Posts Tagged ‘federal reserve’
The stock market in France has been on a tear! Below, I present a chart of the French CAC 40 Index, the main stock market index in France.
Looking at the chart, we see the French stock market is trading at a five-year high. With such a strong stock market, one would expect France, the second-largest economy in the eurozone, to be doing well. But it’s the exact opposite!
As its stock market rallies, France’s economic slowdown is gaining steam. In January, the unemployment rate in France was unchanged; it has remained close to 11% for a year now. (Source: Eurostat, February 28, 2014.) Consumer spending in the French economy declined 2.1% in January after declining 0.1% in December. (Source: National Institute of Statistics and Economic Studies, February 28, 2014.) Other key indicators of the French economy are also pointing to an economic slowdown for the country.
Chart courtesy of www.StockCharts.com
And France isn’t the only place in the eurozone still experiencing a severe economic slowdown. In January, the unemployment rate in Italy, the third-biggest nation in the eurozone, hit a record-high of 12.9%, compared to 11.8% a year ago.
I have not mentioned Greece, Spain, and Portugal because they have been discussed in these pages many times before; as my readers are well aware, they are in a state of outright depression.
Just like how investors have bought into the U.S. stock market again in hopes of U.S. economic growth, the same thing has happened in the eurozone. Investors have put money into France’s stock market in hopes of that economy recovering—but it hasn’t. We are dealing with a … Read More
Earnings estimates for Microsoft Corporation (MSFT) are going up and the stock, which recently accelerated, finally looks like it has broken out of a 13-year consolidation.
Microsoft has been an income play for quite a while. Currently yielding three percent, the company’s forward price-to-earnings ratio is around 12.5 and is not dissimilar from many other blue chips.
Then there’s Intel Corporation (INTC). This company has been struggling for capital gains, but it’s yielding 3.6% and isn’t expensively priced.
What these technology companies illustrate so well is the business cycle, both in terms of operational growth and also as equity securities. Getting the cycle correct (the right place/stock at the right time) is the toughest thing for any investor or businessperson.
Regarding stocks, both Microsoft and Intel’s long-term charts clearly show how extremely overpriced their share prices were during the bull market of the 90s. Intel’s long-term stock chart is featured below:
Chart courtesy of www.StockCharts.com
The benefit of the very long term is that it provides a normalized but still decent rate of return with these kinds of stocks. No enterprise or investor can escape the business cycle, whether it is industry-specific, a local reality, or the general economy.
Railroad stocks have been super hot over the last several years, but for long periods of time, they were not. The solid dividend-payers that they are, you’d be hard-pressed to find Union Pacific Corporation (UNP) competing with Apple Inc. (AAPL) or Google Inc. (GOOG) for headlines.
I feel that stocks have broken out of their previous consolidation phase in favor of a new long-term cycle. But while last year’s stunning … Read More
The chart below is of the S&P Case-Shiller Home Price Index, an index that tracks home prices in the U.S. housing market. As the chart shows, from their peak in 2007 to their low in late 2011, U.S. homes prices fell by about 30%. Since then, prices in the housing market have improved, but they are still down about 20% compared to 2007. Basically, home prices have recouped only one-third of their losses from the 2007 real estate crash.
Yes, the U.S. housing market has regained some lost ground, but it’s far from being back to where it was in 2007. And I’m very worried about the pace of the housing market recovery; I feel that the recovery is in jeopardy.
Chart courtesy of www.StockCharts.com
Consider this: the interest rate on the 30-year fixed mortgage tracked by Freddie Mac increased to 4.43% in January of this year from 3.41% in January of 2013. (Source: Freddie Mac web site, last accessed February 26, 2014.) While there hasn’t been much mainstream media coverage on this, mortgage rates have increased by 30% in one year’s time. With the Federal Reserve cutting back on its quantitative easing program, interest rates are expected to continue their path upwards in 2014.
Higher interest rates are pushing would-be homebuyers away from the housing market. The U.S. Mortgage Bankers Association reported last week that its index, which tracks mortgage activity (of both refinanced and new home purchases), fell 8.5% in the week ended February 21. (Source: Reuters, February 26, 2014.)
