We all know that the stock market has moved up significantly over the past few months. The real question is: is the move up based on the belief that there is enough economic growth available for corporate earnings to continue rising, or is it simply due to a flow of funds?
Let’s analyze this question by taking a look at Wal-Mart Stores, Inc. (NYSE/WMT). Wal-Mart just released its forecast for second-quarter corporate earnings, which was less than most analysts had expected. The company now forecasts corporate earnings on a per-share basis for the second quarter to be $1.22–$1.27, lower than the average estimate by analysts of $1.29. (Source: “Walmart reports a 4.6 percent increase for Q1 EPS of $1.14; U.S. businesses forecast positive comp sales for Q2,” Wal-Mart Stores, Inc. web site, May 16, 2013, accessed May 16, 2013.)
As a sign of the health of America’s economic growth level, Wal-Mart reported that comparable same-store sales dropped by 1.4% between January 26, 2013 and April 26, 2013. Internationally, Wal-Mart is doing better, with sales up 2.9% during the first quarter.
However, corporate earnings suffered during the first quarter due to several reasons, including very cold weather, continuing weak employment levels, and the payroll tax hike. Many businesses that cater to the lower- to mid-level consumer will most likely encounter similar problems due to these issues and general sluggish economic growth.
Recent data have been relatively mixed regarding the potential for economic growth to begin moving upward. However, for Wal-Mart’s corporate earnings, there is the potential for a slightly stronger second half because some of the company’s initial hurdles have been … Read More
One of the biggest concerns for investors when it comes to long-term investing is the safe return of their capital. Following the 6.75% levy imposed by Cyprus on deposits of less than 100,000 euros, many investors were shocked that such an event could take place.
Certainly, long-term investing does have risks, including a hidden hazard of the possibility that a rising inflation rate will erode wealth just as easily as the levy imposed by Cyprus on bank deposits.
A study done by The Economist showed that people in the U.S. who placed their capital in six-month certificates of deposit (CDs) from 2009 until 2012 earned 3.2% (before tax). Many believe that a CD is among the safest of short-term investments. However, the inflation rate was 6.6% during this time period, resulting in a loss of wealth for the investor of 3.2%. (Source: “The financial-repression levy,” The Economist, March 23, 2013.)
While bank depositors in Cyprus are in an uproar over the one-time levy, American investors have also been hit with a loss of wealth of approximately 3.2% during a three-year period due to inflation, as noted above. Now, imagine the full impact on long-term investing over many years and decades as the inflation rate erodes wealth.
Understanding the real impact of the rate of inflation should alter one’s portfolio allocation when it comes to long-term investing. Simply placing capital in U.S. Treasury notes will not have the rate of return that investors need for retirement.
Many people only look at the nominal return, and not the real return on an investment. Remember, regardless of what the expected return is, for … Read More
Home prices are heating up, as the flow of new homes and permits continue to steadily increase and the attraction of historically low mortgage rates motivates buyers.
The buyers that are driving up the housing market are not only the buyers of principal homes, but also the investors who are attracted to the relatively lower home prices and cheap financing.
What is interesting is that we are seeing major buying from not only the smaller investor who may dabble in an investment property, but also the large institutions and hedge funds that are getting into the swing of things, gobbling up hundreds and thousands of properties at lower prices.
The S&P/Case-Shiller index, comprising the 20 largest U.S. metropolitan cites, increased a better-than-expected 9.3% in February, representing the 13th straight up month for prices.
While the housing market is far better than it was a few years ago, when the sub-prime mortgage crisis crushed the housing market and left a trail of destruction, my view is that there may be a bubble building as much of the current surge in prices is due to the cheap money.
Just consider the S&P/Case-Shiller index and notice the major jump in home prices in the housing market. For example, home buyers in the Phoenix housing market saw home prices surge 23% year-over-year, while those living in San Francisco reported an 18.9% surge in home prices.
My problem is that much of the buying in the housing market is being triggered by low-financing costs that can inevitably get homeowners in trouble once interest rates begin to ratchet higher—and they will go higher. For instance, carrying … Read More
Economist Nouriel Roubini, also known as Dr. Doom, is finally on board with the stock market upswing; in fact, he believes the stock market can go even higher over the next two years.
Now, if you are familiar with the often bearish opinions of Roubini, you’ll know that his hawkish view of the stock market is somewhat bizarre, but you’ll also understand why he thinks this way.
The thinking behind Roubini’s view is similar to my own view on the stock market. Roubini believes that the concerted move by the world’s central banks to provide easy access to money via aggressive monetary policy is helping to drive the current buying in the stock market.
