, Washington, D.C.,” Board of Governors of the Federal Reserve System web site, May 22, 2013.)
The end result will see the stock market continue to rally higher to new record highs.
The chart below shows the upward move in the S&P 500 since 1980, shown by the green line, as the effective federal funds rate declines over time. Note the massive gap between the S&P 500 and the effective federal funds rate, shown by the purple oval on the chart.
Chart courtesy of www.StockCharts.com
The reality is that not only is the easy monetary policy flowing in America, it is also flowing across the global economy … Read More
With the introduction of monetary stimulus by many central banks around the world, a common question asked is: what’s a unique investment opportunity in a market sector that is not immediately obvious to the average investor?
If the global stimulus really begins to work, it should result in higher demand for commodities. If this occurs, an interesting market sector that might be an above-average long-term investment opportunity is the shipping industry.
Information just released shows that Greek shipping firms have recently ordered the most iron ore carriers since 2008. Greek shippers own a large number of vessels internationally. (Source: Sheridan, R., “Greeks Bet Ship Rout Ending With Most Orders Since 2008: Freight,” Bloomberg, April 30, 2013.)
While the average earnings per day for a Capesize ship (a type of cargo ship used to transport raw commodities) is only $4,900—a massive drop from the peak in 2008 of $229,000—many analysts are expecting this current level to be a bottom and are expecting earnings to increase to $17,500 per day next year.
Clearly, the Greek shipping market sector sees an investment opportunity over the next few years. From the time of ordering to delivery, the process of obtaining a carrier takes approximately two years. However, because of the economic slowdown, the costs of construction and secondhand sale prices have dropped precipitously.
As an example, a new ship that used to cost approximately $100 million to build in 2008, now costs only $47.0 million. Prices are even lower on the secondhand market sector for large ships, and some shipping firms see this time as an investment opportunity and are using the low prices … Read More
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
You can tell a lot about the pulse of the economy by examining the retail sales and restaurant sector. When people are working and making money, they tend to be more confident and want to spend, especially non-discretionary spending.
In the fast-food restaurant sector, the “Best of Breed” is McDonalds Corporation (NYSE/MCD).
The company has numerous rivals and the sector is extremely competitive, but there is no real and valid threat on the horizon for McDonalds that could affect it.
Characterized by its familiar “golden arches,” which are sometimes visible from miles away, the company is a true American icon, just like General Motors Company (NYSE/GM).
Yet McDonalds is also a decent indicator on how the United States and global economy are faring.
The current level and valuation of stocks suggest everything is going well and on target with the global economy.
But, sorry to break it to you: the path to sustained economic renewal is still filled with potholes.
As I’ve previously written in these pages, the global economy and performance of the stock markets have been built by the easy money injected into the global monetary system by the world’s central banks, including our friends at the Federal Reserve.
So when I begin to see slowing at some of the key multinational companies, I wonder about the condition of the global economy.
McDonalds is a decent barometer on the global economy and, based on what I’m seeing, I sense there’s some stalling in the global economy.
In the first-quarter earnings season, McDonalds reported a marginal one-percent rise in its consolidated revenues due to the slowing in Europe and … Read More
Consistent jobs growth remains an issue here in the U.S.
We also know that the lack of jobs is a worldwide problem that is only made worse by the world’s growing population and the stalling global economy.
The reasoning behind this worldwide jobs problem is simple.
Jobs are created when the economy expands, which drives the need for more workers. Of course, modern technology, industrial efficiencies, and the increased use of robots all combine to pressure jobs growth, and I expect this pressure to continue.
Just take a look at China. In that country’s vast manufacturing landscape, the key driver is the masses of unskilled workers who are required to toil at their workstations for 12 hours or more each day.
China’s companies can make use of robotics to help in many of the assembly areas, but it seems that these companies use human labor instead—perhaps because creating jobs for the masses is a goal of communist China.
According to the International Monetary Fund (IMF), China’s unemployment rate has managed to hold pretty steady at just over four percent since 2003. In 2012, the unemployment rate was 4.1%, the same as in 2010 and 2011, and the estimate for 2013. (Source: “China: Unemployment rate from 2003 to 2013,” Statista web site, last accessed April 23, 2013.)
But in the more industrialized countries, like the United States and countries in Europe, there has been a move toward modern industrial techniques and the use of robotics.
And while America struggles to create jobs growth, the situation is extremely dismal in Europe.
As I commented in these pages a few weeks back, the … Read More
When it comes to the recent pullback in the market, many people naturally wonder if this is the time to start accumulating certain companies, especially technology stocks. The answer, of course, is far more complicated. Obviously, each individual must assess their goals and risk profile before considering any investment.
My goal is to be on the lookout for companies that can continue to grow corporate earnings over a very long period of time. One area that has interested me for a long time because of this ability to grow corporate earnings is in technology stocks.
Recently, many technology stocks have not benefited from the surprisingly strong rally in the overall market. A major reason for this is that many investors are focusing on dividend yield rather than corporate earnings growth. Additionally, many technology stocks are not seeing exceptional corporate earnings growth, as the global economy is still somewhat weak.