And new homebuilders are seeing demand from homebuyers decline in the housing market as well. While presenting … Read More
The bond market is in trouble.
As we all know, the Federal Reserve has been the biggest driver of bonds since the financial crisis. The central bank lowered its benchmark interest rate to near zero, then started quantitative easing, all of which resulted in the bond market soaring as yields collapsed to multi-decade lows.
The chart below will show you what’s happened to the U.S. bond market since the mid-1970s.
As you can see from the chart, the declining yields on bonds stopped in the spring of 2013 and have increased sharply since then.
Chart courtesy of www.StockCharts.com
What’s next for bonds?
The Federal Reserve is slowly taking away the “steroids” that boosted the bond market. The central bank is now printing $65.0 billion of new money a month instead of the $85.0 billion it was printing just a few months back. And now we hear the Federal Reserve will be slowing its purchases by $10.0 billion a month throughout 2014.
Since May of last year alone, when speculation started that the Federal Reserve would cut back on its money printing program, bond yields skyrocketed and bond investors panicked.
According to the Investment Company Institute, investors sold $176 billion worth of long-term bond mutual funds between June and December of last year. (Source: Investment Company Institute web site, last accessed February 26, 2014.) I would not be surprised if withdrawals from bond mutual funds are even bigger this year.
And China is slowly exiting the U.S. bond market, too. According to the U.S. Department of the Treasury, in December, China sold the biggest amount of U.S. bonds since 2011. In … Read More
There is a lot of liquidity out there, and all kinds of stocks are experiencing significant price momentum.
It’s a bull market still, and no matter how long it has to run, it seems that valuations aren’t as important as owning the right stocks for institutional investors. Countless names have fought back in price from recent sell-offs and are now pushing new record-highs once again.
These stocks include Netflix, Inc. (NFLX), priceline.com Incorporated (PCLN), and Google Inc. (GOOG), among others. You could buy a basket of these stocks and if nothing were to change in terms of monetary policy, they probably would be higher in a month’s time.
But while momentum remains strong and existing winners keep outperforming, stocks haven’t really experienced a material price correction in more than two years and because of this, investment risk remains high.
Previously in these pages, we looked at some top-ranked biotechnology stocks that continue to be tremendous wealth creators for shareholders. (See “Can the Rally in Biotechs Keep Its Momentum?”) But their amazing price-performance also illustrates the froth in the stock market. While speculative fervor for initial public offerings (IPOs) has diminished since the beginning of the year, existing winners just keep on plowing higher.
Investor sentiment can always change on a dime, but it needs a catalyst to do so. This could include a change in monetary or fiscal policies, a geopolitical event, a derivatives trade gone bad, currency destabilization—the list is endless.
The Federal Reserve recently gave the marketplace the certainty it was looking for: quantitative easing is going to continue to be reduced and short-term interest rates … Read More
Whenever I got stuck solving a problem in elementary school, my teacher would say, “go back and see where you went wrong.” This lesson—“learn from your mistakes”—was taught again in high school, and then throughout my life. It’s very simple: you can’t do the same thing over and over again and expect different results. Albert Einstein called it “insanity.”
When I look at the Japanese economy, I see the most basic lesson you learn in business school being ignored. The Bank of Japan, and the government, in an effort to improve the Japanese economy has resorted to money printing (quantitative easing) over and over, failing each time to spur growth. One might call it an act of insanity.
Through quantitative easing, the central bank of Japan wanted to boost the Japanese economy. It hoped that pushing more exports to the global economy from its manufacturers would change the fate of the country. It wanted inflation as well.
The result: after years of quantitative easing, the government and the central bank have outright failed to revive the Japanese economy. In fact, the opposite of their original plan is happening.
In January, the trade deficit in the Japanese economy grew—the country’s imports were more than its exports. Imports amounted to 7.70 trillion yen and exports were only 5.88 trillion yen. The trade deficit was 3.5% greater compared to the previous month. (Source: Japanese Customers web site, last accessed February 20, 2014.) Mind you, January wasn’t the only month when imports were more than exports in the Japanese economy. This is something that has been happening for some time.