“In the short-term, it’s great for assets,” said Roubini about investors riding the bubble higher. (Source: Farrell, M., “Dr. Doom: Buy stocks while you still can,” CNNMoney.com, April 30, 2013.)
As many of you know, I have long been a critic of the Federal Reserve’s money-printing operations, along with the easy money flow from the world’s other banks.
Roubini predicts that the stock market will move higher over the next two years—as long as the Federal Reserve continues its aggressive stimulus strategy.
Of course, Roubini is aptly named Dr. Doom for a reason: he believes a period of reckoning is coming. And I’m on the same page.
As interest rates edge higher, investors will exit the stock market, and there will be a subsequent backlash.
I refer to this cause and effect as the impending economic Armageddon—it’s coming.
Interest rates will inevitably move higher. The low or near-zero interest rates are currently enticing investors to look … Read More
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
One of the biggest dangers when it comes to long-term investing is trying to determine the potential hazards on the horizon. Currently, market sentiment has become extremely positive in the market, driven by strong corporations with lean organizations and plenty of cash.
However, to be successful at long-term investing, we must look past current market sentiment conditions and determine what potential pitfalls could arise. Pension funds within corporations are becoming a serious threat in their potential to dampen market sentiment in the long run.
The deficit for American pension funds—the difference between the amount owed to retired workers and the level of funds in the pension—increased at the end of 2012 to $295 billion, up 17% from year-end 2011, according to Towers Watson. (Source: Badawy, M., “Corporate pension funding down in 2012 on falling interest rates,” Reuters, April 23, 2013.)
While assets within the pension plans have increased, as the stock market has moved higher, interest rates have declined to such a level that it still leaves a huge funding gap. Market sentiment for the current state of corporations might be accurate, but long-term investing is all about what will happen down the road. At some point, these obligations do have to be paid one way or another.
According to Towers Watson, American corporations contributed $45.0 billion in 2012 to their pension plans, the largest amount during the past five years. Since the turmoil in the market in 2008 and 2009, many pension plans have shifted away from equities and toward fixed income. According to Towers Watson, since 2009, the equity portion of the average pension plan has declined by … Read More
When interest rates are as low as they are and consumers begin to hold back on their spending, you have to wonder about the prospects for the retail sector going forward.
With the higher taxes on those earning over $400,000 and other tax increases as a result of the sequestration, we may be seeing some evidence of reduced spending.
The U.S. Department of Commerce said retail sales in March contracted by 0.4% on both a headline and an ex-auto basis, which was below the Briefing.com estimates of flat sales and 0.3%, respectively. This was the second decline in retail sales in the last three months.
While it may be premature to assume a new downtrend for retail sales, I wonder if the decline in take-home pay for some Americans has resulted in less consumer spending.
Or, it may be the softness of the jobs market that is making consumers nervous. With only 88,000 new jobs created in March, the jobs numbers must have had some impact on consumers and the retail sector.
Even consumer sentiment appears to be fading a bit as evidenced by the Thomson Reuters/University of Michigan Consumer Sentiment Index reading of 72.3 in April. This reading represented the worst reading since July 2012, and it’s well below the 76.0 estimate by Briefing.com and the 78.6 reading in February.
According to my estimate, the retail sector continues to be full of opportunities, but you also need to be careful on what retail stocks you buy.
You would have been sideswiped if you bought J. C. Penney Company, Inc. (NYSE/JCP), as the company posted horrible results and subsequently fired … Read More
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
One of the most dangerous situations is when an investor attains a false sense of confidence. With the Federal Reserve enacting such an aggressive monetary policy stance, this has led to reduced levels of volatility and an uncanny calm in the financial markets.
Because the Federal Reserve has stepped into the financial markets with such a large level of support through their monetary policy program, this has led to bond prices that remain elevated and yields that are at very low levels. Not much has occurred over the past few years in terms of shocks to the system.
The danger occurs when investors believe this situation will remain in place forever. Nothing lasts forever and one should always prepare for the future.
So far, the net result from the monetary policy action by the Federal Reserve has been higher home prices, an increase in car sales, higher asset prices in general, such as stocks, and a general calm in the financial system.
What happens when the Federal Reserve starts to reduce its monetary policy stance? I think it will hit many sectors, but it will especially affect the bond market.
The President of the Federal Reserve Bank of New York, William Dudley, recently stated that the accommodative monetary policy stance needs to remain for the time being, due to continued weakness in employment growth. However, he did add that the Federal Reserve should begin adjusting monetary policy as the economy improves. (Source: Zumbrun, J., “Dudley Sees ‘Very Accommodative’ Policy on Weak Job Market,” Bloomberg, March 25, 2013.)
