S&P 500 Approaching Inflection Point; How to “Insure” Your Portfolio

S&P 500 Approaching Inflection Point; How to “Insure” Your Portfolio
S&P 500 Approaching Inflection Point; How to “Insure” Your Portfolio
The winds are changing, my friends. For most of the past year, each time the S&P 500 sold off, it was a buying opportunity. I think we are at an inflection point this year, as we all know nothing lasts forever. 

I believe it all began to emerge last week with the Federal Reserve meeting. As long-time readers know, over the past couple of months, I’ve been warning that once the Federal Reserve begins to adjust monetary policy, this will have a negative impact on the S&P 500. 

With the Federal Reserve continuing to reduce its asset purchase program, investors are now calculating the length of time until it’s no longer. The reason for distress in the market is that Federal Reserve Chair Janet Yellen announced a tentative six-month timeframe upon completion of the asset-purchase program that the Federal Reserve will begin increasing short-term interest rates. 

Why the concern? 

Taking a quick look from several angles, this transition won’t be smooth. To begin with, there’s the old saying on Wall Street: “Don’t fight the Fed.” It is obvious that the Federal Reserve is dead set on reducing monetary stimulus and raising interest rates. 

Very rarely does the S&P 500 increase during a period of monetary tightening. This is not to say that the S&P 500 will drop tomorrow; the Federal Reserve is continuing monetary easing for the moment. But investors in the market should be aware that once the Federal Reserve begins changing its monetary stance, the S&P 500 will be affected. 

Another concern is that economic growth in America isn’t exactly on fire. While it’s true that we aren’t in the depths of a recession, economic growth is far from optimal. Frankly, I can’t recall a time that the Federal Reserve began tightening monetary policy when economic growth was so tepid. 

Then we can look to economic growth globally, which is even more worrisome. For March, China’s Purchasing Managers’ Index (PMI), tracked by Markit Economics and HSBC Holdings plc (NYSE/HSBC), was 48.1, a drop from 48.5 in February. Remember that a level below 50 signals economic contraction. (Source: “HSBC Flash China Manufacturing PMI,” Markit Economics, March 24, 2014.) 

In this PMI report for China, Markit Economics remarked that the slowdown in economic growth was broad-based. The company believes that Chinese leadership will enact new policy measures to try and pump up overall economic growth. 

What does this tell us? After trillions of dollars pumped into the financial system by central banks around the world, economic growth remains tepid. With this backdrop, can the S&P 500 continue setting all-time highs over the next year, even as global economic growth appears to be slowing and the Federal Reserve will shortly begin tightening monetary policy? I think it will be much more difficult for the S&P 500 going forward. 

One thing I do consider quite likely is that volatility will begin increasing. 

ProShares VIX Mid-Term Futures ETF Chart 

Chart courtesy of www.StockCharts.com

 

The above chart shows the S&P 500 (black line) superimposed over the volatility exchange-traded fund (ETF) ProShares VIX Mid-Term Futures ETF (NYSEArca/VIXM). As you can see from the past, when the S&P 500 drops, the volatility index (red candlesticks) rises. This volatility index can be seen as a hedge or insurance policy against extremely fast and sharp declines in the S&P 500. 

Improving your financial health is all about probabilities. When you combine all of the potential problems for the S&P 500, whether it is tepid global economic growth or shifts in the Federal Reserve’s monetary policy stance, having some insurance makes sense, considering the all-time highs that the market is currently facing. 

This article S&P 500 Approaching Inflection Point; How to “Insure” Your Portfolio was originally published at Daily Gains Letter

Two Underlying Factors You Need to Consider Before Buying Stocks

Two Underlying Factors You Need to Consider Before Buying Stocks
Two Underlying Factors You Need to Consider Before Buying Stocks
When many investors think of blue chip stocks, a common name that pops up is McDonalds Corporation (NYSE/MCD). 

A blue chip stock is traditionally a well-established company generating stable corporate earnings and usually paying out an attractive dividend yield. McDonald’s certainly hits the bull’s-eye on these blue chip metrics, which is especially attractive in today’s low-interest-rates world with its forward dividend yield of approximately 3.3%. 

The real question to ask is what is McDonald’s potential for corporate earnings growth over the next few years? 

