The Dow Jones Industrial Average, or Dow Jones, is a weighted index representing the stock price action of 30 of the largest U.S. corporations. It is the world’s most widely followed stock market index. The Dow Jones Industrial Average was created on May 26, 1896 and is named after Charles Dow and Edward Jones. The earnings and revenues of large corporations are often leading economic indicators. Hence, economists often look at the Dow Jones Industrial Average as an indicator of economic activity. If the index is hitting new highs, economic activity can be expected to be brisk in the next six months. Comparatively, if the index is falling to new lows, poor economic times could lie ahead.
Between the first quarter of 2012 and the second quarter of 2014, auto sales in the U.S. economy have increased 16%. (Source: Federal Reserve Bank of St. Louis web site, last accessed August 21, 2014.) And auto sales this year have been stellar, too. In July, auto sales reached the highest level since 2007 and are up eight percent from this past January. (Source: Motor Intelligence, last accessed August 21, 2014.)
As auto sales have risen, auto loans have increased as well. In the first quarter of 2012, auto loans amounted to $737 billion; now they are just short of $1.0 trillion. (Source: Federal Reserve Bank of New York web site, last accessed August 21, 2014.)
More auto sales, more auto loans; sounds right. But the problem is that more and more cars are being sold to individuals with bad credit scores.
Looking at it percentage-wise, the amount of auto loans to people with poor credit scores is much higher than to those with good credit scores. As an example, in the second quarter of 2014, $20.6 billion in new auto loans were issued to those with a credit score below 620. That’s an increase of 33% to this group from the first quarter of 2012.
Meanwhile, auto loans to those who have credit scores above 760, called super-prime customers, only increased 17% over the same period.
Now, here comes the kicker…
In the second quarter of 2014, 15.1% of all auto loans originated in the U.S. economy were delinquent for more than 30 days. That’s a 44% jump in auto loan delinquencies from the first quarter of 2012. … Read More
If you follow the financial news, it feels like the stock market is moving higher and higher…a situation in which investors often feel they are missing out.
But the reality of the situation is very different. So far this year, almost eight full months in, the Dow Jones Industrial Average is up only three percent.
Would you buy stocks with the Dow Jones trading at 17,100, near a record-high price-to-earnings (P/E) multiple and a record-low dividend yield? I wouldn’t. Hence, the question changes from “Am I missing out?” to “Is it worth the risk?”
On Monday, the chief market strategist at BMO Capital Markets said, “Longer term we are in the camp that believes U.S. equities are the place to be. They are the most stable asset in the world.” (Source: “Bull market will charge higher for 15 more years says strategist,” Yahoo! Finance, August 18, 2014.)
The belief that “stocks are the place to be” has gone mainstream now. And that’s very dangerous.
The reality of the situation: (1) stocks are trading at very high historical levels when measured by the P/E multiple and dividend yield; (2) the Fed is stopping its money printing program; (3) investors are pulling money out of the stock market; (4) consumer spending is tumbling; (5) stock advisors have remained too bullish for too long; and (6) the chances of a 20% stock market correction are very high.
According to the Investment Company Institute (ICI), between April and June, mutual funds that invest in U.S. stock markets witnessed net withdrawals of $19.1 billion. While July’s monthly figures are not updated just yet, looking at … Read More
The resilience of this stock market is uncanny. Just when transportation stocks, a leading market sector at any time, took a well-deserved break, components turned upward and are once again pushing record highs.
Union Pacific Corporation (UNP) is a benchmark stock in transportation. It’s up fivefold since the stock market low in 2009 and looks to have continued upward price momentum.
This is an exceptional performance for such a mature, old economy type of enterprise. The position has a forward price-to-earnings (P/E) ratio of approximately 17 with a current dividend yield of 1.8%.
Three weeks ago, Union Pacific increased its quarterly dividend 10% to $0.50 a share, payable October 1, 2014 to shareholders of record on August 29, 2014.
In three of its last five quarters, the company has increased its quarterly dividend at a double-digit rate and as much as anything else, this is responsible for its great stock market performance.
Union Pacific had an exceptionally good second quarter. Freight revenues grew 10%, driven by gains in freight volume and rising prices.
The company’s operating ratio, which is key in the railroad industry, hit an all-time quarterly record of 63.5%, and management bought back 8.3 million of its own shares during the quarter, spending $806 million.
It’s a very good time to be in the railroad business. Not only are the pure-play rail companies mostly doing well, but the railroad services sector is also experiencing great business conditions.
The stock market has an underlying strength to it, seemingly only to be undone by geopolitical events. Fed action always has the potential to shock the system. Negative economic news isn’t fazing this market.
On the back of a pretty decent second quarter, many corporate outlooks predict another year of decent growth, particularly with earnings.
While the stock market retrenched recently, positive days are still led by the Dow Jones Transportation Average, the Russell 2000 Index, and the NASDAQ components, which are traditionally positive for broader sentiment.
Some speculative fervor has come back to two stock market sectors that are traditionally volatile—biotechnology stocks and restaurant stocks.
But there really isn’t an underlying trend to latch onto. Jumping on the bandwagon of risky stocks seems unwise considering the stock market is at an all-time record-high.
This is a market where equity investors have to be highly selective and wait for the right opportunities to present themselves, if you’re considering new positions at all.
This can be in the form of a specific sector theme (like oil and gas, for example) or looking for good companies that have retrenched for their own specific reasons.
In any case, with the stock market at a record high, it’s difficult to find value, and new positions become entirely reliant on market momentum, not necessarily individual corporate achievement.
There are very few companies that I would consider now, but within the context of a long-term stock market portfolio, investors want their money to be put to work.
In equities, I still think that portfolio safety is the name of the game. This is a market that … Read More
As gold bullion prices declined last year, I said supply would contract as gold miners pulled back on exploration and closed mines that were not profitable at $1,200-an-ounce gold.
For the supply of gold bullion to increase, there needs to be more discoveries. Sadly, the opposite is happening. According to SNL Metals & Mining, gold discoveries have been trending downward. In the 1990s, there were 124 new gold discoveries totaling 1.1 billion ounces of gold bullion. But since 2000, only 605 million ounces of gold bullion in total has been discovered at just 93 discoveries. (Source: Kitco News, July 18, 2014.)
For there to be more gold discoveries, mining companies need to spend more on exploration and that just isn’t happening. In 2013, when gold prices plummeted, major mining companies pulled back on their spending. Furthermore, exploration companies that need funding found it very difficult to get money, so they also pulled back on finding gold.
But gold bullion discoveries aren’t just slowing; the time it takes to start production at a mine is increasing as well. Between 1996 and 2005, it took an average of 11 years to bring a discovery to production. Between 2006 and 2013, this has increased to 18 years. (Source: Ibid.)
With all of this (it being harder to find new gold bullion and it taking too long for production to start once gold is discovered), the supply of world gold bullion is shrinking.
And demand for gold bullion, well, it just keeps rising. Aside from investors buying gold coins and jewelry at near record levels (with India now easing its stiff tariffs on gold … Read More
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