The U.S. economy still has not employed all those who lost their jobs … Read More
On the surface, the Federal Reserve’s objective is to make sure America doesn’t fall into ruins. Following an aggressive strategy of monetary easing, the end result is interest rates at nearly zero percent and an endless flow of easy money. As I have already stated many times in these pages, the Federal Reserve has created an artificial economy.
Yet, if you think about it, the Federal Reserve’s push for low interest rates has helped the economic recovery—but it has also made life difficult for many Americans. The Federal Reserve’s low finance rates tend to make consumers buy more, enticed by the low carrying charges. This means more buying in homes, furniture, cars, clothes, or whatever goods and services that can be financed at cheap rates. But therein lies the problem. What happens when the Federal Reserve begins to raise interest rates? It’s going to get ugly.
There will be massive debt loads that will be subject to higher carrying charges and greater hardships for many consumers as wages for many continue to be flat.
And with the low interest rates due to the Federal Reserve, people are reluctant to save. Making less than one percent at the bank is not exactly an incentive to deposit money. In my last article, I discussed this issue of low savings. According to the Employee Benefit Research Institute (EBRI), a staggering 57% of workers surveyed said they had less than $25,000 in combined household savings and investments, excluding their homes. (Source: Greene, K. and Monga, V., “Workers Saving Too Little To Retire,” Wall Street Journal, March 19, 2013.) The problem is that the low … Read More
The Federal Reserve is intent on keeping this Fed-induced stock market rally intact for perhaps another few years.
At the Federal Reserve monthly meeting this past Wednesday, the Federal Reserve reconfirmed its program of maintaining near-zero interest rates and its $85.0 billion monthly bond-buying strategy. As I recently discussed, the environment of low rates will offer little choice for investors who have to weigh low-yielding fixed-income investments against stocks. In other words, the equities market will continue to be driven, at least in part, by the cheap money. This will be great for the people who have the funds, but it will be horrific for those with lower income and who may be dependent on income from their investments. But for the government it’s great news, especially when it’s carrying so much debt—well, the government can thank the Federal Reserve.
Faced with the uncertainties in the jobs market and job creation, the Federal Reserve suggested it would maintain its record-low interest rates until the country’s unemployment rate falls to 6.5%. The problem is that the Federal Reserve predicts this will not occur until sometime in 2015, so that’s another two years of easy money and the building up of massive national debt. Remember what I said about the sequestration cuts and how they are well below the interest paid on the debt? Imagine the payments when interest rates ratchet higher! It’s not going to be pretty. The Federal Reserve has created this situation, which could inevitably blow up.
In reality, achieving an unemployment rate of 6.5% may not happen until after 2015, based on current job generation. According to the … Read More
One of the biggest concerns I have regarding the current monetary policy program implemented by the Federal Reserve is the cost that will need to be paid once the program ends.
While the Federal Reserve believes it can bring monetary policy back to normal levels without severe adjustments in the market, I don’t believe this to be the case.
Don’t forget that when interest rates rise, bond prices decline. Investors clamoring for any yield will suffer a massive decline in the price of the asset, all in the hunt for that small yield. As an example, in 1994, when the Federal Reserve increased interest rates, the price of the 30-year bond declined by 24% in one year.
The hunt for yield is so strong due to the aggressive monetary policy program by the Federal Reserve and investors are so worried about the possibilities of inflation that Treasury Inflation Protected Securities (TIPS), which adjust with the inflation rate, have been in such high demand that they now offer a negative yield.
According to the Lipper unit of Thomson Reuters Corporation (NYSE/TRI), for the last week of February, there was a record amount of cash moving into mutual funds that invest in floating-rate loans. (Source: Wirz, M., “Preparing for day when rates rise,” Wall Street Journal, March 10, 2013.)
The aggressive monetary policy program by the Federal Reserve is creating distortions in the market. The real worry is when the monetary policy program begins to tighten, shifting away from the current easy money policies.
With the Federal Reserve’s meeting scheduled this week, it’s interesting to note that a survey by the Wall … Read More
The 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
Federal Reserve Chairman Ben Bernanke testified in front of Congress and faced a barrage of questions and criticisms regarding the central bank’s monetary policy initiative.
There are a growing number of critics voicing their concerns over the current monetary policy path set forth by the Federal Reserve. These critics aren’t only independent analysts such as myself, (I have been writing articles on the topic for some time now, including the article “Current Monetary Policy Unsustainable”), but economists who have worked closely with the Federal Reserve in the past.