There are two underlying factors that I would like to bring to your attention for consideration: 1) the financial health of the company’s primary customers, and 2) the cost of inputs.

While McDonald’s may keep its blue chip status, the growth of corporate earnings remains in doubt. As we all know, both the U.S. and global economy are becoming increasingly split between higher income and lower income people. As we know, neither the U.S. nor the global economy is firing on all cylinders, as seen by the still significantly high unemployment levels. 

Wages remain stagnant, and while companies can increase corporate earnings through share buybacks, at some point, revenues must accelerate. 

The problem for McDonald’s that could really impact corporate earnings growth is that the costs of inputs, specifically for beef, are rising substantially. The price of beef in February had the largest monthly increase since November of 2003. (Source: “CPI – Item Beef,” United States Department of Labor web site, last accessed March 19, 2014.) 

McDonald’s is already struggling with its one-dollar menu. The company has begun shifting its marketing strategy away from the “McDouble” cheeseburger to a new burger with just one beef patty, due to the rising beef costs. In fact, many McDonald’s franchisees have moved the price of the McDouble above its intended one-dollar price point, hoping to recoup losses from the higher costs. 

McDonalds Corp. NYSE Chart

 

      Chart courtesy of www.StockCharts.com

While this is just one factor, as an investor in blue chip stocks, it should be a consideration. We know that many Americans in the lower income bracket (who are key consumers for the fast food giant) are struggling; can McDonald’s push through higher prices to continue increasing corporate earnings? I think there is a definite limit to what the typical McDonald’s consumer will spend, and corporate earnings growth is not assured over the next few years. 

This is not to say that McDonald’s will do anything drastic, such as cutting its dividend yield, but if you are focused on capital appreciation, you do need to be worried that the company is being squeezed by higher input costs and a lack of ability to raise prices to customers. 

In comparison, I think this is why a stock such as Tiffany & Co. (NYSE/TIF) continues to outperform, since its primary customer is experiencing an increase in wealth and is beginning to spend. Corporate profits are also rising since many of Tiffany’s costs are from precious metals, which have dropped in price over the past year. This is a favorable scenario for corporate earnings growth—a customer who is becoming wealthier and input costs that are not rising substantially. 

When it comes to investing in blue chip stocks, make sure you know what your real goal is and your risk tolerance. Don’t simply assume or extrapolate what we’ve seen over the past couple of years will continue forever. 

McDonald’s has had a very strong move over the past decade, much better than many other blue chip stocks, and I would certainly look to take some profits ahead of potential corporate earnings headwinds and move into areas that offer greater possibilities for growth. 

This article Two Underlying Factors You Need to Consider Before Buying Stocks was originally published at Daily Gains Letter

How a Giant Chinese Tech IPO Will Benefit These Other Top Stocks

How a Giant Chinese Tech IPO Will Benefit These Other Top Stocks
How a Giant Chinese Tech IPO Will Benefit These Other Top Stocks
As many people know, one of the hottest areas in the market right now is technology stocks. Investor sentiment has continued piling into this sector—with good reason in some cases. 

The danger for investors is when investor sentiment becomes too bullish—technology stocks might be entering this territory. 

The latest of the technology stocks that has announced it is going public is the Chinese powerhouse Alibaba Group. Started in 1999 by a former English teacher, the company has now grown to be the largest e-commerce company in China and will soon be a public firm with a valuation of more than $140 billion. 

While it can be said that investor sentiment has become too enamored by recent technology stocks such as SnapChat, which doesn’t generate any revenue or earnings, Alibaba is a real business producing billions of dollars in revenue. 

For American investors, the biggest beneficiary of Alibaba has been Yahoo! Inc. (NASDAQ/YHOO). Over the past year, as rumors continued to circulate that Alibaba would go public, investor sentiment has become ever more bullish on Yahoo!, since the firm owns 24% of Alibaba. 

This could be a “buy on rumor, sell on fact” event, as investor sentiment has pushed Yahoo! to multiyear highs amid a backdrop of both positive investor sentiment towards technology stocks and a buildup in anticipation for the initial public offering (IPO) of Alibaba. 

If investor sentiment continues to be overly bullish for technology stocks in general and Alibaba specifically, what will happen is that the IPO price and the subsequent trading activity will capture a huge premium to the current business environment. 