Not all technology stocks are the same. There are vast differences between technology stocks, and an investor needs to dig deep when evaluating which firms can grow corporate earnings over a full decade.
One company that I have liked over the past few years has been eBay Inc. (NASDAQ/EBAY). While many people believe eBay is still primarily a place to sell your knick-knacks, they’re wrong. During the latest quarter, the company reported total revenues were up 14% year-over-year. (Source: “Q1 2013 financial highlights,” eBay Inc. web site, April 17, 2013.)
eBay is transitioning into a real powerhouse through its “Marketplace,” which is where retailers sell fixed-price online goods. The company is now looking at adding same-day delivery services for these goods, … Read More
Oil drives the world.
But the problem now is that the industry is building up an excess inventory in available oil while global demand is dwindling, as the global economy continues to struggle with the aftermath of the Great Recession in 2008. The result: lower oil prices.
Some argue oil prices will easily rally back, but I’m not convinced, based on both the fundamental and technical pictures.
On the chart, the near-term technical outlook for oil prices is bearish. Spot oil prices are below $90.00 a barrel for West Texas Intermediate (WTI) oil, and they’re edging lower to the mid-$80.00 range.
Spot oil prices have recorded 10 new lows and five new highs over the past three months, according to data from Barchart.com. Over the past year, spot oil made 21 new lows to go along with only eight new highs. It’s clear that the market bias is negative on oil prices.
Based on the spot high of $106.16, reached on May 1, 2012, the spot WTI oil price is down 18.3% as of Thursday, which is nearing the official definition of a bear market.
The chart of the WTI spot oil price below shows some indecision, according to my technical analysis.
Chart courtesy of www.StockCharts.com
The fundamental side is also helping to confirm a potential downward pressure on oil prices.
We all know that oil is one of the most volatile of the commodities, fluctuating with the prospects of the global economy and, of course, the happenings in the Middle East.
On the supply side, there is some calm in the Middle East, but the tensions in North Korea … Read More
One of the most closely watched parts of the global financial system is the Chinese economy. I don’t need to tell you that the economic recovery in America and the rest of the world is quite sluggish. Many had hoped that China could help propel the global economy higher; however, there are now concerns that this might not occur.
Recent data on the Chinese economy are signs that economic growth is not accelerating. For the first three months of 2013, the Chinese economy posted growth of 7.7%, a lower rate than the fourth quarter of 2012, in which the Chinese economy grew at 7.9%. (Source: Yao, K., et al., “China growth risks in focus as first quarter data falls short,” Reuters, April 15, 2013, accessed April 16, 2013.)
The Chinese economy is a huge player within the international financial system. If the nation was to regain its economic growth rate of the past, this would have a substantial impact on many people and companies around the world.
The Chinese economy posted industrial production growth of 8.9% year-over-year, below expectations of 10% growth. Power generation was up only 2.1% year-over-year in March, and steel output declined 3.2%, both below expectations.
Don’t forget, China is a huge buyer of many raw materials, including copper and iron ore. This latest data is additional evidence that economic growth is not accelerating, and investors need to reallocate their portfolios in accordance with this information.
One slight positive note was that retail sales within the Chinese economy increased 12.6% year-over-year in March, above expectations of 12.5% and higher than the recorded 12.3% increase for February.
The … Read More
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
Aluminum maker Alcoa Inc. (NYSE/AA) reported its earnings results on Monday, officially kicking off the first-quarter earnings season. While some in the media touted the fact that Alcoa beat earnings estimates, in reality, it’s nothing to get excited about. The stock market looks to be agreeing with me, as Alcoa was under some selling pressure after it reported.
Alcoa remains a key global company, but it probably doesn’t carry the weight it used to have on the market. However, the company does still offer some insight into the global economy.
The company only managed to narrowly beat earnings-per-share (EPS) estimates, reporting adjusted earnings of $0.11 per diluted share, above the Thomson Financial consensus estimate of $0.08.
It was a decent reading, but as I have said in the past, what I want to see is revenue growth to drive earnings—not cost control or some other variable.
Let’s take a closer look at Alcoa.
Revenues came in at $5.8 billion in the first quarter, down three percent year-over-year, which the company blamed on lower prices on the London Metal Exchange and some issues with its production in Europe.
That’s fair, but I want to see revenues grow in the global economy. Companies that expand revenues to drive earnings are what you want to see. In my view, those companies that are reporting solid revenue growth are important, especially given the somewhat stagnant state of the global economy. My thinking is that once the global economy begins to take off, especially in Europe and the emerging markets in Latin America and Asia, these same companies will likely be ready to deliver much … Read More
Central banks around the world have opened the floodgates with massive levels of quantitative easing in an effort to try to stimulate their respective economies. Turning on the quantitative easing tap is easy; putting the genie back in the bottle will be extremely difficult for central banks globally.