The Federal Reserve chairman stated in his testimony to Congress, “Keeping long-term interest rates low has helped spark a recovery in the housing market and has led to increased sales and production of automobiles and other durable goods.” (Source: “Bernanke Affirms Bond Buying,” Wall Street Journal, February 26, 2013.)
Is he correct? Over the short term, the answer is yes, since the Federal Reserve has begun its aggressive monetary policy plan, home prices have gone up and car sales are strong once again. The real question is: what are the costs of accumulating $2.8 trillion of Treasury debt and mortgage-backed securities?
The real issue I have is the belief in fixing a burst bubble with yet another inflated stimulus plan. The previous high level of home prices was artificial and not sustainable. The resulting housing crash was inevitable, as all of the factors that went into creating the bubble were not structurally sound.
With the Federal Reserve pumping out monetary policy at full throttle, home prices are sure to move upward over the short term, but the long-term implications can be quite … Read More
When it comes to long-term investing, many focus solely on revenues and earnings. While clearly these are extremely important fundamentals when conducting a stock analysis, one rarely mentioned but critical variable is pension liabilities.
Pension liabilities are, by definition, crucial to long-term investing, as costs are spread out over many years. Many investors conduct a stock analysis on a very short-term basis—quarter to quarter. Successful long-term investing means conducting a stock analysis on the next five, 10, even 15 years.
Pension liabilities are a huge issue for many companies. A pension liability is the difference between the amounts of funds the company has in reserves versus the expected payments to retirees. At the end of 2012, American businesses had an estimated combined pension deficit of $347 billion, according to JPMorgan Asset Management. (Source: Monga, V., “Why the corporate pension gap is soaring,” Wall Street Journal, February 25, 2013.)
JPMorgan estimates that, on average, companies have promised $100.00 to retirees, yet they only have $81.00 in reserves. That is a massive gap that needs to be taken into account when conducting a stock analysis for long-term investing.
This is an unintended side effect of the low interest rate environment created by the Federal Reserve. While companies can take advantage of low interest rates when borrowing, they can also end up having a shortfall in the long-term returns on their investments.
Companies are attempting to bridge the gap by adding funds to make up the shortfall. If interest rates stay low for a number of years, as expected, a stock analysis must take into account the increased provisions of cash used to … Read More
Recently in these pages, I talked about how the government, the Treasury, and the Federal Reserve were creating an artificial economy that was supported by cheap money and low interest rates.
One of the major benefactors of this cheap money was the housing sector, which is now sizzling hot. The median price of an existing home in the U.S. was $173,600 in January, up 12.3% from an average of $154,600 a year earlier. (Source: United States Census Bureau web site, last accessed February 27, 2013.)
Driving the renewed buying in the housing sector has been the environment of near-zero interest rates. The Federal Reserve has been injecting additional liquidity into the economy and mortgage market via its $85.0 billion in monthly bond purchases. The problem is that the low interest rates and easy money have driven the excess buying of homes and investment properties, as speculators jump into the housing sector, looking for deals and driving up home prices.
My concern is that the buying may be creating another potential bubble in the housing sector. You may not believe it, but I view this as a possibility. Housing starts in January showed some stalling. And now, with the sequestration budgetary cut set to take effect tomorrow, the automatic $85.0 billion in annual budget cuts (the planned sequester will total $1.2 trillion over the next decade) could have a widespread impact on the country and the economy, including program cuts, job losses, and economic chaos. The Congressional Budget Office (CBO) has warned that the U.S. economy could contract by 1.3% in the first half of this year if the sequester is … Read More
The current Federal Reserve monetary policy initiative is truly historic in proportion. Not only has the Federal Reserve held interest rates at extremely low levels for an extended period of time, it has also embarked on an asset-purchasing program in the amount of $85.0 billion per month.
Clearly, this type of monetary policy program is unsustainable. While many people have been warning of the dangers, an interesting paper that will be presented at the upcoming U.S. Monetary Policy Forum will state similar concerns; however, what’s fascinating is who the authors are.
Amongst the four economists, one is a former Federal Reserve governor, Fredric Mishkin; two are former Federal Reserve economists, David Greenlaw and Peter Hooper; and the fourth author is James Hamilton, an economics professor at the University of California whose work has been used by Federal Reserve Chairman Ben Bernanke to justify certain monetary policy initiatives. (Source: Zumbrun, J., “Economists Warn Fed Risks Losing Control Amid Budget Deficits,” Bloomberg, February 22, 2013.)