This is great for Yahoo! at the moment, but if the current share price already incorporates the high valuation of Alibaba, what’s the next catalyst for Yahoo! itself? I think it’s questionable, considering the firm’s actual business model is having trouble growing revenue at all and competition continues to increase. 

With a forward price-to-earnings (P/E) ratio of almost 22 and trading at over eight-times its sales, I think these are pricey metrics considering that the fundamental business is not exactly on fire. Looking at other technology stocks, there appear to be several favorable comparisons where I would think about taking profits in Yahoo! and reallocating these funds into firms that are actually increasing revenue at a significant pace. 

Domestically, an obvious competitor is Google Inc. (NASDAQ/GOOG), which has a forward P/E ratio of over 19 and trades at 6.5X sales. While revenue has decelerated, it’s certainly growing at a faster rate than Yahoo! 

An international opportunity that has recently emerged is in Yandex N.V. (NASDAQ/YNDX). This is a leading search engine in Russia that has seen its shares drop due to the crisis in Ukraine. However, the company is growing revenue at almost 40% year-over-year, and it trades at a lower multiple than Yahoo! 

An important point to consider is where investor sentiment is for various technology stocks, and try to find opportunities when a stock becomes too bullish or too bearish. 

By taking advantage of investor sentiment moving to the extremes, one can look to take profits from technology stocks that have moved up rapidly and reallocate their capital to technology stocks that are experiencing short-term downdrafts. As long as the long-term fundamentals remain sound, short-term aberrations can become great long-term opportunities. 

While I believe Alibaba will be a great IPO success story for Yahoo! over the short term, once people begin to look at the underlying business again, it is possible that investor sentiment might begin to weaken from the lofty highs currently placed on that stock. 

This article How a Giant Chinese Tech IPO Will Benefit These Other Top Stocks was originally published at Daily Gains Letter

What’s Happening in the Copper Market Should Alarm You…

140314_DL_cekerevacThere is something going on right now in the copper market that should alarm you. Over the past week, the price of copper has plunged, recently hitting a four-year low.

Why should this matter?

Most investors and analysts are placing bets that economic growth is about to re-accelerate globally. Never before has the world been so interlinked, so we must pay attention to what is occurring internationally.

Copper is an important part of the potential for economic growth, not just because it is used in building and construction, but because it is also a major factor in the Chinese lending market, which is now showing severe strain leading to a potential debt crisis.

Remember, the last financial emergency was led by a debt crisis brought on by a housing bubble that eventually popped. High levels of debt creating a bubble are always dangerous, as the hangover is quite severe.

How does this impact economic growth for us here in America?

To begin with, we all know that the U.S. is doing relatively better than other parts of the world, but we are not exactly running at full speed. Any slowdown in economic growth—especially with a country as large as China—that is brought on by a debt crisis in that nation could severely impact our economy.

In China, the lending market is quite different than in North America, and firms have to rely on what’s called shadow banking.

Many firms in China have trouble borrowing, so they buy copper and use it as collateral. We are not talking about a small amount of money, as a shadow banking system in China is trillions of dollars large.

I believe a major part of the economic growth in China has been due to a massive increase in borrowing and spending, and this could be the beginning of a debt crisis. Just recently, China suffered it’s very first domestic bond default, and now investors are beginning to worry.

When a debt crisis pops, it certainly creates a drag on economic growth. The real estate bubble in America almost shut down the entire financial system, leading to a slowdown in economic growth both domestically and internationally.

Have any lessons been learned?

It doesn’t appear so, as debt continues to pile up in record numbers around the world. Any cracks within the system could actually be worse during the next debt crisis, since the total amount outstanding is even higher.

Take a look at this chart and tell me that economic growth internationally is doing just fine.

 

 

What’s Happening in the Copper Market Should Alarm You…
What’s Happening in the Copper Market Should Alarm You…

Chart courtesy of www.StockCharts.com

 

Clearly, something serious is occurring, and while it might be beginning as a small debt crisis in China, the impact could be felt worldwide.

China is the second-largest economy in the world, and any slowdown in economic growth certainly will be felt by other nations. But a debt crisis is not your typical cyclical slowdown. When bubbles that were fed by debt pop, it takes a very long time for the excess to be flushed out of the system.

