Posts Tagged ‘interest rates’
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
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
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
Tesla Motors, Inc. (TSLA) has been an excellent trade. The position has recovered strongly and is a very good example for traders who speculate on changes in investor sentiment.
Trading a stock like Tesla is about price momentum as much as anything. And every business, no matter how successful or fast-growing, experiences operational difficulty. This creates opportunity for a trader who is comfortable going against the market.
Tesla ran into problems with its “Model S” and was required to do a recall to help prevent battery fires after an accident. It was a short-lived but perfect storm in investor sentiment, which created an attractive new entry point for traders. (See “The Stock Everyone Is Talking About; How Much Higher Can It Go?”) The company’s stock chart is featured below:
While many investors/traders are attracted to low-priced or penny stocks for their turnaround potential, these stocks are usually down for a reason. In buoyant, highly liquid capital markets like we have today, a buy-high/sell-higher type of strategy can pay off.
The risk is that the price momentum ends, whether it is due to a material corporate event or a general decline in speculative fervor. Biotechnology stocks as a specific stock market sector are particularly prone to strong price momentum because of the strong participation from institutional traders.
Tesla is now a $24.0-billion company. The position didn’t do that much after listing, then it just exploded with extremely strong price momentum on much higher-than-average volume.
As a research strategy, scanning the stock market for new highs can yield some very good trades and/or stocks worth following … 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
The Walt Disney Company (DIS) powered ahead after announcing earnings results that handily beat Wall Street consensus.
The company’s diluted earnings per share increased a substantial 34% from $0.77 to $1.03. Sales for the quarter ended December 28, 2013 grew nine percent to $12.3 billion on a strong performance from studio entertainment and the commercial success of Frozen and Thor: The Dark World.
Once again, the company’s cash position improved materially. Several firms boosted their price targets on the stock and earnings estimates for future periods.
Disney has an uncanny ability to generate growth in an otherwise lackluster environment, illustrating the relative outperformance of media networks, movies, and related consumer products.
The company experienced double-digit comparable growth in studio entertainment, consumer products, and its interactive businesses. This past December, Disney boosted its annual cash dividend by 15% to $0.86 per share. (See “Large-Cap Stocks the Place to Be in 2014?”)
Disney seems to have continued operating momentum on its side, as its theme park business is growing. This division is the second-largest in terms of revenue contribution after media networks.
In terms of blue chips, Disney is not the stock with the highest yield in the marketplace. Its current yield is approximately 1.2%.
It’s not a position worth chasing, but it is worthy of consideration when it’s down or when the stock market is going through periods of poor investor sentiment.
Stocks have been bouncing around, quite trendless since the beginning of the year. Investor sentiment has been shaken by emerging market action and currency movements. Economic data has also been all over the map. Some … Read More
As evidence of the fervor that corporations have to try to keep shareholders happy, 3M Company (MMM) just announced that its board of directors authorized another major share repurchase program.
The company bought back $5.2 billion worth of its own shares in 2013 and can now repurchase up to $12.0 billion.
Stock buybacks are an old-school business strategy. Excess cash that management feels isn’t worth investing in new businesses, plant, equipment, and employees is simply allocated back to shareholders.
And whatever the endgame is for company management—to boost a falling share price, pay for dividends, meet earnings guidance or simply because it’s the easiest thing to do—share repurchases work for investors.
The stock market is a secondary market where share prices reflect relative values until a company becomes non-public (i.e. is taken private).
Some view share buyback programs as a tool a public company can use to prop up its earnings results, but in the large-cap space, this isn’t the case. The fact of the matter is that big business generates a lot of cash and cash management has been and will continue to be one of the main operations (usually part of the executive branch) of a company.
Earnings results might be managed on a quarterly basis, but corporations typically take a longer view regarding interest rates and debt requirements. When rates are extremely low, as they are right now, debt financing makes a lot of sense. Corporations can and do “bulk up” on capital when market conditions warrant. (See “Pullback in Stock Prices Makes These Dividend Payers Attractive Again.”)
Regardless of the motive, the marketplace likes … Read More
Fasten your seatbelt, dear reader. We’re in for a global financial crisis, a currency fiasco, and a stock market collapse all in the same year!
I’m being too bearish? Not after you read this…
In their search for economic growth in 2009, the Federal Reserve and other major central banks in the global economy started lowering interest rates and printing paper money.
While the central banks of the world wanted economic growth, they inadvertently created the “trade” for big investors like financial institutions and banks. I talked about this last Friday. (See “Stock Market: The Great Collapse Back to Reality Begins.”)
