monetary stimulus
Unique Investment Opportunity in a Market Dominated by Money Printing
By Sasha Cekerevac for Investment Contrarians | May 2, 2013
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
Global Central Bank Money Printing to Cause Long-Term Damage
By Sasha Cekerevac for Investment Contrarians | Apr 30, 2013
One of the most confusing topics of late is the low level of the inflation rate even though monetary stimulus has been quite aggressive worldwide. The most recent data point came from Japan, in which consumer prices dropped by 0.5% in March versus the same time in 2012.
The Bank of Japan is just now beginning a new monetary stimulus plan in the hopes of moving the inflation rate back into positive territory, with the target at two percent. However, some analysts question the possibility of reaching the target inflation rate over the next couple years, even with this monetary stimulus plan. (Source: Fujioka, T., et al., “Bank of Japan Sees Inflation Nearing Target in 2015: Economy,” Bloomberg, April 26, 2013.)
This aggressive monetary stimulus package has driven the yen weaker, benefiting export-oriented companies; however, while the general inflation rate is low, prices for imports such as energy will continue to rise as the currency declines. Additionally, the monetary stimulus program to drive up the inflation rate will have an impact on property prices and will raise rent levels.
However, monetary stimulus is not enough to gain traction and increase the inflation rate. Japan needs structural reforms to its business sector to encourage expansion and growth. Psychologically, the average Japanese citizen has been used to price declines for many years—this mentality will be hard to change. As an example, the latest report showed that TV prices fell by 19% from last year. (Source: Ibid.)
In America, we’ve had monetary stimulus for quite a while, yet the inflation rate is still quite low, below the targeted level. In March, the consumer … Read More
The S&P 500 Companies to Watch This Earnings Season
By Sasha Cekerevac for Investment Contrarians | Apr 5, 2013
It’s almost that time again, corporate earnings season. Starting next week, American firms begin reporting their corporate earnings for the first quarter of 2013. Considering how high the S&P 500 is, many analysts and investors will be closely watching the results.
According to estimates from Bloomberg, earnings for the S&P 500 firms are expected to drop by 1.9% for the first quarter. This represents the first decrease in corporate earnings since 2009. (Source: Rupp, L. and Gammeltoft, N., “U.S. Stocks Fall as Energy, Financials Tumble on Economy,” Bloomberg, April 3, 2013.)
We’ve seen a decrease in estimates for earnings just over the last couple of months. In January, according to Bloomberg, the average corporate earnings estimate by analysts for S&P 500 companies was a growth of 1.2% for the first quarter. This follows the fourth quarter of 2012, in which corporate earnings for these companies grew by eight percent.
According to FactSet Research Systems Inc., so far for the first quarter 2013, 86 S&P 500 firms have issued negative earnings guidance, while 24 have issued positive guidance. (Source: “Earnings Insight,” FactSet Research System, Inc. web site, March 28, 2013.)
With one-year forward earnings estimates at $114.08 for the S&P 500, this makes the forward price-to-earnings (P/E) ratio 13.7. This certainly doesn’t make the market expensive, but it’s not cheap either. To put this in context, historically, the trailing P/E ratio is usually in the range of 10 to 25, with certain periods both below and far above this range.
One sector to watch out for is technology, which according to FactSet is predicted to have corporate earnings drop by 3.7% … Read More
Stocks Priced to Perfection; Is a Sell-Off in the Works?
By Sasha Cekerevac for Investment Contrarians | Mar 14, 2013
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
Fed’s Monetary Policy Losing Steam Could Mean Danger for Your Investments
By Sasha Cekerevac for Investment Contrarians | Mar 12, 2013
This won’t be the first time I’ve stated my opinion that the current Federal Reserve monetary policy is not only becoming greatly ineffective, but also dangerous to your investments.
And now, there are growing voices joining this cautious call. The surprising fact is that even the members of the Federal Reserve are now voicing concerns of the dangers inherent in the central bank’s current monetary policy program.
Charles Plosser, the current Federal Reserve Bank of Philadelphia President, stated in a speech that the Federal Reserve’s asset repurchase program needs to be reduced and eliminated by the end of 2013. His reasoning, like mine, is that the costs outweigh the benefits.
The most interesting statement by Fed President Plosser was, “…monetary policy is posing risks to the economy in terms of financial stability, market functioning and price stability.” (Source: Kearns, J. and Gage, C.S., “Plosser says Fed should taper QE as costs exceed benefits,” Bloomberg, March 6, 2013.)
When I think of the massive amount of money that the Federal Reserve has pumped into the U.S. economy, it is shocking that the Federal Reserve’s balance sheet is in excess of $3.0 trillion and yet the U.S. economy grew just 0.1% in the fourth quarter of 2012.
While cuts in the defense budget certainly explain a huge portion of the weak quarter, it is clear that the monetary policy program by the Federal Reserve has become ineffective. While there may be marginal improvements in certain sectors, the costs that I’ve been discussing previously, and which Plosser is now elucidating, will be very severe.