These economists certainly have the kind of background, knowledge, and experience that can’t be ignored. Their assertion is that the explosion in the Federal Reserve’s balance sheet, in addition to the unsustainable fiscal policies, could result in a loss of control over the monetary policy system.
With the Congressional Budget Office (CBO) estimating at current projections for revenues and expenses, the government will run budget deficits of approximately $700 billion for the next 10 years. This type of irresponsible management of fiscal policy by Washington is inexcusable.
While the Federal Reserve is attempting to reduce the unemployment rate through monetary policy, Washington’s inability to get its fiscal … Read More
One of the strongest market sectors in the stock market over the past year has been the financial market sector. Bank stocks have been on a tear, moving up massively since the lows in June. Looking at the entire market sector through the Financial Select Sector SPDR (NYSEArca/XLF) exchange-traded fund (ETF), the index is now up almost 36% from the lows in June.
Bank stocks have benefited from several factors. Low Treasury yields make the dividend yields from bank stocks highly attractive; the entire market sector has also reduced its risk profile, while eliminating costs. The end result has been a group of companies that offer significant upside.
However, the hunt for safety by average citizens might hurt bank stocks going forward. The latest data by Credit Suisse Group AG shows that for the top-eight banks, the average loan-to-deposit ratio fell in the fourth quarter 2012 to 84%, compared to 87% during the same time period in 2011. In 2007, the loan-to-deposit ratio was 101%. (Source: Dexheimer, E., “JPMorgan Leads U.S. Banks Lending Least of Deposits in 5 Years,” Bloomberg, February 20, 2013.)
The loan-to-deposit ratio shows how much of the deposits bank stocks have lent out. Bank stocks are having trouble lending due to several reasons. These include a lack of demand as well as an increase in regulations to try and reduce risks.
For investors in the financial market sector, this is a double-edged sword. On the one hand, it is positive that bank stocks are being more selective in who they are doing business with. This means that any loans that have been issued over the past … Read More
With the recent data over the past few months showing home prices continuing to rise, many investors might believe they’ve missed the boat. The homebuilder stocks have seen a substantial increase in corporate earnings, resulting from higher home prices and elevated production levels; this has led to a massive increase in their share prices.
The market is a forward-looking mechanism. Investors predicted the increase in home prices that we are now witnessing and the resulting rise in corporate earnings in these homebuilder stocks.
Yet another data point just came out, finding that 87.5% of single-family homes in 152 cities had an increase in home prices during fourth quarter 2012 compared to the same quarter in 2011. The number of residences exhibiting higher home prices is increasing, as only 79.0% of metropolitan areas showed an increase in home prices for the third quarter 2012. (Source: “Fourth Quarter Metro Area Home Prices Show Strongest Performance in Seven Years,” National Association of Realtors web site, February 11, 2013.)
While housing inventories are at 12-year lows and the interest rates of mortgages remain low, home prices are set to continue rising for the near future. Firms that are leveraged to higher home prices will see significant increases in corporate earnings.
However, there are still firms that can benefit from higher home prices and that are able to continue growing their corporate earnings over the next several years. But these companies might not be the ones that come to mind for investors when they think of the real estate investment industry.
One company that I have mentioned before when it was trading much lower is … Read More
The national debt ceiling debate was initially expected to be resolved by January 1; but when that date came around, it was extended to May 18, as the two sides continue to debate the budgetary cuts, the deficit, and the increase in the debt ceiling above the $16.4-trillion legal limit.
While something needs to be done, President Obama and Congress must also understand that major cuts in fiscal spending to lower the deficit, at this point, could hurt the current economic recovery, which has been showing encouraging signs over the past year. The housing market is hot, with rising construction and sales and home prices that are edging higher. The Federal Reserve’s buying of mortgage bonds and the existence of near-zero interest rates together were the catalyst.
The combination of fiscal and monetary policy is clearly helping the economy, so it would be a grave error to cut spending at this critical time. Taxes for those earning over $400,000 have jumped. Those earning less are also seeing some increases in taxes. The end result was a decline in the consumer confidence reading to 58.6 in January, well below the 61.0 estimate by briefing.com and the 66.7 reading in December. The numbers suggest that consumers may become more hesitant in wanting to spend, given the tax increases.
For the government, the current debt limit will be reached soon. Without the extension of the debt ceiling deadline, the government would have run out of money to pay its employees, support programs, and cover other key spending items.
Nobel Prize economist Paul Krugman is not in favor of cutting spending to curtail the … Read More
Many investors in gold bullion have become increasingly worried due to the lack of price appreciation lately. Even though there has been an aggressive monetary policy initiative by the Federal Reserve, gold bullion and mining stocks in the sector have declined.