Inflation in the … Read More
In the first five weeks of this year, investors bought $22.0 billion worth of long-term stock mutual funds. (Source: Investment Company Institute, February 12, 2014.)
But as investors poured money into the stock market, hoping to ride the 2013 wave of higher stock prices, stocks did the opposite and went down. The Dow Jones Industrial Average is down three percent so far this year.
Looking at the bigger picture, corporate earnings and key stock indices valuations are still stretched. The S&P 500’s 12-month forward price-to-earnings (P/E) ratio stands at 15.1. This ratio is currently overvalued by roughly nine percent when compared to its 10-year average, and 15% compared to its five-year average. (Source: FactSet, February 14, 2014.)
This isn’t the only indicator that says key stock indices have gotten too far ahead of themselves. In the chart below, I have plotted U.S. gross domestic product (GDP) against the S&P 500.
The chart clearly shows a direct relationship between GDP and the S&P 500. When U.S. GDP increases, the S&P 500 follows in the same direction, and vice versa. When we look at the 2008–2009 period (which I’ve circled in the chart above), we see that when GDP plunged, the S&P 500 followed in the same direction.
Going into 2014, we saw production in the U.S. economy decline; consumer spending is pulling back, unemployment is still an issue, and the global economy is slowing. U.S. GDP is far from growing at the rate it did after the Credit Crisis. Take another look at the chart above. In 2011, you’ll see U.S. GDP was very strong; but after … Read More
In 2013, the U.S. economy, as measured by gross domestic product (GDP), rose at an average rate of 1.9% compared to 2.8% in 2012. And as it stands, GDP may slow further in 2014.
What makes me think this?
In January, U.S. industrial production declined by 0.3% from the previous month. This was the first decline in production since August of 2013. Production of automotive products in the U.S. economy declined by 5.15%, and appliances, furniture, and carpeting production declined by 0.6% in the month. (Source: Federal Reserve, February 14, 2014.)
And factories in the U.S. economy just aren’t as busy as they used to be. The capacity utilization rate, a measure of companies using their potential production, was 78.5% in January. The average rate between 1979 and 2013 has been 80.1%. While a difference of two percent in factory utilization isn’t a big number, because overhead is often fixed in factories, a two-percent decline in production is a big deal.
Then there’s the inventory problem; inventories in the U.S. economy continue to increase. In December, inventories at manufacturers increased by another 0.5% to $1.7 trillion. From December 2012, they have increased by 4.4%. (Source: U.S. Census Bureau, February 14, 2014.)
We have a situation in the U.S. economy today where factories are working at lower capacity than they have historically, while business inventories are rising—two bad omens for the economy; hence, you can see why I’m concerned about economic growth in 2014.
It’s a domino effect…
Inventories increasing suggest consumer demand is stalling. Examples of consumer spending declining in the U.S. economy are many. As I have … Read More
As I have been pointing out to my readers, the “official” unemployment numbers issued by the government are misleading because they do not include people who have given up looking for work and those people with part-time jobs who want full-time work.
In January, there were 3.6 million individuals in the U.S. economy who were long-term unemployed—out of work for more than six months. (Source: Bureau of Labor Statistics, February 7, 2014.)
Those who are working part-time in the U.S. economy because they can’t find full-time work stood at 7.3 million people in January.
Add these two numbers into the equation and the real unemployment rate, often called the underemployment rate, is over 12%. Meanwhile, the official unemployment rate from the Bureau of Labor Statistics sits at 6.6%—that’s the number you will hear politicians most often quote.
But if there’s a group of policymakers that looks past the “official” unemployment numbers, it’s the Federal Reserve.
At her speech before the Committee on Financial Services, U.S. House of Representatives in Washington, D.C. last week, Fed Chief Janet Yellen said, “Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high. These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.” (Source: “Semiannual Monetary Policy Report to the Congress,” Federal Reserve, February 11, 2014.)