I am not alone in sharing this opinion, as the governor of Denmark’s central bank, Lars Rohde, has voiced similar concerns. In a recent interview, Rohde stated, “The risk is we stay in this climate too long and that the carpet bombing of liquidity spurs inflation… How do we exit this without killing whatever nascent recovery there might be at that time?” (Source: Levring, P. and Schwartzkopff, F., “Liquidity Carpet Bombs Fueling Asset Bubbles, Rohde Says,” Bloomberg, April 8, 2013.)
While central banks around the world are using quantitative easing in an effort to revive the global economy, the long-term consequences, as I’ve mentioned before, could prove to be extremely costly. I certainly welcome the honesty that Denmark’s central bank’s governor is displaying in voicing his concerns about how all of this quantitative easing might have serious long-term risks.
With Japan just now unveiling a massive new quantitative easing program in addition to the Federal Reserve’s asset purchase program, the floodgates continue to be wide open. However, central banks around the world have embarked on an aggressive quantitative easing policy since the great recession began, yet little has changed in terms of global unemployment.
Many nations around the world still suffer from extremely high levels of unemployment. It appears that quantitative easing did have an impact in certain asset prices, namely stocks … Read More
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
As the S&P 500 continues marching higher, all eyes will be on corporate earnings for the next quarter and the rest of the fiscal year. While much of the move in the S&P 500 can be related to the Federal Reserve’s easy monetary stance, ultimately, corporate earnings need to rise to justify current price levels.
One company that is quite involved in not only the American economy but also the global economy is FedEx Corporation (NYSE/FDX). The latest corporate earnings report by FedEx indicates that perhaps the underlying economy is not as strong as many people believe.
FedEx reported a 31% decrease in corporate earnings for the third quarter. It is interesting to note that international export volume did increase during the quarter by four percent; however, a large number of shippers moved away from priority services to cheaper options. (Source: Morris, B. and Sechler, B., “FedEx Customers Like Slower and Cheaper,” Wall Street Journal, March 20, 2013.)
While revenues did increase, the hit to corporate earnings is an indication that other companies don’t see a large amount of end-user demand building up. The reason I say this is because if you were a business and had a large number of clients, you would be willing to pay for priority shipping to ensure the sale. However, with a growing number of businesses choosing the cheaper options, this tells me that demand is not as strong as many believe.
FedEx is a company that deals with many of the S&P 500 firms, and this could be an early sign that corporate earnings might be weaker than expected for the next quarter…. Read More
When developing an investment strategy for a given market sector, you need to consider numerous variables. Increasingly, the variables are becoming far more complex due to the global nature of business these days.
One market sector that many analysts pay close attention to is the steel industry. Because steel is used in so many parts of an economy, signs of increasing or decreasing production can help give indications as to how strong or weak the global economy is operating.
Of all the countries in the world, China is a huge player in the steel market sector. When looking at an investment strategy that incorporates steel and iron ore, which is the main ingredient in the production of steel, trying to determine current and future output by China is crucial.
According to the Chinese National Bureau of Statistics, crude steel production increased 9.8% in February, breaking the previous record set in January. Both the real estate and automobile industries within China have regained momentum, resulting in an increase in investments in factories and other fixed assets by 21.2% during the first two months of 2013, versus the same time period in 2012. (Source: Yap, C.W., “China’s steel production climbs 9.8%,” Wall Street Journal, March 12, 2013.)
Additionally, those investors whose investment strategy incorporates the steel market sector based in America might see this as a cautionary sign: not only are the Chinese producing a huge amount of steel domestically, but exports of steel rose 25% from the year-ago period.
And remember, the steel market sector within China is a money-losing proposition. Most steel makers do not make a profit in China, … Read More
One of the more common economic topics to be discussed recently has been the possibility of a global economic recovery. The lack of job creation is not only a problem for America, but it’s also a problem globally. The economic recovery has been extremely slow for many parts of the world, leading to an international void in job creation.
Recent data have offered contradictory information regarding the possibility of a global economic recovery. But what worries me is that after so many years following the Great Recession and after trillions of dollars in monetary stimulus, the world still cannot achieve an economic recovery, and millions remain unemployed due to a lack of job creation.
Recent data from France show that industrial production fell far more in January than was expected. Expectations for France’s industrial production in January estimated a 0.2% drop; yet it came in at -1.2% from December, according to Insee, France’s national statistics office. (Source: Deen, M. and Riecher, S., “French industrial output tumbles as recession looms,” Bloomberg Businessweek, March 11, 2013.)
For the three months ended January 31, 2012, factory output fell by 4.6% in France. This is a serious decline, and it clearly shows a lack of economic growth. Job creation is nowhere in sight, as unemployment in France was 10.6% in the fourth quarter—a 13-year high.
Why does this matter for Americans?
Of course, America is not France; however, recent policy decisions here worry me tremendously. In fact, it’s the lack of policy decisions that worry me. Washington is quick to raise taxes, as were the French, yet they can’t make structural reforms that can … Read More
It’s clear that the global economy has been in a weak state for an extended period of time. However, investor confidence has rebounded over the past few months in anticipation that the global economy can regain past momentum.
