Posts Tagged ‘financial crisis’
Getting a sense of where stocks are going to go in the year ahead is always difficult with the major indices at their all-time highs.
The fundamental backdrop is still very favorable for equities. While the Federal Reserve has put off raising interest rates for the near future, the cost of capital, especially for corporations, remains extremely low. And corporate balance sheets remain in excellent condition with strong cash positions and good prospects for rising dividends going forward.
The stock market recovered extremely well from the financial crisis and subsequent crash in 2008/2009. But it wasn’t until early 2013 that I saw the beginning of a new cycle for stocks, or a bull market as it were.
Until then, I viewed the market’s performance purely as a recovery period from the previous cycle, which was the technology bubble.
Many of the technology stocks have only now recovered to their previous highs set in 1999 and 2000. The recovery cycle took a long time to play out and the catalyst for its breakout was, not surprisingly, the Federal Reserve.
Stocks can move significantly higher in a rising interest rate environment, but only from a low base, which is what we have now. And within the context of a new market cycle or bull market, the economy can experience a full-blown recession and stocks can experience meaningful corrections.
The two most important catalysts for the equity market near-term are what corporations actually report about their businesses and the Federal Reserve’s actions.
The surprising weakness in oil prices should be evident in corporate financial results (especially in the fourth quarter). Old economy industries … Read More
According to the U.S. Congressional Budget Office, next year, the government is expected to incur a budget deficit of $469 billion and then another budget deficit of $536 billion in 2016. (Source: Congressional Budget Office web site, last accessed July 21, 2014.) From there, the budget deficit is expected to increase as far as the projections go.
Yes, the government’s own estimates are that our country will run a budget deficit every year for as long as the government’s forecasts go.
That’s quite unbelievable. We live in a country where the government (and politicians) feel it is okay to continue being “negative” every year, indefinitely. It’s like I’ve written many times: if our government were a business, it would have gone bankrupt long ago. But the government, through its non-owned agency, the Federal Reserve, has the luxury of printing paper money to fund its budget deficit and debt. If a business did that—printed money to pay its bills—that would be illegal.
Today, the U.S. national debt stands at $17.6 trillion with about $7.0 trillion of that incurred under the Obama Administration. (Is it any wonder a CNN/ORC International poll said this morning that 35% of Americans say they want President Obama impeached with about two-thirds saying he should be removed from office?)
But what happens to the budget deficit once interest rates start going up? We’ve already heard from the Federal Reserve that interest rates will be sharply higher at the end of 2015 and 2016 than they are now.
Earlier this month, the U.S. Department of the Treasury was able to borrow money (issued long-term bonds) at an interest … Read More
We are hearing more and more about interest rates getting ready to rise. The Federal Reserve itself has said it expects the federal funds rate to increase to 1.5% by the end of next year and to 2.25% by the end of 2016.
Before the Fed came out with its forecast, I was writing about how the Fed will have no choice but to raise interest rates because inflation is rising too quickly.
And I have been reading what clueless reporters and analysts are writing about how gold bullion prices don’t perform well in a high interest rates environment. I want to set the record straight for my readers.
Shattering the myth about the high interest rates, today’s rates are still very low compared to the historical average. In the chart below, you will see the changes in the Federal Reserve’s federal funds rate since 1980.
Chart courtesy of www.StockCharts.com
Over the past five years, the benchmark interest rate set by the Federal Reserve has all but collapsed to zero. Moving rates to 2.25% by 2016 will have a significant impact on the economy. But at 2.25%, over the long-term, it’s still a very low rate. Prior to the financial crisis of 2008 and 2009, the federal funds rate stood above five percent.
Bringing it back to gold bullion, if you are old like me and remember the early 1980s when interests were very high, you will also remember gold bullion was trading at a then-record high of more than $800.00 an ounce, or about $2,500 in 2014 dollars.
