Posts Tagged ‘quantitative easing’
A Froth Called the Stock Market
By Michael Lombardi, MBA for Profit Confidential
Didn’t the government say the economy is getting better? Why do I question what they’re saying? Because consumer spending is going the wrong way.
Core retail sales declined 0.1% in April—and that’s after they already fell 0.4% in the previous month! (Source: U.S. Census Bureau, May 13, 2013.)
When compared to the first four months of 2012, consumer spending in the U.S. economy declined in the first four months of 2013 at electronics and appliance stores, health and personal care stores, gasoline stations, and general merchandise stores.
And looking forward, consumer spending in the U.S. economy doesn’t appear to look very promising either.
If companies don’t spend or create better-quality/better-paying jobs, can consumer spending really pick up? It’s well documented in these pages: the job creation we have seen since the financial crisis started has been in low-wage-paying sectors.
Keeping all this in mind, with consumer spending still bleak and core retail sales constantly declining, the retailer must be suffering.
But that’s not so!
When you look at the stock market and, more specifically, at the retailers, it appears that consumer spending in the U.S. economy is booming! Consider the chart below of the S&P Retail Index. This index tracks the performance of some of the most well-known retailers in the U.S. economy.
Chart courtesy of www.StockCharts.com
Dear reader, the stock market isn’t portraying the real picture of the U.S. economy. The retail sales number actually shows how consumer spending—the biggest contributor to our gross domestic product (GDP)—is fairing, and those numbers look terrible.
Even with the printing of trillions of dollars of new money via quantitative easing, the Federal … Read More
Too Many Buyers as Central Bank of India Restricts Gold Imports
By Michael Lombardi, MBA for Profit Confidential
Data from the U.S. Commodity Futures Trading Commission showed that on May 7, there were 67,374 short contracts on gold bullion—speculators betting the yellow metal will go down in price. This was 6.4% higher than it was a week earlier. (Source: Bloomberg, May 13, 2013.)
According to EPFR Global, a firm that tracks money flows, for the week ending May 8, money managers fled from gold bullion and precious metal funds, withdrawing $1.27 billion. So far this year, they have withdrawn $20.8 billion—the largest amount since the firm started to track the data in 2000.
As bears continue to look for reasons to sell and investors pour out of gold, I see a brighter future for gold bullion ahead.
For the price of any investment to decline, there has to be some fundamental changes. Consider the decline in the key stock indices in 2008–2009. The reasons for the broad market sell-off were dismal earnings, a financial system on the verge of collapse, and anemic consumer demand.
But the fundamental reason for the rise in gold bullion prices hasn’t changed. There is still strong demand, and it’s increasing not just in U.S., but in the global economy.
In April, the trade deficit of India, the biggest consumer of precious metals, increased by more than 70% from March due to high imports of gold bullion and silver. The country imported $7.5 billion worth of precious metals in April, compared to $3.1 billion in the same year-ago period. (Source: MarketWatch, May 13, 2013.)
As a result of this pressure on the account deficit, the central bank of India put restrictions on … Read More
Who Will Buy Our Bonds When Fed Stops Funding Government?
By Michael Lombardi, MBA for Profit Confidential
This has caught some by surprise…
The U.S. government reported a budget surplus (money coming in was more than money going out) of $112.9 billion for the month of April. (Source: U.S. Department of the Treasury; Financial Management Services, May 10, 2013.)
It’s a surprise, because April’s surplus is the biggest monthly government budget surplus in five years.
But unfortunately, this trend will be very short-lived. The main reason the U.S. government was able to post a budget surplus in April was, obviously, the large amount of individual tax deposits during that month.
One month of budget surplus certainly doesn’t mean the U.S. government is back on its feet. On the contrary, the U.S. government has been posting a budget deficit for a long time now, and as a result, our national debt has skyrocketed to $17.0 trillion. It’s a major problem. So far in fiscal year 2013 (which began in October of 2012), the U.S. government has already run up a budget deficit of about $500 billion.
We are the most indebted nation in the global economy. Remember: when a government runs a budget deficit, it needs to borrow money to pay for its expenses.
And as the government continues to spend and post budget deficits, adding more to its national debt, there’s another set of troubles developing.
Consider the situation in Detroit, Michigan. The city is on the verge of defaulting on its obligations to its creditors because of its massive budget deficit. Detroit is expected to run out of cash, even though the state took control over the city’s finances. (Source: Bloomberg, May 13, 2013.)
Detroit is … Read More
Bond Funds Buying Stocks?
By Michael Lombardi, MBA for Profit Confidential
According to BlackRock, Inc. (NYSE/BLK), the biggest U.S. money manager by assets, $70.1 billion was funneled into exchange-traded funds (ETFs) in the first quarter of this year. What’s even more surprising is that 93% of all the inflows were in the U.S. equities market funds. (Source: Wall Street Journal, April 2, 2013.)
Morningstar, Inc. (NASDAQ/MORN), an investment research firm, states that 352 mutual funds that are classified as bond funds had exposure to the equities market as of the end of March 2013. This number is up from 312 at the end of 2012 and 283 in the first quarter of 2012. (Source: Wall Street Journal, May 1, 2013.)
Take Loomis Sayles Strategic Income fund, for example. This $15.0-billion fund is shifting its gears toward stocks, as its allocations to the equities market soared from five percent in mid-2011 to more than 19% now. According to the fund, it can allocate up to 35% of its assets into the equities market in preferred stocks and dividend-paying common shares. (Source: Loomis, Sayles & Company, L.P. web site, last accessed May 3, 2013.)
On top of this, and as it has been documented in these pages before, central banks are investing in the equities market, too.
It is no longer a hidden fact: investors, like central banks, and bond funds are rushing toward the equities market, because investment returns elsewhere are very low. These investors are taking a higher risk for an average rate of return.
The Dow Jones Industrial Average rose 11% in the first quarter—the best start to a year since 1998—and the S&P 500 soared 10%.
All … Read More
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