Global Economy
Taking together all of the countries, one would have a view of the global economy. Understanding the global economy and the shifts among countries, businesses can better allocate capital to the areas of the world that are growing. The U.S. currently is the largest economy in the world, now followed by China. Shifts among countries in their global economic ranking are the result of many criteria, including population growth and fiscal and monetary policies. Knowing which part of the world is growing economically and which part is shrinking is extremely important for businesses.
Chinese Credit Reaches 200% of GDP; Why American Investors Should Care
By Michael Lombardi, MBA for Profit Confidential
In just a few years following the Lehman crisis, credit in the Chinese economy has gone from $9.0 trillion to $23.0 trillion. Comparing it to the gross domestic product (GDP) of the country, credit has ballooned to 200% of GDP—it was only 40% before the U.S. subprime bubble burst.
Fitch Ratings’ senior director in Beijing, Charlene Sue, said this week, “…this is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial.” (Source: Evans-Pritchard, A., “Fitch says China credit bubble unprecedented in modern world history,” The Telegraph, June 16, 2013.)
Adding to the credit worries in China, just like the U.S. economy, consumers in the Chinese economy are shying away from spending. According to the China Association of Automobile Manufacturers, car sales in the Chinese economy in May grew at a slower pace than the previous month’s. The car sales growth rate registered at nine percent in May, compared to 13% in April. (Source: Financial Times, June 9, 2013.)
Furthermore, manufacturing in the Chinese economy has been witnessing a slowdown. Exports from the country have fallen victim to anemic demand in the global economy. Sadly, this year, as per government estimates, the Chinese economy is expected to grow at the pace of only 7.75%—much slower than China’s past double-digit growth rates.
The troubles in the Chinese economy continue to mount, but with the optimism seen in the key stock indices, investors are ignoring their implications. I can’t stress this enough: growing problems in the Chinese economy will not only hurt the … Read More
Why Investors Should Be Worried About the Sharp Rise in Bond Yields
By Michael Lombardi, MBA for Profit Confidential
While government data continue to show a lack of inflation in the U.S. economy, the bond market screams the opposite.
The Consumer Price Index (CPI), the most commonly quoted measure of inflation, increased only 0.1% in May after declining 0.4% in April. Since the beginning of the year, from January to May, inflation in the U.S. has edged higher by only 0.2%. (Source: Bureau of Labor Statistics, June 18, 2013.)
But the bond market says this isn’t true.
Since May, we have seen yields on U.S. bonds skyrocket. Take a look at the chart below; it shows the change in yields on 30-year U.S. bonds (indicated by the red line) and 10-year U.S. notes (marked by the blue line). Note the circled area.
Chart courtesy of www.StockCharts.com
In a matter of a few weeks, yields on 30-year U.S. bonds have jumped about 19% and 10-year note yields have skyrocketed almost 35%.
This is dangerous for bond investors. As the yields on bonds climb higher, their prices slide lower, bond investors face losses…and they’re fleeing the bond market.
For the week ended June 5, long-term bond mutual funds witnessed an outflow of $10.9 billion. Looking at it on a monthly basis, the long-term bond mutual funds haven’t seen an outflow since December of 2008. This month may just be the first since then. (Source: Investment Company Institute, June 12, 2013.)
Even the foreigners, who have been providing credit to the U.S. economy, seem to be running toward the exit. According to Treasury International Capital Data, in April, foreign residents were net sellers of long-term U.S. bonds. Private foreign investors accounted for … Read More
Truth Behind 1Q 2013 Earnings and What’s Next for Stocks
By Michael Lombardi, MBA for Profit Confidential
This shouldn’t be a surprise to the readers of Profit Confidential.
According to an analysis done last week by the Wall Street Journal, in the first quarter of 2013, corporate earnings growth of companies in the key stock indices like the S&P 500 wasn’t really due to companies doing better. Rather, “research tax breaks” are what pushed 1Q13 earnings up for many S&P 500 companies. (Source: Wall Street Journal, June 14, 2013.)
Consider Intel Corporation (NASDAQ/INTC). The company spent $10.1 billion on research and development, which essentially lowered its effective tax rate from 28.2% in the first quarter of 2012 to 16.3% in the first quarter of 2013! This bolstered Intel’s corporate earnings.
Other big names in the S&P 500 like Google Inc. (NASDAQ/GOOG), Abbott Laboratories (NYSE/ABT), The Boeing Company (NYSE/BA), Yahoo! Inc. (NASDAQ/YHOO), and Xerox Corporation (NYSE/XRX) were able to use “research tax breaks” to also boost their corporate earnings.
While this technique helped companies boost 1Q13 earnings, profit expectations aren’t so rosy going forward.
Expectations for corporate earnings for the S&P 500 companies continue to drop. At the end of the first quarter (March 31), second-quarter corporate earnings were forecasted to grow at 4.5%. Now, corporate earnings growth for the second quarter is estimated to be only 1.3%. (Source: FactSet, June 7, 2013.)
Only four out of 10 industry sectors in the S&P 500 are expected to show corporate earnings growth in 2Q13. The information technology sector of the S&P 500 is expected to report a decline of 6.3% in corporate earnings this quarter and the health care sector could see its profits slide four percent!… Read More
Finally Some Good News for the U.S. Economy?
By Michael Lombardi, MBA for Profit Confidential
Finally, some good economic news is coming to the U.S. economy…
The U.S. Census Bureau has reported that retail and food services sales for the month of May, adjusted for seasonal effects, increased 0.6% from April and 4.3% from the same period a year ago.(Source: U.S. Census Bureau, June 13, 2013.) This is the first report I’ve seen in a long time that shows increasing consumer spending in the U.S. economy.
And the Thomson Reuters/University of Michigan Consumer Confidence Index for May showed consumer spending increasing as well. The index registered at 84.5 in May, improving from 76.4 in April. (Source: Bloomberg, May 31, 2013.) This was the highest level the index has been at since July of 2007.
While this is all good news, my concerns about the U.S. economy remain…
Since the financial crisis in the U.S. economy, the Federal Reserve has been increasing the size of its balance sheet (printing trillions of dollars in new money) and the U.S. government has been spending rigorously, all for the sake of spurring economic growth. Consumer spending in the U.S. economy makes up 70% of our gross domestic product (GDP); hence, it’s vitally important that consumer spending rises if we are to have a sustainable economic recovery.
As it stands, the Federal Reserve is still creating $85.0 billion a month in new money to purchase government bonds and mortgage-backed securities. This may be the biggest reason why economic numbers like May’s retail sales are looking better.
But the unemployment rate in the U.S. economy is still staggeringly high. According to the most recent jobs market report, there … Read More
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