Posts Tagged ‘Dow Jones Industrial Average’
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
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
The Bureau of Economic Analysis (BEA) surprised even the most optimistic of economists when it reported the U.S. economy grew at an annual rate of four percent in the second quarter of 2014.
On the surface, the number—four percent growth—sounds great. But how serious should we take that gross domestic product (GDP) figure?
Firstly, I’d like to start by pointing out that the BEA often revises its GDP numbers downward. We saw this happen in the first quarter. First, we saw the BEA say the U.S. economy grew by 0.1% in the first quarter, then after a couple of revisions, they said the economy actually contracted 2.9% in the quarter.
I obviously expect the BEA to lower its initial second-quarter GDP numbers again.
But here’s what really worries me…
If the GDP data suggests the U.S. economy is growing, why are investors pricing in an economic slowdown?
The chart below is of the 10-year U.S. Treasury, the so-called safe haven. Back in 2007 to 2009, investors ran to U.S. Treasuries as a safe haven. As the U.S. economy improved, the yields on the 10-year U.S. Treasury started to rise as interest rates rose with general optimism towards the economy.
Chart courtesy of www.StockCharts.com
But since the beginning of this year, yields on the 10-year U.S. notes have declined 18%. This is despite the fact the biggest buyer of these bonds, the Federal Reserve, has stepped away from buying these Treasuries as its quantitative easing program comes to an end.
At the same time, we have the stock market finally starting to give in. So if the stock market is a … Read More
Remember Alan Greenspan? He was the chairman of the Federal Reserve from 1987 to 2006. Several media sources, including this one, blamed the sub-prime mortgage fiasco that led to the Credit Crisis of 2008 on the easy money policies under the leadership of Greenspan.
But the Credit Crisis aside, it is ironic but true that Greenspan has had a knack for calling stock market bubbles correctly.
For example, in December of 1996, while chairman of the Federal Reserve, Greenspan grew wary about the stock market. In a now famous speech called the “Challenge of Central Banking in a Democratic Society,” along with other observations on the value of stocks, Greenspan essentially argued that the rise in the stock market at that time wasn’t reflective of the poor economic conditions that prevailed.
Within two years of that speech, the stock market started to decline and stocks did not recover until 2006.
In an interview with Bloomberg a few days ago, Greenspan said, “the stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction.” (Source: “Greenspan Says Stocks to See ‘Significant Correction,’” Bloomberg, July 30, 2014.)
In the interview, Greenspan says long-term capital isn’t growing and as a result, productivity and the economic recovery will be in jeopardy.
Greenspan is out of the Federal Reserve. But the leader of the Fed today, Janet Yellen, also has reservations about the value of certain stocks. As I wrote on July 16, Yellen had been quoted saying tech stocks were priced “high relative to historical norms.” (See “How Many Warnings Can … Read More
Yesterday, the Dow Jones Industrial Average fell 317 points, while the NASDAQ Composite Index fell 93 points—respective losses of about two percent per index. This morning, stock market futures are down again.
As a reader of Profit Confidential, this “rout” we are now in should come as no surprise. I have been writing for months how overpriced the stock market has become, how the stock market has become one big bubble thanks to the easy money policies of the Federal Reserve, and how the bubble would burst.
Yesterday, those who have been riding the stock market’s coattails higher and higher got the first taste of what is being called a “correction” by the mainstream media. But like I just said, to me, this is a stock market bubble that is bursting—very different than a correction. For months, historically proven stock market indicators (many of which I have written about in these pages) have been flashing red…but very few investors paid any attention to them.
The Dow Jones is now down for 2014. Yes, seven months into the year and big-cap stocks have gone nowhere. So far in 2014, investors would have done better owning gold and silver or U.S. Treasuries.
I have been predicting this will be a down year for the stock market and I’m keeping with that forecast. After five consecutive positive years for the stock market, the bounce from the 2008 market low of 6,440 on the Dow Jones could finally be over.
Dear reader, as elementary as it sounds, interest rates are the catalyst for all this.
After falling for 30 years, a time in … Read More
The tally as of this morning:
The stock market is up 2.4% so far in 2014 as measured by the Dow Jones Industrial Average, while gold bullion is up 8.1% for the year.
“As an investor, do I get into gold or stocks at this point in the year?”
Well, if you’ve been reading my articles for a while, you know I’m not a fan of stocks right now. I simply believe the stock market has become a Federal Reserve–induced bubble.
And while there has been a lot written about price manipulation in the gold market, and while mighty Goldman Sachs still says the metal is headed lower in price, investors should look at gold bullion right now…that’s both old gold investors (so they can average down their cost) and new gold investors taking their first position.