The problem since the last debt crisis is that central banks and governments around the world believe that the solution to a debt problem is even more debt. As I wrote in a recent article, global debt is now over $100 trillion, a jump of 40% over the past few years. (See “How Global Debt of More Than $100 Trillion Is Threatening Your Portfolio.”)

Now we have a situation unfolding in China, where this massive borrowing scheme is beginning to unwind itself.

Is it any wonder why investors are moving back into gold bullion? It makes perfect sense in a world of such uncertainty to have at least some gold in your portfolio, because no one can predict (least of all, the central bankers) the full impact of the next debt crisis.

 

This article What’s Happening in the Copper Market Should Alarm You… was originally published at Daily Gains Letter

How Global Debt of More Than $100 Trillion Is Threatening Your Portfolio

There is a recent statistic that is quite shocking: the total amount of debt globally is now over $100 trillion, a jump of 40% over the last six years. 

According to the Bank for International Settlements, which is run by 60 central banks, since the financial crisis, the majority of the $100 trillion in debt has been issued by governments and nonfinancial corporations. (Source: “March 2014 quarterly review,” Bank for International Settlements web site, March 9, 2014.)

You would think that with such a huge amount being issued, it would drive interest rates higher amid a debt crisis. But as we all know, the exact opposite has occurred with interest rates still near historic lows.

What’s really shocking is that governments and corporations have borrowed and pumped out a massive amount of money, yet the global economy is barely moving. We know why corporations have issued the debt; with interest rates low, it does make sense to take advantage of the environment, borrow money, and fund share buybacks and dividends.

Of course, it makes one ask the question—if high levels of debt fueled the previous debt crisis, can we fundamentally solve this problem with even more debt? Not likely.

The real question for investors who are allocating capital to these markets is: are they suitable for long-term investors, or should we consider if a debt crisis is possible?

With the situation in Ukraine deteriorating along with other parts of the world, such as Venezuela, this is creating a flight to the perceived quality of the bond market in the developed world. However, long-term, I’m not so sure.

With the U.S. official debt now well over $17.0 trillion, $100 trillion is a massive amount of money. As we all know, the unfunded liabilities for America are much higher.

 

 

How Global Debt of More Than $100 Trillion Is Threatening Your Portfolio
How Global Debt of More Than $100 Trillion Is Threatening Your Portfolio

                                                Chart courtesy of www.StockCharts.com

We’ve already seen long-term interest rates begin creeping higher, as investors are beginning to anticipate that higher interest rates will eventually be coming. The real question is: how will investors react? This is always a question to consider if we are talking about a potential debt crisis.

Let’s be honest: for the most part, countries are not running budget surpluses, which means that it’s impossible for them to pay back all the money borrowed. I think that most governments would be quite happy to see inflation begin rising enough to inflate away this overhang before a full debt crisis explodes.

I don’t believe U.S. interest rates will surge anytime soon, because of the lack of available investments for institutions elsewhere. I do think interest rates will continue rising at a steady rate, which means I would avoid long-term fixed-income products.

I also think we are close to an inflection point when it comes to the velocity of money. Trillions of dollars have been printed, yet inflation remains relatively low. This is because the velocity of money has hit all-time lows.

In my opinion, we are coming to a point where inflation is about to begin to increase here in America. However, it’s a fine line between somewhat manageable inflation and an outright debt crisis. If things get out of hand and long-term interest rates begin rising, this will severely affect the economy.

Of course, none of this will happen tomorrow, as it takes time for these events to occur. As long as interest rates remain low, the rise in the stock market will continue. But I would begin taking precautions by adding some gold bullion to a well-diversified portfolio.

Making This “Difficult” Trade Now Could Set You Well Ahead of the Crowd

050314_DL_cekerevacOne of the most difficult things for an investor to do is look beyond the current environment. One of the biggest reasons that many investors underperform is because of their own human biases.

This is perfectly natural, as we tend to expect more of the same in terms of what has been recent history. In this way, investor sentiment becomes far too complacent.

Is there a way that you can take advantage when investor sentiment is causing the markets to be mispriced?

Absolutely, but you first need to have an understanding that this is indeed occurring. A perfect example over the past couple of years has been with gold bullion. During the run-up in gold bullion prices, investor sentiment became overly bullish as some people assumed that the price would continue rising forever.

