Posts Tagged ‘global economy’
Earlier this month, Jeremy Siegal, a well-known “bull” on CNBC, took to the airwaves to predict the Dow Jones Industrial Average would go beyond 18,000 by the end of this year. Acknowledging overpriced valuations on the key stock indices are being ignored, he argued historical valuations should be taken with a grain of salt and nothing more. (Source: CNBC, July 2, 2014.)
Sadly, it’s not only Jeremy Siegal who has this point of view. Many other stock advisors who were previously bearish have thrown in the towel and turned bullish towards key stock indices—regardless of what the historical stock market valuation tools are saying.
We are getting to the point where today’s mentality about key stock indices—the sheer bullish belief stocks will only move higher—has surpassed the optimism that was prevalent in the stock market in 2007, before stocks crashed.
At the very core, when you pull away the stock buyback programs and the Fed’s tapering of the money supply and interest rates, there is one main factor that drives key stock indices higher or lower: corporate earnings. So, for key stock indices to continue to make new highs, corporate profits need to rise.
But there are two blatant threats to companies in the key stock indices and the profits they generate.
First, the U.S. economy is very, very weak. While we saw negative gross domestic product (GDP) growth in the first quarter of this year, the International Monetary Fund (IMF) just downgraded its U.S. economic projection. The IMF now expects the U.S. economy to grow by just 1.7% in 2014. (Source: International Monetary Fund, July 24, 2014.) One more … Read More
There are two important charts I want my readers to see this morning.
The first is a chart that is an indirect measure of demand in the global economy. Right now, the Baltic Dry Index (BDI) sits at its lowest level of the year. Since the beginning of 2014, the BDI has fallen 60%.
The BDI measures the cost of moving major raw materials by sea in the global economy. The thinking is that the lower the cost to move goods by ship, the lesser the amount of goods to move (a strict demand/supply price situation).
Chart courtesy of www.StockCharts.com
What’s happening with the steep drop in the BDI can be seen in a corresponding slowdown in the global economy.
Germany, the fourth-biggest economy in the world, saw its industrial production decline by 1.8% in May after falling 0.3% in April. (Source: Destatis, July 7, 2014.)
Great Britain, the sixth-biggest market in the global economy, saw its production decline 0.7% in May, while its manufacturing decreased 1.3%. (Source: Office for National Statistics, July 8, 2014.)
France, the fifth-biggest economy, reports no gross domestic product (GDP) growth in the country in the first quarter of 2014. (Source: MarketWatch, July 8, 2014.)
In 2014, the Chinese economy will grow at its slowest pace in years. In Japan, the Bank of Japan (its equivalent to our Federal Reserve) has announced it will start buying exchange-traded funds (in specific, the Nikkei 400 ETF) to “boost the impact of (its) unprecedented easing.” (Source: “Bank of Japan Seen Buying Nikkei 400 ETF,” Financial Post, July 10, 2014.) Yes, the central bank of Japan is buying … 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
The global airline sector is probably at its brightest point in history, having seen a significant improvement following the effects of 9/11 that nearly killed the industry.
The factor that’s pushing up the airline sector has been the renewal in the global economy, particularly the massive buildup of newfound wealth in the emerging markets in Asia, Latin America, and Eastern Europe. The growth is especially strong in Asia, as China continues to develop a significant middle class and consumer generation who want to spend and travel both domestically and internationally.
Future prospects look bright for the airline sector and are on target for higher profits for the second straight year, based on research by the International Air Transport Association (IATA). North America is estimated to retain its top spot in the airline sector, but the Asia-Pacific region is a fast-growing second. (Source: “Industry on Track for Second Year of Improving Profits – Rising Fuel Costs Largely Offset by Increased Demand,” International Air Transport Association web site, March 12, 2014.)
China is estimated to require 5,000 new planes over the next two decades. The key plane makers fulfilling the need will be The Boeing Company (NYSE/BA) and Embraer S.A. (NYSE/ERJ). Yet China is aggressively developing its own domestic plane for the airline sector called the “COMAC,” which is expected to launch its first regional airliner soon and has plans to deliver longer-range planes by 2018.
The S&P Aerospace & Defense ETF (NYSEArca/XAR) is near its highest levels in a year and is trading in an upwards channel, based on my technical analysis of the chart below.
Chart courtesy of www.StockCharts.com
While … Read More
As it stands, the U.S. national debt has skyrocketed to above $17.4 trillion. With this year’s budget deficit expected to be around $500 billion, we’ll be at a national debt of $18.0 trillion in no time. In fact, a $30.0-trillion national debt is not out of the question by the end of the next decade.