Numerous problems remain across various sectors in the global economy, and they are preventing an increase in growth. Yet one risk that could severely impact investor confidence is the possibility of war in Asia.
Many people quickly dismiss the idea that yet another war could ignite. Investor confidence clearly doesn’t see this as a probability, considering how high the stock market is. However, as a prudent investor, one must evaluate every potentiality.
There are two areas of concern: North and South Korea, and China and Japan.
The situation between North and South Korea is quickly deteriorating. This past Monday, both nations staged war games, while increasing threats. South Korea has troops on high alert, while North Korea claims it has nullified the armistice.
North Korea is increasing its aggressive stance in the hopes that the world will back down and cave in to its demands. The nation has repeatedly warned that it will use nuclear weapons.
Tensions are also increasing between Japan and China, the catalyst being three tiny islands in the East China Sea.
Both nations claim territorial rights to the islands, with each nation increasing its aggressive stance. On January 10, two Japanese F-15s intercepted a Chinese plane flying in the vicinity of the islands, an action to which China retaliated by sending its own fighter jets.
Japan is now considering firing warning shots if any further Chinese aircraft encroach … Read More
Oil is one of the most volatile of the commodities and fluctuates with the prospects of the global economy and of course the happenings in the Middle East.
Yet, if you really look forward, how can you not like oil given the growth in China and, more importantly, the emerging growth in India?
In June 2012, when oil prices fell below $80.00 and some were saying to sell, I was positive, as the chart suggested support would surface and the weakness was not a trend.
The U.S. Energy Department increased its projections for crude oil prices for this year, citing that global oil consumption would rise to a record in 2013. (Source: Shenk, M., “U.S. Energy Department Raises 2013 Oil Forecast,” Bloomberg News January 8, 2013.)
Take a look at the price chart for the spot West Texas Intermediate (WTI) futures contract. After trading at $115.00 in May 2011, oil prices slid despite multiple attempts at rallying back to the $100.00 level. The spot WTI is again back below its 50-day moving average (MA), but I expect there will be decent support at the lower trendline and the 200-day MA.
The chart is displaying what is looking like a bullish flag formation setting up, which means higher oil prices could be coming to back over $100.00 in the best-case scenario based on my technical analysis. You need to also be watchful of the $80.00 support level, which was breached on several occasions; but in each case, a rally followed.
Chart courtesy of www.StockCharts.com
I believe oil will continue to hold above at least $80.00 a barrel going forward and will … 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
When it comes to creating an investment strategy, the crucial variable is determining where one believes corporate earnings will be in the future. Trying to determine what the future landscape will be, and not necessarily the current level of corporate earnings, is the real goal.
One of the strongest sectors in the global economy has been the growth of smartphones. The latest data from Gartner, Inc. (NYSE/IT), a leading technology research company, show that during the fourth quarter of 2012, smartphone sales reached 207.7 million units, up a staggering 38.3% from the same time period in 2011. (Source: “Gartner Says Worldwide Mobile Phone Sales Declined 1.7 Percent in 2012,” Gartner, Inc. web site, February 13, 2013, last accessed February 19, 2013.)
Even while much of the world’s economies are not growing at extremely robust levels, a solid investment strategy continues to be focused on smartphone products that are driving corporate earnings in that sector.
Gartner estimates that for 2013, smartphone sales will total nearly one billion units. This clearly shows that corporate earnings will continue to grow in the smartphone category for the near future, which leads me to look for an investment strategy that can take advantage of this information.
While many focus on the hardware manufacturers, I think the big winner over the next five to 10 years will be Google Inc. (NASDAQ/GOOG). Because Google has been able to develop its “Android” platform software to work on both high- and low-end smartphones, this opens up the entire world as a potential marketplace.
I don’t believe many parts of the world will pay the high price for some of … 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
At the beginning of January, I said “small-cap stocks will be a key driver of the broader market should the U.S. and global economy continue to improve” in 2013.
Small-cap stocks have been impressive early on in 2013, as the Russell 2000 is up 8.7% this year, increasing 2.3% in February alone, with the index trading at record highs above the 900 level. Small-cap stocks are easily outperforming the broader market in 2013.
In my view, continued economic renewal will drive small-cap stocks higher, as these companies tend to be able to react quicker to a changing economy.
The strong start to 2013 is also a bullish sign, as was the case in 2012, when stocks flew out of the gate. We are seeing a similar situation this year, so expect some gains.
But what I’m concerned about is the rate of the advance; in my view, unless you believe the Russell 2000 will gain 65% this year based on an annualized rate, the index’s rate of advance is clearly not sustainable. And you know this is highly unlikely, so you should expect to see ebbs and flows going forward. The last big year for the Russell 2000 was a 25.3% gain in 2010.
The chart of the Russell 2000 below shows the break at the horizontal resistance line that had been in place since 2011. While the relative strength and moving average convergence/divergence (MACD) indicators are both flashing “buy” signals, the angle of the recent breakout, marked by the blue oval, clearly indicates an unsustainable advance, so be careful.