Obviously, no one can predict the future; it’s impossible to know for sure where gold bullion, or mining stocks in general, will be in the future.
However, there are several things that individual investors can do to enhance their probability of success when it comes to investing in gold bullion mining stocks.
One metric that I watch is the debt level of a company. This doesn’t mean to avoid all mining stocks with high levels of debt; rather, one should only buy these companies at a discount, unless they are growing rapidly. Gold bullion mining stocks with high levels of debt are far more likely to be susceptible to negative shocks.
Because interest rates have been low for some time, gold bullion mining stocks with high debt have been able to get away with relatively low rates of financing. But over the next five years, we are certainly looking at a higher interest rate environment; this is one area of caution for investors.
One way to look at gold bullion mining stocks is in two general categories: low- or no-debt mining stocks and high-debt mining stocks. The companies with a high debt level should not trade at a premium when compared to gold bullion mining stocks with low levels of debt, unless their growth rate is above average.
Here are three stocks that are great examples.
One of the … Read More
As corporate earnings season continues for S&P 500 companies, it is becoming quite evident that revenue growth is lacking across many sectors of the economy. However, we are continuing to see growth in corporate earnings per share.
How is this possible? One method is through share buybacks. S&P 500 corporations, which are generating very high levels of cash, are buying back shares and reducing the number outstanding, which increases the corporate earnings-per-share level.
From April 2011 through October 2012, S&P 500 companies bought back and retired approximately eight billion shares, according to FactSet. This has been a significant driver for corporate earnings over the last two years. (Source: Cheng, J., “Investors See a Way Forward: Buybacks,” Wall Street Journal, January 21, 2013.)
If this level of share buybacks for S&P 500 corporations continues this year, we can expect to see corporate earnings increase by between five percent and 10%, without any organic growth in corporate earnings and flat revenues.
Another driver for S&P 500 share prices will be that the dividend yield will still remain very attractive when compared to U.S. Treasuries.
While revenue growth needs to begin to increase substantially at some point, I think 2013 will be another year in which the combination of a strong dividend yield and modest corporate earnings growth will result in the continuation of investment funds rotating out of the bonds and into equities.
Personally, I think a lot of buybacks are ill timed. While I like to see corporate earnings increase, the problem with many S&P 500 companies is that they tend to buy shares at the wrong time.
When the S&P … Read More
It was extremely difficult times for homeowners following the subprime mortgage implosion that helped to drag down the global economy in 2008. I recall 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) can get a mortgage with no questions asked, you have to wonder how long it might be before a housing bubble surfaces.
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 by the Federal Reserve each month has driven down the cost of interest rates to record lows.
More people are working now, 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 the housing market is displaying much-improved industry metrics. We just saw another strong housing starts and building permits reading.
In December, there were an impressive 954,000 annualized starts, which is above the Briefing.com estimate of 880,000 and November’s 851,000.
Also lending support to the housing market recovery was a strong building permits reading of 903,000 in December, beating the Briefing.com estimate of 880,000 and September’s 900,000. The strong reading indicates that builders are expecting a good flow of buying in the housing market, and this could only bode well for homebuilder stocks.
Home prices, representing another key piece of the housing market, are edging higher, with the S&P/Case-Shiller U.S. Home … Read More
Last year was a great year to be an investor in bank stocks. We’ve seen a dramatic rebound in the price of most major bank stocks in America as the earnings outlook has improved. Clearly, the earnings outlook at the beginning of last year was far too pessimistic for the majority of bank stocks.
The question: what’s in store for bank stocks in 2013?
Wells Fargo & Company (NYSE/WFC) just released its earnings numbers, and they were very strong, as the firm reported a 24% jump to $5.1 billion in profit for the fourth quarter of 2012 from the year-ago period. For the full year, the company had record income of $18.9 billion, up 19% from 2011. (Source: “Wells Fargo reports record full-year in quarterly net income,” Wells Fargo & Company, January 11, 2013.)
An area of concern is that the net interest margin was down to 3.56%, from 3.89% the previous year. This is the difference between the rate it charges borrowers and the interest it pays depositors.
Refinancing of mortgages accounted for approximately 75% of the total revenue. Clearly, the lower rates that the Federal Reserve has engineered have encouraged a large number of homeowners to refinance, freeing up excess funds to use in other ways.
However, while it seems a great time to be invested in bank stocks, the earnings outlook might be a bit more complicated. The big problem for bank stocks is that they are not able to find enough places to lend in comparison to the massive inflow of deposits.