The higher interest rates went then, the higher gold bullion went. … Read More
Everything in the stock market experiences its own cycle of enthusiasm among investors. And this is especially well illustrated among speculative issues.
There was a time only a few years ago when some of the hottest speculative stocks were in solar energy. Now this small equity universe is still trying to rebuild itself.
And in more recent history, 3D-printing companies experienced incredible capital gains, only to experience incredible capital losses in what is a commonality among the market’s most speculative stocks.
At the end of the day, high-flying positions are still real businesses that have to deal with managing their own business conditions and hype among institutional investors.
As an investor, you have to consider both realities—the growth an underlying business is experiencing and the enthusiasm the marketplace has for such an enterprise or sector.
Twelve months ago, 3D Systems Corporation (DDD) was trading at $44.00 a share. Then it appreciated to a high of $97.28, before spending most of this year retreating to the $50.00-per-share level.
It’s only recently that the position broke the $55.00-per-share barrier, still sporting a forward price-to-earnings ratio of approximately 46.
Fervor for speculative stocks definitely diminished at the beginning of this year, and it’s part of the cycle that equities perpetually experience.
At the beginning of 2013, the breakout was in large-cap blue chips. Institutional investors had just started buying these stocks, and they led the broader market higher.
Then the NASDAQ Composite began to improve and actually took the lead for a while. But even with the Federal Reserve onside, it didn’t take too long for big investors to just book some profits. … Read More
I’m going to put aside my daily ranting about the stock market and the economy today to bring what I believe is an important story to the attention of my readers.
There is no doubt you’ve heard about how poorly the city of Detroit, Michigan is faring now that the automotive sector has all but closed up there.
Yesterday, news came that the city has started cutting off water to about 150,000 people. About half of the city’s 324,000 water customers are delinquent on paying their water bill, so the city is turning off their taps. (Source: Financial Post, June 24, 2014.)
In protest, residents are appealing to the United Nations High Commissioner for Human Rights, saying their human right to water has been denied. (Unfortunately, the right of access to water is not in our Constitution or our Charter of Rights.)
I think what’s happening in Detroit, while it’s not getting much publicity, is very important. It should be a warning to us all.
At the very core, it tells me that if a government is not taking in enough money to pay its bills, it will increase the financial burden on its citizens…and if you can’t pay, you’re cut off.
In the case of Detroit, last week, city council approved a nine-percent hike in what it charges for water. (And the government tells us inflation is below two percent!) This lesson teaches us that if you can’t pay the increased costs the government levies on you, it will cut you off.
Secondly, today’s citizens are responsible for the past actions (or should I say lack of actions) … Read More
It’s a difficult environment in which to be constructing new equity portfolios right now, mostly due to the very simple reason that the stock market is at an all-time record high and it’s likely that monetary policy will change soon.
But there is still a great deal of interest in equity securities and in a lot of cases, individuals require the income that they provide.
There are a lot of really good investment funds and money managers in the marketplace; but for those who wish to build and manage their own stock market portfolios, you want to approach the process methodically and with a great deal of care.
As a stockbroker, I learned a long time ago that financial products are typically sold not bought. Don’t let anyone sell you anything in this market—stocks are at all-time highs.
If you’re looking to the stock market to create a portfolio of companies, just remember that there is no rush to do so. Because of the financial crisis and subsequent recession, policy has been about the re-inflation of assets (mostly financial), and the stock market’s been going up based on the certainty that the Federal Reserve will be extremely accommodative.
Right or wrong, institutional investors used that certainty to buy equity securities.
Traders might like to buy high in order to sell higher, but momentum trading isn’t investing and as an investor, it’s tough buying stocks at their highs.
But the current environment is a good one in which to identify good businesses that can become core positions in a portfolio over time.
In terms of creating a new, risk-averse stock market … Read More
With the Dow Jones hitting 17,000 being pretty likely in the not-too-distant future, from there, it’s only another 18% or so until the Dow hits 20,000, which is pretty incredible.