The scariest part of the Federal Reserve’s monetary policy … Read More
How You Can Profit from the Currency Wars
By Sasha Cekerevac for Investment Contrarians | Jan 18, 2013
Recently, we have heard a lot about currency wars being waged by various nations around the world. To those who are unfamiliar, “currency war” is a term that refers to countries that are actively looking to devalue their currency to help stimulate export growth and their domestic economy.
Investing in stocks in this type of environment can be tricky, as one needs to add additional variables to the analysis. Having a strong market sector, solid long-term fundamentals of the individual stock, and a favorable currency direction can help when considering investing in stocks.
While many look to the Federal Reserve as being the most active in trying to devalue the U.S. dollar, I would point to Japan. Newly elected Japanese Prime Minister Abe has been vocal about demanding massive and unprecedented monetary stimulus by the Bank of Japan to help stimulate the Japanese economy.
Large institutions interested in investing in stocks certainly have jumped on the export-oriented market sector, as Japanese stocks are up approximately 24% since mid-November, when elections were announced, and the yen is down in value by approximately 10%.
However, this is not a short-term phenomenon. I believe the yen will continue to remain weak for a long time, and this will benefit the Japanese export market sector. Those interested in investing in stocks could look to equities in Japan that will benefit from the yen’s devaluation.
One market sector that also has strong fundamentals in the U.S. is vehicle sales. The U.S. had extremely strong car sales in 2012, and I expect 2013 to be just as strong. When combined with a further lowering of the … Read More
Bank Stocks at Crucial Crossroads
By Sasha Cekerevac for Investment Contrarians | Jan 15, 2013
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
Can America Learn Important Lessons from the Japanese Economy?
By Sasha Cekerevac for Investment Contrarians | Dec 17, 2012
This weekend, I will have my eyes turned toward Japan and the Japanese economy, as the nation holds its elections on Sunday. The reason for my interest is that the Liberal Democratic Party, led by Shinzo Abe, has repeatedly called for an ultra-hyper monetary stimulus package to be used in attempting to kick-start economic growth within the Japanese economy.
The Japanese economy has been mired with lackluster economic growth for decades, even though monetary stimulus has been applied. The problem, according to the Liberal Democratic Party, is that monetary stimulus has been too weak, and the tap needs to be opened to flood the system by printing more of its currency, the yen.
However, not all economists believe this monetary stimulus plan will lead the Japanese economy to higher economic growth levels in the future. Stephen Roach, the esteemed Yale University senior fellow, stated on CNBC, “I don’t think it’s going to work. QE (quantitative easing) is good at containing the downside, addressing crisis and disruptive markets, but it definitely doesn’t give you traction in regenerating demand in the real economy.” (Source: “Aggressive Easing Wrong Medicine for Japan: Roach,” CNBC, December 13, 2012.)
It’s easy to fall into the habit of looking toward easy monetary stimulus as a way to kick-start economic growth. This is one problem with America’s crop of politicians who are expecting the Federal Reserve to continue monetary stimulus as a way of generating economic growth, as opposed to applying real structural reforms to the economy.
At the very least, America has made some improvements in its economy over the last five years. Banks are far better … Read More
Worried About America? You’d Better Watch China
By George Leong for Investment Contrarians | Oct 16, 2012
What happens in China will have an impact on the U.S. economy and the global economy. The linkage between economies worldwide has become more profound over the past decade. This is why, as an investor, you need to be fully aware of the situation across the Pacific.
The state of the Chinese economy continues to ramp up heated discussion specifically concerning the immediate need for further monetary stimulus to drive domestic consumption in China.
China’s inflation rate is currently manageable at 1.8%, which allows for added monetary stimulus. (Source: National Bureau of Statistics.)
China’s recent industrial production is a sore spot compared to the sizzling results from 2003 to 2006, as reflected on the chart; albeit, the number has risen in the past three straight years. Industrial output improved from 2008 to 2011, but the current year is heading for the lowest levels since 2008, when the global recession started and there was a need for monetary stimulus. According to China’s Ministry of Industrial & Information Technology, the country’s industrial production is estimated to fade to 10% in 2012 versus 13.9% in 2011, which is an ideal level for monetary stimulus.
Copyright Lombardi Publishing 2012; data source: Central Intelligence Agency (CIA), The World Factbook.
The World Bank predicts China may see its economic growth expand by a mere 7.7% this year and rebound to an optimistic 8.6%. But these metrics may not be easily achievable, especially given the financial crisis in the eurozone, hence the need for monetary stimulus in China.
The country’s gross domestic product (GDP) has declined over the past six straight quarters. GDP growth came in at … Read More
Why “Don’t Bet Against the Fed” Is Now Truer Than Ever
By Sasha Cekerevac for Investment Contrarians | Aug 8, 2012
With the recent Federal Reserve meeting just concluded with no change in monetary stimulus policy, all eyes are focused on its September meeting. As the economic data continues to deteriorate, this is having a negative impact on the economic forecast for the future. The Federal Reserve is closely monitoring the situation and, with a lack of strong, positive news, I believe that additional monetary stimulus will occur by the end of the year to avert a continuing diminished economic forecast for the future.