Any way you look at these very big numbers, it is the American taxpayer who is on the hook for the years the government mismanaged finances.
If we look at the Greek example, that country’s government, too, rigorously spent money, registering massive budget deficits year after year. This caused Greece’s national debt to get to a point where it was unable to make payments on what it borrowed. Those who bailed out the Greek government asked for changes. This resulted in the lowering of pension payments to Greek citizens and austerity measures across the board.
The U.S. has more national debt than any other country in the global economy. At some point—and I don’t know when, as the can just keeps getting kicked down the road—either taxes will need to go up or austerity measures will need to be introduced to deal with the debt mess.
And since we now have so many people in this country dependent on government handouts and support, I think we’ll see higher taxes before we see austerity in the U.S.
Consider this: New York City’s mayor, Bill de Blasio, is considering a “mansion tax.” This is essentially an extra tax on homes valued at more than $1.0 million. He wants the proceeds from the tax to go towards adding … Read More
The Chinese economy had been growing at about 10% a year, like clockwork, for years. Now, China is in the midst of an economic slowdown, with growth expected to come in this year at 30%–50% below China’s five-year average growth rate.
Why is China’s economy growing so slowly, and why does it matter to us here in North America?
Manufacturing, the key component of China’s economy, is quickly slowing. The HSBC Chinese Purchasing Managers’ Index (PMI) declined for the sixth consecutive month in April, registering at 48.1. Remember that any reading below 50 for the PMI suggests an outright contraction in the manufacturing sector. (Source: Markit, May 5, 2014.)
Japan isn’t faring any better; the third-biggest hub in the global economy is facing its own economic slowdown. The government and Japan’s central bank are trying to boost the economy by printing more and more money, but they are failing miserably. Japan’s gross domestic product (GDP) growth has been abysmal for years.
Germany is the only country in the eurozone showing some resilience. Other eurozone countries, like France, Italy, and Spain, are also facing an economic slowdown. Bad debt, tight lending requirements, and high unemployment remain the biggest problems in the common currency region; so big, the European Central Bank (ECB) wants to take the same course as the Federal Reserve and the Bank of Japan and start printing more paper money.
In the U.S., we, too, have a soft economy. The first quarter of 2014 proved to be terrible for corporate profits growth. And if the rest of the world is in an economic slowdown, I don’t know how … Read More
A lot of stocks are rolling over, breaking their 50- and 200-day simple moving averages (MAs). This is a tired market that could very well consolidate or correct right into the fourth quarter.
And the economic data has been softer, as well. Throw in geopolitical tensions with Russia and we have the makings of a material price retrenchment.
There’s still resilience, however, in some of the most important stock market indices. Stocks composing the Dow Jones Transportation Average are holding up extremely well, especially compared to the Russell 2000, the NASDAQ Biotechnology index, and the NASDAQ Composite index itself.
While the main market indices are mostly flat on the year, I don’t think investors can expect any capital gains until perhaps the fourth quarter.
From my perspective, relative price strength in the Dow Jones industrials, transportation stocks, and most of the S&P 500 index means that the longer-run uptrend remains intact.
With speculative fervor still coming out of initial public offerings (IPOs) and select biotechnology stocks, this action is an indicator of a tired market that’s long in the tooth, as investors are clearly less willing to speculate on those stocks that don’t offer income or relative safety in their earnings.
Risk aversion won’t kill a secular bull market. But it does mean that risk-capital opportunities are a lot less plentiful. Currently, among speculative stocks, one of the only sectors still experiencing decent price action is oil and gas drilling and exploration.
This is still a market that I think favors existing winners—blue chips, in particular. (See “Top Stocks for the Coming Correction.”)
These are the stocks to … Read More
I keep hearing about the economy improving, but I keep asking, where? I ask because the facts continue to say otherwise.
The U.S. Bureau of Economic Analysis reports gross domestic product (GDP) came in at just 0.1% in the first quarter of 2014. To remind my readers, in the fourth quarter of 2013, U.S. GDP grew by 2.6%. (Source: U.S. Bureau of Economic Analysis, April 30, 2014.)
These GDP figures reaffirm what I have been saying for some time now: the U.S. economy is headed towards an economic slowdown, not growth.
All we need to do is look at our exports. Exports from the U.S. economy to the global economy collapsed in the first quarter of 2014, declining by 7.6%. That’s definitely not helping GDP.