Chart courtesy of www.StockCharts.com
I favor small-cap stocks for long-term … Read More
One of the most important aspects to consider when creating an investment strategy is to try and determine where demand might be in the future. Given the relatively weak global economy, this certainly adds complexity to long-term investing.
Austerity is the buzzword at the moment. Many governments are continually espousing the need for greater austerity. However, while austerity is the goal, there are still some areas where governments are increasing spending, creating an opportunity to develop an investment strategy. And this includes railways.
According to the consulting firm Roland Berger, the market globally for railway-related spending has been increasing at 3.2% per year throughout the recent global downturn, and they believe spending will increase at 2.7% per year until 2017. Roland Berger also predicts that metro rail systems will grow at a much faster rate, at an estimated six to eight percent per year. (Source: “Metro Systems: Going underground,” The Economist, January 5, 2013, last accessed February 14, 2013)
These types of projects appear quite favorable for those interested in long-term investing. With multiple countries increasing spending in their railway system, this should bode well for a diversified company with an investment strategy that can capitalize on these opportunities.
Countries interested in making significant increases on rail-based transportation include Brazil, India, many Middle Eastern nations, and China. Beijing now has the largest metro system in the world, at 442 km with just under six million daily users. The second-largest metro system is Shanghai at 423 km in length.
Long-term investing is about trends that last many years. While many firms say they are creating an investment strategy based on long-term … Read More
The major bank stocks all closed off 2012 near their respective 52-week highs; and they’ve started 2013 with a bang. Driven by an improving banking industry that is assuming less risky businesses while shoring up their balance sheets and producing stronger units, the KBW Bank Index is up eight percent, outperforming both the S&P 500 and the Dow Jones.
The subprime credit crisis that surfaced in 2008 and drove the U.S. and the global economy into a recession was not what we wanted to see; but in some sort of twisted way, the events have led to an industry that has restructured the way banks do business—more specifically, the amount of risk that is assumed by a bank via sophisticated strategies. So far, this shift in structure, coined the “Volcker Rule” because it was set in place by economist and ex-Federal Reserve Chairman Paul Volcker, appears to be capping the number of speculative trades made by the banks, which is good.
Banks have altered the way they do business, and they’ve shown positive strides along the way.
In my view, the operating results have been fairly good, and this indicates that the banks will be able to grow their business volume across the board during the U.S. economic recovery.
Moreover, with the housing market and the U.S. economy continuing to improve, I feel bank stocks will also see some gains.
Most of the big banks have paid back part or all of their government loans. Overall, bank stocks are showing promise and delivering better results.
While risk surrounding the bank stocks has declined, there are still issues that could hamper … Read More
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
The key to the global economy is a rise in consumer spending. My view is that the emerging markets will continue to be an excellent place to invest some capital, whether it’s the BRIC countries (Brazil, Russia, India, and China) or the Southeast Asian “Little Tigers,” comprising Hong Kong, Singapore, South Korea, and Taiwan. I’m bullish on this area of the world. My reasoning is that the newfound wealth and growing middle class in these markets will drive consumer spending and economic growth.
Famed technical analyst Louise Yamada is looking positively at the emerging markets and believes they can outperform the U.S. market. (Source: Macke, J., “Emerging Markets Set to Outperform the U.S. Says Yamada,” Yahoo! Finance web site, January 17, 2013.)
A good indicator of global consumer spending patterns is MasterCard Incorporated (NYSE/MA), since the company has a presence in over 210 countries. In a third-quarter press release, MasterCard reported that its worldwide purchase volume surged 12% in the third quarter on a local currency basis. In the press release, MasterCard President and CEO, Ajay Banga, also noted that emerging markets continue to provide opportunities for growth. (Source: “MasterCard Incorporated Reports Third-Quarter 2012 Financial Results,” MasterCard Incorporated web site, October 31, 2012, last accessed January 21, 2013.)
What is interesting is the emergence of credit in the emerging markets, where cash has long been king. In these growth regions, the per-capita income is rising, helping to drive consumer spending and economic growth.
Just take a look at the iShares MSCI Emerging Markets Index (NYSEArca/EEM) chart that shows the stock market rally since mid-November 2012.
Chart courtesy of www.StockCharts.com
The … Read More
When oil prices recently fell to below $80.00, I said don’t sell.
The U.S. Energy Department increased its projections for crude oil prices for this year, adding that global oil consumption will rise to a record high in 2013. (Source: “U.S. Energy Department Raises 2013 Oil Forecast,” Bloomberg, January 8, 2012.)
Take a look at the price chart for the December West Texas Intermediate (WTI) futures contract. After trading at $115.00 in May 2011, we have seen oil prices slide, despite multiple attempts at rallying back to the $100.00 level. The spot WTI is trying to hold at its 50-day moving average (MA), currently above its 200-day MA of $85.08.