The “trade” had investors borrowing money from low interest rate countries and buying bonds in high interest rate countries, pocketing the spread. In the world of finance, this is often referred to as the “carry trade.” It works as long as the currencies of the low interest rate country and the higher interest rate country stay stable.
But now, the “trade” is backfiring as the currencies of emerging markets go into free fall.
China, the biggest economy in the emerging markets and second-biggest in the global economy, got most of the “trade” money. According to the Bank for International Settlements, in 2013, foreign currency loans and borrowing by Chinese companies from other countries was close to a trillion dollars. In 2009, it was only $270 billion. (Source: Telegraph, February 1, 2014.)
European banks have the biggest exposure to emerging markets, having lent them $3.0 trillion. Breaking down this number even further, British banks have loaned $518 billion to the emerging markets; Spanish banks come in second … Read More
If you have a serious commitment to the equity market, you know that it’s very easy to lose money with stocks. Even when market action is good, one wrong number or any small aberration has the potential to change investor sentiment on a dime. Today’s hottest stocks are easily tomorrow’s biggest losers; today’s financial engineering could lead to tomorrow’s market crash after a derivatives trade–gone-bad.
This is why it really is worthwhile to spend time thinking about investment risk and how a portfolio of stocks is vulnerable to the downside.
I firmly believe that capital preservation is just as important as the expectation of generating a return on investment from stocks at a rate that is greater than inflation. In today’s world, with artificially low interest rates and poor rates of return from bonds and cash, stocks are a huge asset class with tremendously higher risks.
Because of this, approaching equities from a portfolio perspective and building core positions in stable, dividend-paying businesses is a strategy that complements the more speculative approach of trying to achieve short-term capital gains.
Equity investors are well served by trying to “do it all” in the sense of having core positions in stocks that can be accumulated over time, along with a certain percentage allocated for risk-capital trades. (See “Two Steps to a Solid and Profitable Portfolio.”)
And for those less comfortable with the idea of selecting and managing a portfolio of individual stocks, there’s no reason why you can’t integrate active investing with passive investing. Index funds and exchange-traded funds (ETFs) are still great instruments in which to have exposure to … Read More
“The trade” was very easy to do not long ago. Anyone with the basic knowledge of how money flows could have done it and profited.
Of course, I’m talking about the Federal Reserve “trade.” The investment strategy was straightforward: borrow money at low interest rates in the U.S., then invest the money for higher returns in emerging markets and bank the difference. If you could borrow money at three percent per annum in the U.S. and invest it for a six-percent return in emerging markets like India, why wouldn’t you?
The “trade” created a rush to emerging markets. And if you didn’t like the emerging markets, you could have invested in the stock market right here in the good old U.S.A. Again, borrowing money at a low rate to buy stocks from companies that were buying back their own stocks at the same time the Fed flooded the system with cold hard cash…how could you go wrong? (No wonder the rich got richer during the Fed’s quantitative easing programs.)
But, as I have written so many times, parties can only last for so long. Eventually, someone takes away the punch bowl. And from the looks of it, the Federal Reserve has pulled its own punch bowl.
In its statement yesterday after its two-day meeting, the Federal Reserve said, “…the Committee (has) decided to make a further measured reduction in the pace of its asset purchases…” (Source: Federal Reserve, January 29, 2014.)
In summary, the Federal Reserve will be buying $65.0 billion worth of bonds in February following its reduced $75.0 billion in purchases in January following its $85.0 billion-a-month bond … Read More
Some prolonged downside is exactly what this stock market needs—a market that’s been looking for a catalyst to sell for quite some time.
While there has been pressure on long-term interest rates, we still have virtual monetary certainty this year with the Fed funds rate staying where it is. Weakness abroad in China is still a story of overcapacity, but there has been some refreshing economic data out of the eurozone.
What’s clear in Western economies is that positive economic data is sporadic and mostly without trend. The lack of consistency in mature economies has equity investors in a bit of a loop. Ten percent downside across the main stock market indices would be a healthy development for the long-term trend. We never did get a stock market correction last year, only consolidation, as investors were only too happy to keep buying.
Fourth-quarter earnings season has been modest so far, with outperformance (according to Wall Street) mostly coming in at the bottom-line, meaning that genuine sales growth is still a very tough thing to accomplish. Furthermore, a lot of corporations aren’t guiding 2014 above previous outlooks, and this makes it very difficult to be a new buyer.
Global capital markets are gyrating on a reassessment of investment risk and the prospect for real economic growth. Add in currency volatility, and there are the makings of a flight to the U.S. dollar and a sell-off in the stock market.
Still, the most important data now is what corporations actually say about their businesses. Beating the Street is less important than a true assessment of business conditions and expectations for the future. … Read More
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