The Baltic Dry Index (BDI), an indicator of how demand in the global economy looks, is in a sharp downtrend, as illustrated in the chart below.
And consumer spending is facing headwinds. I can see this in the amount of inventory businesses are stockpiling. In the first quarter of this year, private business inventories rose by $87.4 billion after increasing by $111.7 billion in the fourth quarter of 2013. Businesses increasing inventories suggests customers are buying less, as each business’ inventory isn’t turning over; it’s stockpiling. GDP cannot grow without consumer spending.
Finally, last Friday, we heard the “good news” that the U.S. economy added 288,000 jobs in April—the biggest increase since January 2012. But the underemployment rate, which includes people who have given up looking for work and people who have part-time jobs but want full-time jobs, stands … Read More
The International Monetary Fund (IMF) has lowered its growth forecast for the global economy. It says the world economy will now grow by 3.6% in 2014 and 3.9% in 2015; it grew at three percent in 2013. (Source: International Monetary Fund, April 8, 2014.)
I see the IMF forecast on global growth as being far too optimistic. In fact, I think we’d be lucky to get three percent growth in the global economy this year. Key indicators I follow suggest demand in the global economy is close to outright collapsing.
Consider the chart below of the Baltic Dry Index (BDI). This index tracks the shipping prices of dry goods in the global economy. If it declines, it suggests global demand is declining. The BDI has plunged more than 48% since the beginning of the year, pointing to slow growth for the global economy ahead.
Manufacturing is another indicator of demand in the global economy that we follow. If manufacturing activity increases, it means demand is increasing and that consumers are buying more. Sadly, global manufacturing is suggesting an economic slowdown is the most likely scenario ahead.
The JPMorgan Global Manufacturing Purchasing Managers Index declined to its lowest level in five months in March. (Source: Markit, April 1, 2014.)
Adding to the misery, most economic hubs are telling the same tale.
The eurozone is still in trouble; the European Central Bank is contemplating its own quantitative easing program as Italy just reported its highest unemployment rate ever recorded. China is pumping out weak economic data. Japan’s economic slowdown isn’t taking any break despite the central bank … 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
Understanding the economic slowdown in the Chinese economy is very important because not only does it impact American companies doing business there, but what happens in the Chinese economy—now the second-largest economy in the world—affects the global economy.
While media outlets tell us the Chinese economy will grow by about seven percent this year (30% below the 10% the economy has been growing annually over the past few years), the statistics I see point to much slower growth.
In February, manufacturing activity in the Chinese economy contracted and hit an eight-month low. The final readings on the HSBC Purchasing Managers’ Index (PMI) for February showed manufacturing output and new orders declined for the first time since July of 2013. (Source: Markit, March 3, 2014.)
And there are other troubles. The shadow banking sector in the Chinese economy shows signs of deep stress, but we don’t know how much money is really on the line here. China keeps much of its real economic news to itself, but we do hear how firms that are involved in the sector are defaulting on their payments.
And the Chinese currency, the yuan, keeps declining in value compared to other major world currencies. The Wisdom Tree Chinese Yuan Strategy (NYSEArca/CYB) is an exchange-traded fund (ETF) that tracks the performance of Chinese money market instruments and the yuan compared to the U.S. dollar. Look at the chart below:
Since the beginning of February, the Chinese yuan and Chinese money market instruments have been showing signs of severe stress, largely unnoticed by mainstream media and economists.
There is no doubt in my mind … Read More
There’s a big push on buying green stocks, a move that has the ability to make investors feel good and make money at the same time. Here, we are talking about alternative energy stocks and companies that have mandated that their impact on the environment be one of their core values. (Read “My Top Stock Pick in the Innovative Alternative Energy Sector.”)
Then there are the stocks on the other end of the spectrum. Here I’m talking about the defense, gun, and military stocks that produce weapons and technology to defend and harm. These companies have made investors a lot of money, despite the fact that not everyone might agree with their line of business.
There are also those companies that are sought out due to their use of cheap and exploited labor. Of course, since so many goods are now made in China and other cheap labor markets in Asia and Latin America, it would be safe to say that many companies are pursuing this practice of seeking really cheap labor in order to maximize profits for investors. This is also the major reason why there are so many people looking for work across America; because companies cannot return strong margins while they’re paying the much-higher American wages or those of other Westernized countries, compared to the obscenely low wages found in places like China and Mexico and other low-wage countries.
While I’m not here to favor or condemn one group of companies, the reality is that nothing is perfect when you are operating in an extremely capitalistic global economy that needs to satisfy investors.
There’s … Read More
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