Formally established in 1993, the eurozone, often referred to as the “European Union,” is a political and economic union established after the ratification of the Maastricht Treaty by members of the European Community. It has since expanded to include some Central and Eastern European nations. The establishment of the eurozone provided for the creation of a central European bank and the adoption of a common currency: the euro. The idea behind the eurozone is to create a single geographical market where goods, services, and money can be exchanged freely.
The S&P 500 traded at another record high last Thursday, and there appears to be no stopping the bullish investor sentiment that has encapsulated the stock market.
Yet, while the stock market gains are great for the bulls, I still have an issue with the rate of the stock market rally. Simply stated, it’s just a bit too fast, too quick.
I also wonder why the stock market is ignoring the continued fragile state of the global economy in spite of a deep recession in the eurozone and stalling in China.
The reality is that we need to be concerned about how the global economy is faring. The idea of focusing too much on only America doesn’t make sense due to the increased correlation between the global economies. Slowing in Asia and Europe will impact U.S. companies. (Read “Why America Will Struggle if the Eurozone Languishes.”)
Looking at China, while the Chinese economy continues to expand at rates we can only dream of, the country is stalling, as reflected in its demand for commodities.
Copper is a key commodity used in wiring, pipes, electronics, and other areas. When the economy expands, so does the demand for copper.
China imported less copper in February with imports declining to a 20-month low, according to the country’s General Administration of Customs (Source: “China Copper Imports Slump to 20-Month Low on Holidays,” Bloomberg, March 7, 2013, last accessed May 6, 2013.) China is the world’s top importer of copper, so the decline in the import number is important. (Source: “International Trade Centre,” NationMaster.com, last accessed May 6, 2013.)
The lower … Read More
April has ended. The S&P 500 has edged higher for six straight months and is eyeing 1,600 on the chart.
We are also coming to the end of the historically best six months of the year for the stock market (November to April), according to the Stock Trader’s Almanac.
I’m not saying to exit the stock market, but you will need to be more selective and focus more on trading opportunities as we move toward the second half of the year.
With about one-third of the year behind us, the advance in the stock market so far is becoming more realistic, but it’s still somewhat elevated, based on the annualized return.
For instance, based on the current advance, the Dow is headed for a 38% gain this year. The S&P 500 is on a path to 35%, and the NASDAQ is headed to 29%. These are all excellent goals, but I doubt this will happen, which means that something else has to give as we move forward. I expect more hesitancy.
The first-quarter earnings season has been average and slightly better than expected, but the lack of revenue growth is a major concern of mine. To me, the lack of revenues implies corporate America is hurting for business, so there may be some stalling on the horizon.
I continue to believe there are additional gains to come for the stock market; albeit, we could see a correction in the process. By year-end, I still feel the stock market will be higher.
As of April 22, 67% of the companies in the key stock indices that reported their corporate earnings were able to beat earnings estimates, but only 44% of them were able to exceed the revenue expectations of Wall Street analysts. (Source: Reuters Alpha Now, April 22, 2013.)
Looking at all this, you have to ask: why are the key stock indices rising when the underlying reasons for their rise (corporate earnings and growth) are diminishing?
The key stock indices aren’t climbing because of fundamental reasons. The harsh reality is that the yields from other investments are too low, so investors are forced to take higher risks to earn a decent rate of return. Just look at the yields on bonds of stronger governments around the world—most are barely beating inflation.
Even the most conservative investors, central banks, are rushing toward the stock market. According to a survey done by Central Banking Publication and Royal Bank of Scotland Group PLC of 60 central banks, 23% of them said they either own equities or plan to purchase them in the future. (Source: Bloomberg Businessweek, April 25, 2013.)
The central bank of Israel bought stocks for the first time last year. Similarly, the central bank of Switzerland and the Czech National bank have increased their stock holdings to at least 10% of their reserves.
The Japanese central bank has done the same. The Bank of Japan, the central bank with the second most reserves, expects to boost its holdings of equity exchange-traded funds (ETFs) to 3.5 trillion yen (about US$35.2 billion) by 2014.
Dear reader, central banks around the world usually … Read More
The fourth-biggest hub in the eurozone, Spain, is facing a severe economic slowdown. According to Spain’s National Statistics Institute in Madrid, the unemployment rate in the country has surpassed the 27% mark, with more than six million people jobless—the highest number since 1976. (Source: Bloomberg Businessweek, April 25, 2013.)
Furthermore, the Bank of Spain reported that the Spanish economy contracted 0.5% in the first quarter of this year after witnessing a decline of 0.8% in the last quarter of 2012. The International Monetary Fund (IMF) expects this eurozone nation to contract 1.6% this year.
While Spain seems to be at the forefront of headlines about the eurozone, other nations like Portugal are witnessing a severe economic slowdown as well. The country has been experiencing a recession for three years, with its unemployment rate at a record high of 17%. (Source: Wall Street Journal, April 23, 2013.)
The situation in the eurozone is very critical; but if you look at the key stock indices, they do not portray this.
Even though Ford Motor Company (NYSE/F) was able to earn a profit in North America in the first quarter of 2013, its losses in Europe are piling up. The company posted a loss of $462 million in the first quarter in Europe, an increase of more than 210% compared to the same quarter of last year. (Source: Wright, R., “Ford reveals deeper European losses,” Financial Times, April 24, 2013.)
Ford is just one example of how U.S.-based multinational companies can face severe losses in the eurozone as the economic slowdown continues to take its toll on Europe. Even … Read More
As companies in the key stock indices report their corporate earnings for the first quarter of 2013, it appears their revenues aren’t improving. While I know it’s a blanket statement, what this means is that companies are not selling more goods or services; their corporate earnings are being propped up by cost-cutting and financial engineering.
Honeywell International Inc. (NYSE/HON), a big-cap industrial goods company, reported corporate earnings that were 16% higher in the first quarter as compared to the same period of last year. However, revenues for the quarter were flat—with no change in overall sales. (Source: Honeywell International Inc., April 19, 2013.)
Similarly, General Electric Company (NYSE/GE) reported a 16% increase in its first-quarter corporate earnings (though the company did lower its forecast for the year). The company’s revenues were flat in the first quarter over the same period of 2012, and General Electric (GE) experienced a 17% decline in orders from Europe in the first quarter. (Source: Wall Street Journal, April 19, 2013.)
McDonalds Corporation (NYSE/MCD), the fast-food giant, experienced a global sales decline in the first quarter of 2013: sales declined 1.2% in the U.S.; 3.3% in Asia, the Middle East, and Africa combined; and 1.1% in Europe. The chief financial officer (CFO) of the company, Peter J. Bensen, said, “…that battle for market share has become so critical for the long-term heath of business; we’re willing to sacrifice that margin.” (Source: “McDonald’s Profit Rises, but Year-Over-Year Sales Fall,” The New York Times April 19, 2013.)
In the long term, the key stock indices reflect the corporate earnings and revenue growth of public companies, and that … Read More
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