Recent comments by Eric Rosengren, who is the Federal Reserve Bank of Boston President, will surely reignite additional expectations of monetary stimulus, as he commented that the central bank should enact open-ended quantitative easing. He also suggested the Federal Reserve should boost this monetary stimulus program by substantial magnitude.
The economic forecast for America continues to be subpar. Obviously, this Federal Reserve Bank president and others are voicing the opinion that the current monetary stimulus policy is not enough to decrease the unemployment rate and increase the growth rate of the country. The wording that open-ended quantitative easing should be the new monetary stimulus policy initiative is quite a change for Federal Reserve standards.
This policy initiative would be quite bullish for certain markets, such as gold. With the payroll data last week not being horrible, many were led to believe that Federal Reserve policy might be on hold. Even with some doubts, gold has held up quite well. Gold stocks have also performed reasonably well, but I believe there is more to come.
As many analysts will continue to decrease their economic forecast for the American … Read More
Spanish Economy in Dire Straits
By George Leong for Investment Contrarians | Aug 7, 2012
Markets were disappointed following the decision of both the Federal Reserve and European Central Bank (ECB) to inject monetary stimulus into their respective economies. And like the Fed, the ECB will look to the bond market for help as it considers another bond-buying program for Spain in hopes of driving down yields with the country facing a financial crisis.
Yet the problem is that Spain needs help now, as the 10-year Spanish bond traded at an unsustainable yield of 7.2% on Friday, which could force the country to seek a bailout to avoid a worsening of the financial crisis. Spain says it doesn’t need a bailout but a loan.
ECB chief Mario Draghi said the central bank would help Spain once it formally requests a bailout. Spain has already received about $130 billion to avert a financial crisis in its fragile banking system. My view is the ECB wants to see Spain put together a tough austerity program in exchange for a bailout, but Spain is trying to avoid this.
A tough austerity program would bind Spain’s spending (but isn’t this needed?). The country is declining in its economic strength. Its economy has fallen to 12th in the world in 2011, according to the International Monetary Fund (IMF). Previously, Spain’s economy was the ninth largest, but with its financial crisis it has since been surpassed by Russia, Canada, and India. Regardless, a collapse in Spain would be devastating.
The thought of tough austerity measures in Spain is causing civil unrest. Just like Greece, the country is facing a financial crisis, a second recession, and an unemployment rate of 25%. The … Read More
What Should You Watch Before the Next Fed Meeting? I’ll Tell You
By Sasha Cekerevac for Investment Contrarians | Aug 3, 2012
With the recent Federal Reserve meeting concluded, many investors were disappointed that additional monetary stimulus was not initiated. I, for one, was not surprised at the lack of monetary stimulus at this meeting, because the conditions are not yet set for such a maneuver. However, economic data leading up to next month’s Federal Reserve meeting will be crucial in determining if additional monetary stimulus will be needed.
Recent economic data show that the economy in the U.S. has slowed down from the beginning of this year. The Federal Reserve has the tough task of juggling the economy and the spigot that is monetary stimulus. This has become even more difficult since the data have not been a complete disaster.
Since the Federal Reserve has enacted several bouts of monetary stimulus involving the first and second rounds of quantitative easing, plus “Operation Twist,” the Federal Reserve is now hesitant to take on further action, because the fear is that this might have only a limited impact on the market.
I agree with this line of thought. I believe that the Federal Reserve only has a limited amount of effect left for additional monetary stimulus before deleterious actions occur. The next two months of economic data, especially in the unemployment rate and non-farm job creation numbers, are crucial in determining where the Federal Reserve stands for monetary stimulus. Currently, a large number of market participants believe additional monetary stimulus will be enacted at the September 12–13 meeting of the Federal Reserve.
The real question is, if the jobs numbers come in flat or slightly above expectations, does this mean the Federal Reserve … Read More
Is the Market Setting Up for a Crash?
By Sasha Cekerevac for Investment Contrarians | Aug 1, 2012
While the economic data have continued to come in worse, the S&P 500 has strengthened over the past few months. What is the stock analysis that can justify such a move, and is it sustainable? These two questions are critical for those interested in investing in stocks. There are several reasons for why the S&P 500 is at current levels, and it starts with how stock analysis is conducted.
The first thing to remember when investing in stocks is that the market is a forward-looking mechanism. That means that the current economic environment is not as important as what will happen 6–12 months or more into the future. Proper stock analysis needs to take this into account and try to understand where the winds will be shifting.
Even in this weak world economy, there are several points of interest for those interested in investing in stocks. First, we have central bank activity. Question: is it more or less likely world central bankers will be adding monetary stimulus before the end of the year? I think it’s quite apparent that at least some central bankers will be increasing monetary stimulus. This is seen as a positive when conducting stock analysis.
While the Federal Reserve might wait for the September meeting to enact further monetary stimulus, if that were to occur it would be a positive when it comes to stock analysis. I also think the European Central Bank (ECB) and even the Chinese financial authorities will also add additional monetary stimulus; again, these are further positives when it comes to stock analysis.
A huge worry for those interested in investing in … Read More
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