Investment Contrarians

stock market


Why What’s Happening in the Bond Market Now Is So Important to Stock Investors

By for Investment Contrarians | Dec 10, 2013

Stock InvestorsTaper or no taper? When? How much? These are the worries that are currently driving tensions in the stock market on a daily basis. As I wrote in a previous article, no one seems to care that corporate revenue growth is muted and consumers aren’t spending.

Last week, we saw jobs market data that helps support the Federal Reserve’s reasons to begin tapering its bond buying program.

The non-farm payrolls reported the generation of 203,000 new jobs—better than the consensus estimate of 180,000 for the month of November. This represented the second straight month that more than 200,000 jobs were created, and while the jobs market has a long way to go, this is positive news. Jobs numbers were revised upwards in September and October.

Now it may be true that the quality of jobs created could be improved upon, as much of the increase in the jobs market continues to be driven by the service sector and other lower-skilled jobs. However, the results do suggest some action may be taken by the Federal Reserve.

The unemployment rate fell to a five-year low of seven percent, much better than the consensus 7.2% and October’s 7.3%. The rate appears positive on the surface.

The Federal Reserve had said it wants to see the unemployment rate fall to around 6.5% before it considers raising interest rates, but with a seven percent rate, you have to wonder if the Federal Reserve is thinking hard about when to rein in its monthly bond buying and reduce the stock market’s dependency on cheap money.

Yet I don’t think the Federal Reserve will begin tapering until … Read More


Fear Index Hits Multiyear Low; A Bad Omen for Stock Investors?

By for Investment Contrarians | Dec 9, 2013

Investors Too ComfortableLet me begin by first stating this: I’m not going to talk about the Federal Reserve in any detail, or about the holiday shopping season and how it’s so important to the retail sector and the economy because these don’t seem to be of any great concern to the markets.

The reality is that both traders and investors appear to be really comfortable at this moment with the record-high levels in the stock market. Take a look at the multiple records recently set by the S&P 500 and Dow Jones Industrial Average; you won’t see any sign of a pullback. Yet no one seems to care—even though this is all incredibly dangerous for the stock market.

This is simply not a normal trading environment for the stock market, since the Federal Reserve has largely been responsible for the record advances, as I previously discussed in this column on Friday.

A look at the CBOE Volatility Index (VIX), or the “fear index,” reveals the current multiyear low in the VIX, which we haven’t seen since 2007, prior to the subprime mortgage-driven stock market correction in 2008, The current low level of the VIX suggests that the stock market is relaxed and is not expecting any strong moves in either direction on the horizon. Looks like the market could be in for a surprise in the New Year.

Are traders simply too relaxed? The chart of the VIX below shows the big gaps between the VIX readings and the S&P 500.

In 2007, the VIX reading was below 10, but the S&P 500 didn’t begin to sell off until the VIX increased … Read More


Can’t Afford a Picasso? Try Investing in This Stock Instead

By for Investment Contrarians | Dec 6, 2013

Investing in This StockThere’s one point that I cannot stress enough in this column, and longtime readers are sure to know it: consumer confidence is extremely important for economic growth here in America.

It’s simple logic. Because so much of our economy is built on domestic spending, without an increase in consumer confidence, consumer spending will languish and we won’t have higher levels of economic growth.

Recently, new information from the Conference Board was quite disappointing. The Consumer Confidence Index dropped to a seven-month low in November to 70.4, following a decline in October as well. (Source: “Consumer Confidence Declines Again in November,” The Conference Board web site, November 26, 2013.)

Over the short term, consumer confidence declined due to people stating their concerns regarding a weakening of economic conditions. What’s more concerning is that the expectations for the next six months worsened, as people stated they were increasingly worried about their job prospects and earnings, which isn’t a surprise considering the data hasn’t been all that positive lately, especially when it comes to wage growth.

If consumer confidence is turning pessimistic over the stability of jobs or paychecks, how can we really expect the average American to increase their spending or businesses to feel more confident in expanding?

This type of uncertainty leads to slower economic growth. If you are unsure of your financial health over the next few months, chances are you won’t increase your spending, and a lower level of consumer confidence leads to muted economic growth.

Clearly, one market sector I am worried about is that of companies catering to the average American.

Target Corp Chart

Chart courtesy of www.StockCharts.com

Target Corporation … Read More


Should You Stay in Stocks When Fed Finally Tapers?

By for Investment Contrarians | Dec 6, 2013

Fed Finally TapersFor me, trading has always revolved around economic fundamentals and stock market analysis. And if you’re like me, you’re getting somewhat irritated with the recent trading in the stock market by investors who seem more inclined to trade on what economists at the Federal Reserve do with their quantitative easing strategy than on what’s really important—the underlying fundamentals of the economy and corporate America’s financial health.

The reality is that corporate America is struggling to grow revenues. This means that companies and consumers aren’t spending at levels that make me comfortable with the economy. Of course, the stock market doesn’t really seem to care; it simply wants the flow of cheap money to continue.

In my view, it’s the same old thing that continues to engulf the trading in the stock market, and it’s annoying. For instance, if we see strong non-jobs economic data, the stock market edges higher. If we see signs of strengthening in the jobs market, the stock market sells off.

Of course, that’s because the Fed has made it clear that jobs creation is the focal point that will dictate when the central bank will begin to taper its monthly bond buying program, an unprecedented policy that has added trillions of dollars of debt to the bank’s balance sheet.

While all eyes will be on the non-farm payrolls reading today, November’s ADP Employment Change reading released last Wednesday showed that 215,000 new jobs were created last month, which is well above the consensus estimate of 173,000 and the upwardly revised 184,000 jobs created in October. How did the stock market react to the good news? Negatively, … Read More


How to Insure Your Portfolio as Fed Second Guesses Its Monetary Policy

By for Investment Contrarians | Dec 5, 2013

Fed Second Guesses Its Monetary PolicyOne of the most interesting ideas that came out of the last Federal Reserve meeting at the end of October is a serious issue for everyone, including the Federal Reserve and the eventual impact of monetary policy. And that idea is that slow productivity growth might actually be the new norm. (Source: “Minutes of the Federal Open Market Committee,” FederalReserve.gov, November 20, 2013.)

Since the Great Recession, worker productivity has been running at roughly half the rate that the U.S. experienced over the 25 years prior. The problem is that potential gross domestic product (GDP) growth comes from a combination of productivity and the labor force.

If productivity stalls and the Federal Reserve continues with its monetary policy, at some point, this excess cash will begin to seep into the economy and cause inflation.

The reason we aren’t seeing inflation in the official data despite record levels of monetary policy is that the velocity of money has been low. This basically means that money is sitting in bank reserves or is being funneled into assets, such as stocks, instead of being channeled into the actual U.S. economy. There is asset inflation, but the official measures don’t track items like the stock market.

However, at some point, this begins to shift, especially when worker productivity remains low. The last time productivity hit such low levels was during the 1970s, and we all know what happened to the U.S. economy during that time.

Clearly, the monetary policy program run by the Federal Reserve is not having a positive impact on the real economy, as unemployment remains stubbornly high.

While the Federal Reserve … Read More