Posts Tagged ‘stock market’
As the key stock indices continue to climb higher, optimism amongst investors and stock advisors rises to a dangerous level.
According to the Advisor Sentiment tracked by Investors Intelligence, an indicator I follow to gauge optimism in the stock market, the number of stock advisors who are bullish towards key stock indices is at its highest since April of 2011. (Source: Investors Intelligence, May 22, 2013.) To bring this into perspective, in April of 2011, the key stock indices like the S&P 500 started to decline, dropping nearly 20% through October of that year.
The stock market is becoming very overbought and very overpriced. It’s not a matter of “if” the market faces a major set-back, but “when.”
The U.S. economy continues to struggle and early indicators of economic slowdown are flashing warning signs. Consider the Business Outlook Survey by the Federal Reserve Bank of Philadelphia, which provides an outlook for manufacturing activity in the Philadelphia area. The survey indicates demand has been weak, with new orders and shipments declining and inventories building up. (Source: Federal Reserve Bank of Philadelphia, May 16, 2013.)
The index of current manufacturing activity in the Philadelphia region registered at negative 5.3 in May compared to positive 1.3 in April. Any number below zero indicates conditions in the manufacturing sector are becoming poor.
This isn’t the only troubling statistic that shows the U.S. economy is headed towards an economic slowdown. Our economic growth is questionable; unemployment is still staggering; the majority of jobs created since the financial crisis have been in low-paying jobs, and a significant portion of the U.S. population is on food stamps…. Read More
While testifying in front of the Joint Economic Committee in Washington regarding monetary policy and the economic outlook of the U.S. economy, the Chairman of the Federal Reserve, Ben Bernanke, said yesterday, “…the committee has said that it will continue its securities purchase until the outlook for the labor market has improved substantially in a context of price stability.” (Source: “The Economic Outlook,” Board of Governors of the Federal Reserve System, May 22, 2013.) In other words, the Federal Reserve has made it clear, once again: it will not stop quantitative easing until the unemployment rate comes down.
The Federal Reserve continues printing $85.0 billion a month in new money, using this newly created money to purchase long-term U.S. bonds and mortgage-backed securities (MBS). The Fed has already inflated its balance sheet to over $3.0 trillion, and by keeping the pace of quantitative easing the same, its balance sheet will reach $4.0 trillion very quickly.
I believe the longer the Federal Reserve continues with the quantitative easing, the bigger the eventual troubles will be.
First of all, quantitative easing and artificially low interest rates by the Federal Reserve have essentially forced investors to take higher risk elsewhere, as guaranteed yields have collapsed. The yield on 10-year U.S. bonds is less than two percent; meanwhile, tax-favored dividends from the rising Dow Jones Industrial Average stocks pay 2.35%.
It is very well documented in these pages how investors are rushing to get higher yields as the Federal Reserve stays the course. Investors are adding junk bonds to their portfolio; conservative investors, like the central banks, are buying stocks; and bond funds … Read More
Just as you can with statistics, if you dig hard enough, you can find the numbers to support any case.
But in the stock market, it’s very important to remember that the mindset of institutional investors is different from that of Main Street.
By “institutional investors,” I’m referring to any entity that is buy-side, with investing money being the main concern. The Wall Street investment banker mindset, the sell-side, is its own unique beast.
Institutional investors are paid to play. That’s their business. If a mutual fund or exchange-traded fund (ETF) takes in money, it has to invest it. Contributors don’t pay fees to have money sit in cash.
The stock market is very much a marketplace that is fueled by the supply and demand of common shares and cash.
With greater demand (new inflows to institutional investors) and less supply (the amount of initial public offerings [IPOs], secondary offerings, and corporate share buybacks), prices go up.
That’s why everything in the stock market is only relative—share prices, earnings, earnings estimates, valuations, and views.
Is priceline.com Incorporated (NASDAQ/PCLN) worth $847.33 a share? Or should it be $694.06 a share, like it was on May 1? That’s a huge stock market gain, and the month isn’t even over yet. (See “BlackRock Takes in Billions For Equities: A Signal the Stock Market Is Near a Top?”)
The only thing institutional investors lament is a lack of new cash inflows.
Being in the business … Read More
A healthy housing market is essential to economic growth in the U.S. economy. But despite what we are hearing from the media, the housing market rebound is facing major headwinds.
To start with, home prices in the U.S. housing market are nowhere close to their pre-crash levels. There are millions of homeowners in the U.S. economy whose homes are worth less than what they originally paid for them. From their peak in 2006, home prices in the U.S. housing market are still down roughly 30%. For millions of homeowners to break even on their home investment, home prices will have to go up by at least 40%.
We just learned housing starts plunged 16.5% in April from March. (Source: U.S. Census Bureau, May 16, 2013.) This decline in new housing starts was one of the sharpest declines since mid-2011.
The chart below depicts housing starts from 2001 to today. Notice the recent sharp decline in housing starts.
Chart courtesy of www.StockCharts.com
Housing starts may not be a very exciting number to some, but I follow housing starts to gauge consumer spending. Think of it this way: when a family buys a new home they need to buy things that are needed in the household—new furniture, appliances, lawn mowers, and so on. It is this spending that ultimately results in economic growth for the U.S. economy.
Construction spending in the U.S. economy is also on the decline. It registered an annual rate of $893.6 billion in December of 2012, and by March 2012, construction spending fell to an annual rate of $856.7 billion—a decline of four percent. (Source: Federal Reserve Bank … Read More
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