Like all economists, Yellen knows that when an individual has a part-time job then their income isn’t as … Read More
The savings of 500 million individuals living in the European Union are on the line.
Let me explain:
We all know Cyprus, one of the smallest countries in the eurozone and part of the European Union, went through what many feared. To save itself from default and pay down its out-of-control national debt, the government imposed a one-off capital levy on the bank accounts of individuals in that country. If you had more than a certain amount of money in your savings account, the government outright confiscated a portion of it.
Poland, another European Union country, did something very similar. In an effort to reduce its national debt, the government took assets from private pensions and made them public. (This incident never even made the big mainstream headlines.)
When these events took place, I started writing how this would be a new trend—governments would find new and crafty ways to take money from savers in their efforts to make the governments’ dire conditions better, be it for paying off their national debt or bailing out banks.
Now, we learn of documents from a European Union official stating more of the same is on the way. The savings of the individuals in those countries will be used to fund the countries’ long-term investments and reduce the gap that the region’s banks have created by pulling back on their lending.
The document, revealed by Reuters, said, “The Commission will ask the bloc’s insurance watchdog in the second half of this year for advice on a possible draft law to mobilize more personal pension savings for long-term financing.” (Source: “EU executive sees personal … Read More
The last time we looked at Alexion Pharmaceuticals, Inc. (ALXN), the position was trading around $121.00 a share. Now, it’s $175.00 a share, and once again, the company reported outstanding financial results from its “Soliris” wonder-drug.
This stock has been a powerhouse wealth creator, and virtually every time we take a look at it, the share price is higher.
There has been and continues to be tremendous momentum with biotechnology stocks in this market. And a great deal of it is happening in the large-cap space, where price momentum, thanks to institutional investors, has been robust and often very consistent.
Previously in these pages when looking at Alexion Pharmaceuticals, we also considered Biogen Idec Inc. (BIIB). (See “How Risk-Averse Investors Can Capitalize on 2014’s Expected Record Drug Approvals.”) It’s a similar story in terms of the price momentum being experienced on the stock market. In our last update, the position was treading around $290.00 a share; now, it’s $325.00, representing another new record-high.
Strong trading action in biotechnology stocks is partially due to economic success within this specific sector, but it’s also a reflection of buoyant capital markets, or equities in particular. The speculative fervor that investors have for this sector has been unmatched in recent history.
The NASDAQ Biotechnology Index broke out of a 12-year price consolidation in 2011 and has almost tripled since. While there were some retrenchments in this index in the last few years, considering the inherent volatility in biotechnology stocks, the pullbacks have been minimal.
While monetary policy is favorable to equities, like it is currently, I’d say there’s further price momentum in … Read More
The single greatest certainty capital markets are looking for is policy stability from the Federal Reserve, and Janet Yellen, the new Chair of the Federal Reserve, delivered the goods for Wall Street.
With certainty in regards to short-term interest rates and the expectation that quantitative easing will continue to be reduced over the coming quarters, the fundamental backdrop for the stock market remains positive.
Many companies sold off after reporting earnings results that basically met consensus. This was well-deserved, especially in a market that has not experienced a meaningful correction for a number of quarters.
Particularly for large-caps, corporate earnings results in the last quarter of 2013 were decent and corporate outlooks for 2014 were also relatively positive, considering the current state of things.
Add in the high likelihood of rising dividends from blue chips in the bottom half of the year, and you have the makings of another decent year for stocks.
Corporate balance sheets are in top-notch condition, and the cost of capital is cheap. From the corporate perspective, this is the perfect backdrop for greater growth, and sales growth translates to the bottom line.
For the last couple of quarters, I’ve been reticent about investors buying this stock market. Long investors benefitted tremendously in 2013, even by owning blue chips. While the expectation has been for a major stock market correction (or collapse), one has yet to transpire. Instead, we are getting meaningful price consolidation, which is happening again.
The lack of a meaningful double-digit price correction in the stock market illustrates the continued underlying fervor that institutional investors have to be buyers. With continued certainty from … Read More
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