These numbers seemed so unrealistic just a few years ago but now, it’s not too farfetched. The most amazing thing to me is that stocks still haven’t experienced a material price correction since the financial crisis.
Stocks aren’t necessarily stretched in terms of valuation, especially with corporate earnings outlooks holding up for this year and going into 2015. What is stretched is investor determination with a market at its high.
Johnson & Johnson (JNJ) is a great company and a worthy long-term investment (see “Three Blue Chips Set to Drive Higher”), but it’s tough to buy stocks at all-time record-highs. In Johnson & Johnson’s case, the position’s up almost 20 points since the beginning of February, and this is on top of a previous 20-point gain in 2013.
One of these days, stocks are going to get walloped. But there’s got to be some sort of catalyst for it to happen.
The Federal Reserve can be a catalyst if it decides to suddenly change its outlook for interest rate certainty. The catalyst could also be a geopolitical event or something that comes out of nowhere, like a big derivatives trade gone bad.
In any event, there will have to be a shock that is perceived to have a lasting effect on capital markets.
In the lull between earnings seasons, which we’re currently experiencing, stocks reaccelerated on the back of very modest economic news and that in itself is … Read More
The Dow Jones Transportation Average keeps powering ahead, and the rest of the stock market is very close behind it.
The strong performance of this index is confirmation of further Dow theory gains. The Dow Jones Industrial Average has been fighting its way higher since May 20.
Some of the performances of transportation stocks have been truly spectacular and very much a reflection of a bull market.
Alaska Air Group, Inc. (ALK) just bounced off $100.00 a share. It was $50.00 a share late June last year.
Union Pacific Corporation (UNP), which has been one of my favorite benchmark stocks for gauging industrial economic activity and the stock market, is right around $200.00 a share. (See “Buybacks, Dividends, Stock Splits: Business Is Getting Better for This Must-Watch Stock.”)
It was $150.00 a year ago, which is a very good capital gain for such a mature large-cap enterprise.
And Southwest Airlines Co. (LUV) just hit an all-time record-high, about double what it was trading at this time last year.
The Dow Jones Transportation Average is old economy, but it is a very meaningful gauge for the rest of the stock market. I advise all investors to follow the index on a frequent basis. The broader market is highly unlikely to break down without a commensurate move in transportation stocks.
The NASDAQ Composite and Russell 2000 can certainly be more volatile, but generally speaking, so long as the Dow Jones Transportation Average is holding up, so will the rest of the market.
Since the financial crisis, big corporations have been very unwilling to invest in new operations. But in what … Read More
Did you see this story in the Wall Street Journal last Friday?
“Retirement investors are putting more money into stocks than they have since markets were slammed by the financial crisis six years ago… Stocks accounted for 67% of employees’ new contributions into retirement portfolios in March… That is the highest percentage since March 2008…” (Source: Wall Street Journal, May 2, 2014.)
You read that right. With stocks at a record-high (and valuations stretched), retirees are pouring back into stocks. Are they getting ready to get slaughtered again? I believe so.
If you are a long-term reader of Profit Confidential, you know my take: the “bear” has done a masterful job at convincing investors the economy has recovered and the stock market is a safe place to invest again. Meanwhile, nothing could be further from the truth.
We are living the slowest post-recession recovery on record. And that recovery has been manipulated by the tampering of the Federal Reserve. You see, the Federal Reserve played a key role in driving the key stock indices higher. In 2009, in the midst of a financial crisis, the central bank started printing money and buying bonds. This resulted in lower bond yields. Those who had money in bonds, who had essentially paid nothing, moved into stocks.
And those record-low interest rates enabled companies in the key stock indices to borrow money and issue new equity, using the money to buy their own stock, thus pushing up per-share corporate earnings.
The end result? 2013 was a banner year for stocks on the key stock indices. But as 2014 came around, we began … Read More
Earnings are beginning to roll in and quite a few companies are missing Wall Street consensus.