Yet the chart is displaying what looks like a bullish flag formation setting up, which means that higher oil prices could be coming, rising above $100.00 in the best-case scenario, based on my technical analysis. You need to be watchful of the $80.00 support level, which was breached on several occasions, but in each case, there was a rally after.
Chart courtesy of www.StockCharts.com
I believe oil will continue to hold above at least $80.00 a barrel going forward and will rally as the global economy strengthens. If you extend the oil futures contract to 2021, the current prices range from $83.00 to $96.00, so I’m not that worried and don’t have the urge to go and sell.
Helping to add support will be the continued erosion in the major economies in the eurozone, along with its impact on the U.S. and China.
Also add in the geopolitical issues in the Middle East. Iran and North Korea are real threats … 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
When it comes to looking for a long-term investment opportunity, sometimes it pays to look at a market sector that might not initially seem bullish. While I have pointed out several structural impediments to economic growth in America, there are a few areas that do provide a long-term investment opportunity.
One of the strengths in America is the growth in resurgence of the energy market sector. This is clearly not the result of any government initiative; rather it is due to private enterprises realizing the long-term investment opportunity in the energy market sector by creating revolutionary technologies in extracting natural gas.
New techniques for hydraulic fracturing have enabled the American energy market sector to become a global leader. This has sent prices plummeting when compared to not only domestic but also global history.
The investment opportunity for many firms is to use this abundance and cheap input for production, attracting numerous firms to set up facilities in America. While the U.S. economy is still sluggish, many might seem surprised to find such a strong investment opportunity that’s attracting firms worldwide to our shores.
There are copious areas of the economy that benefit from low natural gas prices, including the chemical market sector, the steel market sector, and the fertilizer market sector, just to name a few.
Companies see a long-term investment opportunity in building multi-million-dollar facilities to benefit from the comparative advantage of a low-priced input. As an example, Nucor Corporation (NYSE/NUE), a U.S.-based steelmaker, is about to construct a $750-million facility in America. Voestalpine AG, a steelmaker based in Austria, stated that it is looking at building a $661-million … Read More
On January 1, 2000, the world breathed a collective sigh of relief that the over-hyped Y2K fiasco dissipated without even a whimper after years of ballyhoo.
Some things never change.
As expected, at the last moment, Democrats and Republicans came together in joyous union and resolved the so-called fiscal cliff. Nervous investors around the world joined together with rapturous optimism and jumped back into the markets.
On January 1, 2013, the House approved the new deal by a 257 to 167 margin. The bill increases the income tax rate from 35.0% to 39.6% for individuals earning more than $400,000 a year and couples taking home more than $450,000 combined. Everyone else will continue to see income tax cuts.
None of this should be a surprise to anyone, since Obama, in his bid for re-election, said he would increase the tax rates on the wealthy, though his definition of “wealthy” has changed, climbing from earnings of $200,000 for individuals and $250,000 for families.
While both sides are unhappy about what they didn’t get, they should be unhappy about how they treated the global population.
For almost a year, inept politicians in Washington sat around, worrying about their chances for re-election; ignoring the impact the unresolved fiscal cliff was having on the international investing community and global economy.
But why put your hard-earned time and effort into resolving the fiscal cliff when you might not be re-elected? Maybe because it’s part of your job? You’d be forgiven for thinking it was otherwise. After all, during the eternal run up to the Presidential elections, the fiscal cliff wasn’t even a major talking point. … Read More
I realize many people might be getting tired of hearing about the eurozone and the lack of economic growth in that union; however, we must be aware that what does occur in the eurozone and the trajectory of its economic growth can and will have an impact on the American economy. The global economy is more closely tied together now than ever before, and a lack of economic growth in one area could spread into another nation.
As I wrote several days ago in my article “Global Recession Fears Grow as Strong Nations Weaken,” Finland is showing signs of extremely weak economic growth. On Friday, we had more reports from the eurozone that economic growth is far below what is acceptable.
Germany’s central bank, the Bundesbank, announced that its estimate for economic growth in 2013 will only be 0.4%, a huge decrease from earlier estimates in June for economic growth in 2013 to be 1.6%. Austria’s central bank also slashed its 2013 estimates to 0.5%, as compared to previous estimates of economic growth of 1.7% in 2013. (Source: “German, Austrian central banks see grim 2013 as crisis bites,” Reuters, December 7, 2012.)
The level of adjustment in economic growth rates for both of these central banks is massive, and it’s a sign that the eurozone is far weaker than anyone previously thought. A good example of how weak economic growth is in Germany, the core country within the eurozone, is the statement by the Bundesbank that “The cyclical outlook for the German economy has dimmed. Enterprises are cutting back their investment and hiring fewer new staff.” (Source: “German, Austrian central … Read More
Silver continues to hold strong on the charts, with a possible upcoming move at the tough $35.00 resistance level and potential retest of the $40.00 level. The aggressive upward move has largely been driven by the move in gold, along with speculative trading.
Buying in the white metal is generally in line with global economic growth, which drives the demand for industrial goods that use silver as a raw material, while it also pushes up income levels and the global demand for silver and gold jewelry.