Here are my reasons why…
In 2013, the Indian central bank and government imposed tariffs and restrictions on the importation of gold bullion into India, as they believed the demand for gold bullion in the country was hurting its national accounts. In the first quarter of this year, India started to ease its gold importation restrictions, and bang, last month, gold bullion imports into the country increased by 65% over June of last year. (Source: Bloomberg, July 16, 2014.) Demand for gold bullion in China, which I’ve documented in these pages, is also very strong.
Inflation, what gold bullion acts as a hedge against, is starting to gain momentum. The Producer Price Index (which tracks changes in the prices producers pay) increased by 0.4% in June from the previous month; that’s an annualized … Read More
I’ve been writing in these pages for most of 2014 on how the stock market has become one huge bubble. On my short list:
The economy is weak. The U.S. experienced negative growth in the first quarter of 2014. If the same thing happens in the second quarter (we’ll soon know), we will be in a recession again. Revenue growth at big companies is almost non-existent.
Insiders at public companies are selling stocks (in the companies they work for) at a record pace.
The amount of money investors have borrowed to buy stocks is at a record high (a negative for the stock market).
The VIX “Fear” index, which measures the amount of fear investors have about stocks declining, is near a record low (another negative for the stock market).
Bullishness among stock advisors, as measured by Investors Intelligence, is near a record high (again, a negative for the stock market).
The Federal Reserve has issued its economic outlook, and it says interest rates will be much higher at the end of 2015 than they are today and that they will continue moving upward in 2016.
The Federal Reserve has said it will be out of the money printing business by the end of this year. (Who will buy all those T-bills the U.S. government has to issue to keep in business?)
And yesterday, in an unprecedented statement, Janet Yellen, during her usual semi-annual testimony to Congress, said the valuations of tech stocks are “high relative to historical norms.”
How many warnings can you give investors?
Well, the warnings don’t seem to matter. The Dow Jones Industrial Average has … Read More
Don’t buy into the notion that there’s economic growth in America!
We’ve already seen U.S. gross domestic product (GDP) “unexpectedly” decline in the first quarter of 2014, and now there are signs of another contraction in the current quarter. (The technical definition of a recession is two negative quarters of GDP—we’re halfway there!)
As you know, consumer spending is the biggest part of our U.S. economy, accounting for about two-thirds of our GDP. And consumers are pulling back.
Consumer spending in the U.S. economy declined 0.26% in April from March. This was the first monthly decline since December of 2013. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 4, 2014.)
And while consumer spending is one indicator that suggests a recession may soon be coming into play in the U.S. economy, there’s also one very interesting phenomenon occurring that suggests the very same.
The Federal Reserve is serious about pulling back on its quantitative easing program. And in anticipation of the Fed pulling back on money printing (when it first indicated it would start tapering), the yields on bonds shot up.
But since 2014 began, and the Federal Reserve actually started to taper, the yield on the long-term 30-year U.S. bond has declined more than 12%.
Chart courtesy of www.StockCharts.com
If the Fed is pulling back on printing (it has said it wants to be out of the money printing business by the end of this year), why are bond yields declining?
From a fundamental point of view, it suggests the market anticipates very slow growth for the U.S. economy ahead.
Dear reader, the perfect … Read More
Five years ago, it looked like the world was falling apart. Remember when Lehman Brothers went bankrupt, freezing financing on Wall Street? The government had to bail out General Motors and the Federal Reserve pumped money into too-big-to-fail banks. Investors were running scared of the stock market.
Seems like years ago…but it was only 2008 and 2009 when this all happened. Fast-forward to today, and thanks to trillions of dollars of new money (printed out of thin air), the Dow Jones Industrial Average has ballooned back, close to 17,000.
The stock market became a bubble in 2007 when it surpassed 14,000, subsequently crashing down to 6,440 in March of 2009. Now the bubble is back; but bigger this time.
Bears like me, who believe the Fed created this new stock market bubble, are rare to find. More and more stock advisors and investors have turned bullish. They believe—incorrectly, I suggest—that all is well with the economy and that the stock market will head higher and higher.
To see just how many advisors have turned bullish on stocks, I really want you to look at the below chart of the Investors Intelligence Bull Index. Under the chart, you will see a black line, indicating the S&P 500.
Chart courtesy of StockCharts.com
The Investors Intelligence Bull Index tracks stock advisors’ opinions on the stock market. Currently, the index of stock advisors’ sentiment stands at 62.20, its highest level since (you guessed it) October of 2007. Whenever this index has gone over 60, the stock market has come down hard.
When it comes to investing, you don’t want to do what … Read More
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