This doesn’t mean, however, that there isn’t growth out there; only that estimates have so far been a little optimistic.
CarMax, Inc. (KMX) is a well-known used-car dealer. The company’s latest numbers were decent, but they came in below what Wall Street was looking for.
Fiscal fourth-quarter sales grew nine percent to $3.08 billion, which is pretty good. Comparable store unit sales grew seven percent in the fourth quarter and 12% year-over-year.
The company had to correct some accounting procedures related to extended service plans and warranties, and it took a hit on earnings because of this.
CarMax is buying back its own stock and just authorized another $1.0-billion repurchase plan that expires at the end of the 2015 calendar year. The stock only dropped marginally on the news.
Another company that missed consensus but is very much a growing enterprise is AZZ Incorporated (AZZ) out of Fort Worth, Texas. We looked at this company last year. (See “Things Are Looking Up! Let’s Hope They Don’t Wreck It.”)
This is a good business. The company manufactures electrical equipment and components for power generation and transmission. Management recently said that business conditions are improving and new quoting activity is noticeably stronger.
Fiscal 2014 fourth-quarter revenues came in at $180 million, compared to $140 million in the fourth quarter of 2013. Earnings were $10.2 million, or $0.40 per diluted share, compared to earnings of $13.2 million, or $0.52 per diluted share.
While the company actually missed Wall Street consensus earnings by $0.02 a share … Read More
In the early days of the 2008 financial crisis, the Federal Reserve said, “Job losses, declining equity and housing wealth and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.” (Source: Federal Reserve, March 18, 2008.) As a result of this, the central bank came up with the idea of printing paper money to stimulate the economy; thus, “quantitative easing” was born.
Five years later, the Federal Reserve’s balance sheet has grown to $4.2 trillion. We also saw the U.S. government increase spending to stimulate the U.S. economy after the Credit Crisis of 2008. The U.S. national debt skyrocketed from around $9.0 trillion back then to over $17.0 trillion today.
With all this money being created (by the Fed) and borrowed (by the government), the logical assumption is that there’s finally economic growth in the U.S. economy.
Paper money printing by the Federal Reserve and out-of-control spending by the government hasn’t really given much of a boost to the U.S. economy (aside from the stock market bubble it has created). Problems still persist. The amount of paper money that has been printed out of thin air is huge—an unprecedented event in American history.
Now that the Federal Reserve is putting the brakes on quantitative easing (it will print less money each month), will we see businesses pull back on capital spending? Of course we will. When money is tight, businesses pull back on research and development, expansion, and acquisitions.
Consider this: since December of last year to this past … Read More
Copper is considered an industrial metal, used in industries across the board. When copper prices fall, it’s usually an indicator of a slowdown in the global economy. On the contrary, gold bullion isn’t much of an industrial metal; rather, it is used as a hedge against uncertainty in the global economy.
When you look at these two metals together, often referred to as the gold-to-copper ratio, they tell us something very important: the ratio of how many pounds of copper it takes to buy one ounce of gold bullion has long been an indicator of sentiment in the global economy.
If the gold-to-copper ratio is in a downtrend, it means investors are betting on the global economy to grow. In contrast, if it is increasing (if the number of pounds of copper it costs to buy an ounce of gold is rising), it tells us investors are concerned about protecting their wealth in a slowing global economy.
Below, you’ll find a chart of the gold-to-copper ratio.
Looking at the chart above, it is clear something happened at the beginning of 2014. Investors became very worried. Since the beginning of the year, the gold-to-copper ratio has increased more than 28%—the steepest increase in more than two years.
And the weekly chart of copper prices looks terrible too:
Copper prices have been trending downward since 2011. In 2013, these prices broke below their 200-day moving average and recently, they broke below a very critical support level at $3.00. While all of this was happening, on the chart, there was also a formation of a … Read More
Profit Confidential — IT'S FREE!
"A Golden Opportunity for Stock Market Investors"