Here in the U.S., the economic recovery is faring well. The better-than-expected U.S. gross domestic product (GDP) growth revised up to 2.7% for the third quarter, along with other encouraging economic data, is also adding some optimism of economic renewal.
While gold is considered more of a pure-play hedge against risk, any sign of industrial recovery helps, as silver—unlike gold—is used in numerous industrial applications.
The price of silver has had some bull legs on the chart since its breakout in August, based on my technical analysis.
As you can see on the chart below, the upward move in prices for March contracts above the 50- and 200-day moving averages (MAs), which is bullish. The March silver is also showing a bullish golden cross with the 50-day MA of $33.09 above the 200-day MA of $31.06.
The MA convergence/divergence (MACD) is also quite bullish, but it may be approaching a top. The risk is that the run-up appears to be overextended and vulnerable to some near-term selling pressure with resistance at around $35.00. For the white metal to advance, we need to see a … Read More
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
When making an economic forecast, whether it is for the global economy or a specific nation, one of the most fundamental inputs is the growth of wages for the average citizen. Since consumer demand supports so much of the modern economy, especially in the U.S., a lack of wage growth will certainly filter into a weaker overall economy.
While we have seen some improvements in the number of jobs created this past year, clearly this is not enough, as we have not seen any improvement in wages. My economic forecast for America in 2013 will continue to be muted, as real wages are actually declining, in addition to the global economy being extremely weak.
I was looking at the data from the Bureau of Labor Statistics and it reports that real wages, which take inflation into account, have fallen every month since February 2011 except one, in which real wages were flat. Over this period, my economic forecast for America continued to be lower than consensus, because there was no sustained increase in income. Without real wages growing, the wealth of the average citizen continues to decline.
America certainly cannot look to the global economy to help pull us out of the trough. In fact, a recent economic forecast on the global economy by the Organization for Economic Cooperation and Development (OECD) has also shown that it, too, has reduced expectations for growth.
The OECD now has an economic forecast that the global economy will grow 2.9% this year, versus an earlier estimate of 3.4%. The OECD has also drastically reduced next year’s economic forecast for the global economy to … 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
There were extremely difficult times for homeowners following the subprime mortgage implosion that helped to drag down the global economy in 2008. I recall at that time how easy it was to get a mortgage without even having to provide an income or work history to the lenders. When an entry level worker at McDonalds Corporation (NYSE/MCD) could get a mortgage with no questions asked, you had to wonder how long it would be before a housing bubble would surface.
Luckily, after several years of the housing market being dragged through the mud, the current situation has vastly improved to the point where housing stocks are hot.
The declining mortgage rates have helped. The $40.0 billion in mortgage-buying each month by the Federal Reserve has driven down the cost of interest rates to record lows.
There are more people working, and with the jobs picture improving, albeit at a slow pace, I expect the housing market will continue to strengthen.
Wherever you live, it’s clear that the housing market is displaying much-improved industry metrics. We just saw another strong reading for housing starts and building permits.
In October, there were an impressive 894,000 starts, according to the U.S. Census Bureau, which is above the Briefing.com estimate of 815,000 in October and the 863,000 starts in September.
Also lending support to the housing market recovery was a strong building permits reading of 866,000 in October, albeit short of the Briefing.com estimate of 900,000 and the 890,000 reading in September. The strong reading indicates that builders are expecting a good flow of buying in the housing market, and this could only bode … Read More
There is no question that the level of job creation currently in America is quite poor. While we have seen some improvement from the depths of the great recession, much more work needs to be done, not only for job creation, but also for a fundamental restructuring of the U.S. economy.
One point that every American, including the politicians, needs to be aware of is that the U.S. is part of the global economy. We cannot have job creation in isolation; we need to understand how America and its businesses fit into the global economy first.
The CEO of Cisco Systems, Inc. (NASDAQ/CSCO), John Chambers, has been quite vocal for the business community in terms of how tax policy is impacting domestic job creation. During Cisco’s current earnings quarter, in which the company did report solid numbers that beat expectations, what was interesting to me were his comments regarding job creation and how the company sees the global economy.
To begin with, 82% of Cisco’s large cash pile, which is approximately $45.0 billion, is not in America. The extremely high corporate tax rates are preventing this firm from being able to bring these funds into America to help job creation domestically. As Chambers states in an interview with Maria Bartiromo on CNBC, the company is looking around the world for the most attractive areas to conduct business. He specifically points out that Cisco will be spending its money in Canada, because that country has better corporate tax rates and is generally an easier place to conduct business. (Source: “Cisco’s Chambers: If No US Compromise We Will Invest Overseas,” video interview, … 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
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
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
Have you read or heard the recent economic data from China? Chinese exports for September grew 9.9% from the same period last year, almost double what the investment community expected.
The Chinese economy is extremely dependent on exports while it’s slowly developing its domestic economy. To get a better gauge of global economic growth, if China’s exports are indeed improving, then some economies around the world also must be improving, as the Chinese economy has grown to become a significant part of the global economy over the past decade. China makes up a large portion of many industries, and supplies numerous products to many parts of the world. Regardless of what one thinks about the Chinese economy, there is no question that it has a large influence on worldwide economic growth.