Bank stocks currently hold $10.6 trillion in deposits at the end of 2012. This … Read More
Over the last few years, the aggressive monetary policy plan by the Federal Reserve has left many income investors in a difficult position. The low level of interest rates has reduced the income-generating potential of traditional fixed-income products.
Increasingly, more people are creating an investment strategy, looking for stocks with a solid dividend yield to add income to their portfolio.
For dividend yield investors, 2012 was a great year. In total, the S&P 500 corporations paid $281 billion in dividends in 2012, a record high, according to analyst Howard Silverblatt at S&P Dow Jones indices. (Source: “Dividends Galore: Expect Another Record Year in 2013,” Wall Street Journal, January 7, 2013.)
The total paid out in dividend yield was a 17% increase from 2011, and a 14% increase from 2008, which was the previous high until 2011. As I’ve written before, special one-time payments played a large role in dividend yield for 2012. More corporations announced special dividends in December 2012 than at any other time since 1955.
Even though dividend yield taxes are going up, I still believe that due to the low interest rate environment, more institutions will be creating an investment strategy that will focus on placing their funds with companies that pay out a solid dividend yield.
Part of creating an investment strategy is to anticipate what other investors will do. While I do believe interest rates will eventually rise, this most likely won’t occur in 2013. For many people, this will leave an investment strategy to still favor dividend yield over the relatively low rates of fixed income.
With the 10-year Treasury yielding approximately 1.9% and … Read More
At the end of 2008, the financial crisis in America was so severe that the Federal Reserve began a historically significant and unprecedented monetary policy program, which has continued to this day, dramatically altering the financial and economic landscape.
Considering the extent and breadth of this huge monetary policy program by the Federal Reserve, two questions linger: why hasn’t the economy recovered as many economists had expected, and what is the downside?
Monetary policy is an extremely complicated initiative, with the end result not easily quantified or predictable. One of the most common complaints has been the lack of income from savers due to the lowered interest rates.
There is some validity that a massive amount of income has been foregone from savers because of these lower rates, due to easy monetary policy by the Federal Reserve and other central banks around the world.
According to The Economist, personal interest income has declined at an annual rate of $432 billion since 2008, more than four percent disposable income. This was interest income that was not generated and, ultimately, not spent in the economy. (Source: “Savers’ Lament,” The Economist, December 1, 2012, last accessed January 7, 2013.)
However, the situation is far more complex, as there are two sides to every coin. The lowered interest rates due to easy monetary policy by the Federal Reserve have also decreased the costs of borrowing.
The Bank of England conducted a study showing that between 2008 and 2012, the lowered interest rates ended up costing savers 70 billion pounds in lost income, but households saved 100 billion pounds in interest expense. (Source: The Economist, … Read More
While many eyes are focusing on Europe and America when it comes to the next financial crisis, one sector that people aren’t focusing on is the bond market in Japan. Many investors might not realize it, but Japan might be the next financial ticking time bomb.
How does a financial crisis in the bond market affect the average person? On a basic level, the bond market prices move based on supply and demand, which affect interest rates. With greater demand in the bond market, this pushes up prices and lowers interest rates. A lower interest rate obviously helps prevent a financial crisis from occurring, as it takes less money to pay off the debt—much like a credit card interest rate being reduced.
Conversely, if investors are worried about their funds in the bond market, this will cause selling or a reduction in purchases, a decline in prices, and a rise in interest rates. For countries that have a large amount of debt, higher interest rates will cause a financial crisis, as the funds available to maintain that debt are limited and could run out.
Much like a person who racks up very high credit card debt, at some point the income from the person’s job is not enough to make the minimum payment, let alone pay down the principal. The end result is a financial crisis.
Japan has a massive debt-to-GDP (gross domestic product) level of 211%, much higher than America’s or even Greece’s debt burden. (Source: Trading Economics, last accessed January 7, 2013.)
Even though Japan’s 10-year bond interest rate is only 0.79%, a full 25.0% of government revenue … Read More
One of the biggest investor mistakes by the average retail investor is to be late to cash in on an investment theme. These investor mistakes are not limited to just the stock market, but all types of investments. If we look at investor mistakes by the retail public for buying real estate, most people were bullish at the top of the market and were selling, or were forced to sell, their real estate at the bottom. Buying high and selling low is one of the most common investor mistakes by the majority of the public.
Since 2008, the biggest trend for the average investor has been to get out of stocks and to park money in U.S. bonds. EPFR Global, a provider of data, reports that since 2008, equity funds have had a net redemption of $467 billion, compared to bond funds that have seen an influx of $1.1 trillion. (Source: “Desperately Seeking Yield,” The Economist, November 10, 2012, last accessed January 2, 2013.)