The European Union (EU) is a disproportionately large and important destination for the Chinese economy. With economic growth anemic within the EU, it was no surprise that exports to the Union fell 10.7% in September. This makes the overall increase of 9.9% that much more startling. It means that economic growth outside of the EU appears to be far stronger than anyone thought it would be so far.
Exports to America were up 5.5% for the September period as compared to year-ago levels. Neighboring South East Asian countries saw the biggest jump in exports at 25.5% for the month. This included Taiwan, up 19.9%, and South Korea, up nine percent. (Source: “China Sept. Exports Jump 9.9%, Imports up 2.4%,” The China Post, October 14, 2012.)
We will hear shortly from government officials regarding gross domestic product (GDP) numbers for … Read More
The sub-prime credit crisis that surfaced in 2008 drove Lehman Brothers to bankruptcy, caused significant upheaval, and drove the U.S. and global economy into a recession. The aftermath was a structural change to the way banks do business, specifically the amount of risk that is assumed by a bank via sophisticated strategies. So far, the change coined the “Volcker Rule,” set in place by economist and ex-Federal Reserve Chairman Paul Volcker, appears to be capping the speculative trades made by the banks, which is good.
Banks have altered the way they do business and have shown positive strides along the way. JPMorgan Chase & Co. (NYSE/JPM), the first of the major bank stocks to report earnings, blew away revenues and earnings estimates. Wells Fargo & Company (NYSE/WFC) beat on earnings but fell slightly short of estimates despite an eight percent year-over-year increase. In the case of JPMorgan, the recovery in the housing market and the demand for mortgages helped drive revenues. (Source: “Mortgage boom leads to profit surge for JPMorgan, Wells,” Yahoo! Finance, October 12, 2012.)
In my view, the results are fairly good for the two bank stocks, and they indicate that the banks are able to grow their business volumes across the board despite the mixed economic recovery in the U.S. And with the housing market and economy continuing to improve, I feel bank stocks will as well.
The majority of the big banks have paid back part or all of their government loans. Bank stocks are showing promise, and expectations are the third-quarter earnings season will provide some upside surprises. Of course, the impact from the stalled … 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
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
It’s not news to anyone that the global economy is slowing down. With Europe experiencing a severe credit crisis and many of the member nations reporting substandard economic performance, China is also failing to re-ignite its economy. Many are hoping that the Chinese economic engine will spark the global economy, but I have serious doubts that this is possible.
Yes, the Chinese are trying their best to boost their economy through massive infrastructure spending. They know that the rest of the global economy is slowing and, thus, their exports will not grow at an above-normal rate. In fact, we know that even U.S. exports are weak, especially to Europe. One sector that has had some headwinds is that of mining stocks geared towards economically sensitive commodities like iron ore.
While many mining stocks have gone up with the recent Federal Reserve monetary policy action, in addition to the European Central Bank’s actions, the underlying commodities won’t gain traction unless the global economy picks up. Considering China is a massive buyer of numerous commodities, investors in mining stocks should pay attention to how that nation is performing.
BHP Billiton Limited (NYSE/BHP), which is one of the world’s largest mining stocks, has previously stated its intentions to delay and halt many of its new projects. This is because, at the time, it saw demand slowing due to the weak global economy. BHP has now come out with a more recent forecast, stating that iron ore demand from China has decreased by half.
As the Chief Commercial Officer, Alberto Calderon stated, “We’re already seeing the beginning of the end of the first phase … Read More
Oil prices recently briefly traded at $100.00 a barrel prior to retrenching back down towards the $90.00 level. Yet, having been in a bear market in June, oil has since rallied. The November West Texas Intermediate (WTI) futures contract is up 16.7% from its 12-month low. While the November oil is displaying a bearish death cross on the chart with the 50-day moving average (MA) of $93.92 below its 200-day MA of $97.52.
The chart appears to be showing a bullish flag formation setting up, which means that higher oil prices—to over $115.00 in the best-case scenario—could be coming, based on my technical analysis.
I believe oil will continue to hold above at least $80.00 a barrel going forward and will rally as the global economy strengthens. Extending the contract to 2020, the current prices range from $86.00 to $93.00.
Helping to add support will be the continued erosion in the major economies in the eurozone, the U.S., and China. Also add in the geopolitical issues in the Middle East and rising tensions in the South China Seas between China and Japan.
Chart courtesy of www.StockCharts.com
I also expect oil prices to be supported by the Organization of Petroleum Exporting Countries (OPEC) oil cartel. OPEC estimates oil prices in nominal terms could hold in a range of $85.00 to $95.00 a barrel for the rest of this decade, according to its internally produced World Oil Outlook (WOO). The report blames the spikes in oil prices on speculators, which I fully agree with, but it’s part of the business. An interesting note in the WOO report is the assumption that oil … Read More