According to Morningstar, money flowing into bond mutual funds accelerated in 2012, with 26% of household investments in U.S. bonds up from 14% in 2008. This was during a year in which the S&P 500 was up a solid 13%, now up over 111% since the low in March 2009. Meanwhile, 10-year U.S. bonds are currently offering a negative yield after inflation, meaning people are willing to lose money over 10 years because they are so scared of the market. (Source: “Bond Craze Could Run Its Course in New Year,” New York Times, December 31, 2012.)
This type of thinking is one of the most common … Read More
One of the most important sectors of the economy is the housing market. The housing market is crucial for several reasons. First, the housing market employs a lot of people, both directly and indirectly. This includes the direct employment of people in the housing industry, such as tradesmen and homebuilders, and the indirect employment of people in related industries, such as the automakers that build pickup trucks to be used by tradesmen and homebuilders.
Another crucial factor is the direction of home prices. We’ve now seen continued strength in home prices, which is a positive for the homeowner. Considering a house is the largest property many citizens own, to see its value continually decline is mentally and emotionally difficult. However, with month after month of steady gains, this will help alleviate some concerns about the future.
According to the latest report from research and analytics firm CoreLogic, Inc. (NYSE/CLGX), in October 2012, home prices, including distressed sales, jumped up 6.3% nationwide. This is the largest increase for home prices since June 2006. This was not a one-time jump for the housing market, but the eighth consecutive month of year-over-year nationwide increases in home prices. (Source: “CoreLogic Home Price Index Marks Eighth Consecutive Month of Year-Over-Year Gains,” CoreLogic, Inc., December 4, 2012.)
In regards to homebuilder sentiment for the housing market, which is correlated with home prices, confidence continues to rise. According to the National Association of Home Builders (NAHB), confidence by homebuilders in December rose for the eighth consecutive month. This is the highest level of confidence by homebuilders since April of 2006. (Source: “Builder Confidence Continues Improving in December,” … 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
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
We live in a very unusual time. With the European debt crisis on the market’s mind daily, and as China’s economy slows and the U.S. economy falters, the world has become more complicated.
Economic slowdowns and/or recessions are normal, but what is unusual this time around is the fact that interest rates in many countries are going negative.
Investors are paying certain governments to hold onto their money. Government debt is not an investment vehicle anymore; it has become a safety deposit box for investor money. Negative interest rates are signaling the fear investors have.
Just in the last month, Germany’s two-year government debt bond yielded a negative interest rate of -0.002%. Investors believe that should the eurozone fall apart, Germany’s economy will be one of the few to withstand the financial crisis storm. As such, investors paid for Germany’s government debt, because they believe they have assurances of getting their money back.
The Netherlands, another European Union member, is one of the few countries with a AAA credit rating left in the world. Its economy has certainly suffered from the turmoil in Europe, but with low unemployment and relatively low debt-to-GDP, investors believe it is a safe place to park their money. The short-term government debt of the Netherlands was sold at negative interest rates, as well, in the last month, as investors put interest rate returns aside for the safety of their money.
Two countries outside the European Union that have seen their currencies skyrocket and their interest rates fall in the last few months are Switzerland and Denmark.
These countries have attempted various methods to try to … Read More
The Federal Reserve is frustrated that its low interest rate policy and thus low mortgage rates are having no effect on the U.S. economy. The Federal Reserve was hoping to stimulate borrowing to get the U.S. economy growing again.
The problem is the record number of people whom are long-term unemployed: 5.4 million were unemployed for longer than 27 weeks as of May.
There are over 80.0 million Americans who are not even counted as unemployed because they are discouraged when it comes to finding a job in this economy.
With no available jobs and the housing market continuing to languish at the low end, it doesn’t matter how low mortgage rates are. Also, because of the reality of the jobs market, the Federal Reserve is well aware that more and more Americans fall into the category of poor credit scores.
Banks and mortgage companies in the U.S. are very hesitant to lend, because they are still healing from the crisis. Regardless of how low mortgage rates are, they are tightening their lending standards to protect themselves.
The Federal Reserve should pay attention to a report from Moody’s Analytics that noted 90% of new mortgages in 2011 were given to people with only high credit scores.
There is no question that those with high credit scores are taking advantage of Federal Reserve policy to refinance and borrow. The problem is Americans with low credit scores are finding they need to pay much higher mortgage rates than what the Federal Reserve intended.
The other issue is that those Americans who had their credit scores cut down due to the ramifications of … Read More