Obviously, that’s completely unrealistic, but this led to a position where investor sentiment was leaning too far toward the bullish camp. Conversely, gold bullion in the second half of 2013 was the recipient of massive levels of negative investor sentiment.

In that case, people looked at the recent price trends for gold bullion and assumed that the sell-off would continue—again an unrealistic expectation, but a natural human reaction. There’s an old saying in the market that the right trade is the tough trade. When the market in gold bullion was selling off and very few people were talking about it, this negative investor sentiment was an excellent opportunity to begin accumulating, but it’s not easy to be contrary to the crowd.

The future is unknown, and a perfect example is the current situation occurring in Ukraine. With “pro-Russian forces” taking over the Crimean peninsula, the world is now watching a potentially catastrophic situation. Naturally, in times of uncertainty, people are also turning to gold bullion and investor sentiment is beginning to increase.

I really started becoming bullish on gold bullion at the end of 2013, not because I foresaw this conflict in the Ukraine, but because the level of investor sentiment became so bearish that the long-term risk-to-reward scenario for gold bullion was extremely attractive. This is a situation in which I am moving ahead of the crowd, not following or reacting to the current environment.

If the situation worsens between Russia and the Ukraine, I think gold bullion will continue increasing in price, which will create additional bullish investor sentiment. As the trend continues in favor of gold bullion, this reinforces the bullish investor sentiment, and this cycle continues until the environment becomes overbought. In that case, one needs to begin adjusting to the shift in investor sentiment by reducing exposure and moving towards areas in the market that offer value. The market is one big cycle, swinging back and forth on a pendulum of emotions

 

 Gold - Spot Price (EOD) Chart (1)

                                                Chart courtesy of www.StockCharts.com

 

The fact of the matter is that to be financially successful, you need to be dynamic in your approach, adjusting your portfolio to take advantage of these swings in investor sentiment. With the price of gold bullion now exceeding the 200-day moving average, this should help bring additional bullish investor sentiment into play, but remember: nothing moves in a straight line.

Following the bounce up off the lows in 2013, there will certainly be some consolidation of this move. The price might pull back slightly, but the next big test for gold bullion is the area just below $1,500. Overall, I think 2014 should be a positive year for gold bullion.

 

This article Making This “Difficult” Trade Now Could Set You Well Ahead of the Crowd was originally published at Daily Gains Letter

Resource Stock Pays Investors to Wait for a Rebound

Resource Stock Pays Investors to Wait for a Rebound
Resource Stock Pays Investors to Wait for a Rebound
When you are looking at your portfolio and considering making adjustments, it’s important to take into account not only the current environment, but what potential changes could occur in the future that can alter your investment strategy.

Here’s a perfect example of what I’m talking about:

We all know that Japan has been trying to lower its currency in an attempt to stimulate its economy.

What’s a side effect of a weaker economy? Higher import prices, and since Japan relies almost entirely on imported energy, costs are rising significantly, which is hurting the average Japanese citizen since wages are not increasing.

Just recently, Japan announced that it is now drafting a plan that will reopen nuclear power plants, allowing the country to rely on nuclear power for their core power production once again. (Source: Iwata, M., “Japan sees key role for nuclear power,” Wall Street Journal, February 25, 2014.)

We all know about the horrible disaster that occurred at the Fukushima Daiichi plant, but as much as Japan doesn’t want nuclear power, the country is finding that it has no alternative.

This is a significantly bullish scenario for uranium stocks. Obviously, following the disaster, corporate earnings for uranium stocks fell sharply along with the price of the commodity. The natural investment strategy was to avoid this sector until there was some clarity about the potential for a renewed interest in uranium, which should help drive corporate earnings.

It appears we are certainly turning the corner, as 17 nuclear power plants are currently being screened to be restarted by the Nuclear Regulation Authority. In total, Japan has 48 nuclear reactors, which had provided approximately 30% of all of Japan’s energy needs. Prior to the disaster, the Japanese government was looking to increase this reliance on nuclear power to 50%. Currently, no nuclear plants are operating.

What does this tell you and how do you incorporate this into an investment strategy?

As much as we all like the idea of clean energy, let’s be realistic in assessing the situation. There is no way we can immediately shut down all conventional forms of power generation, such as nuclear and coal, in favor of wind and solar.

While there is certainly potential for corporate earnings to be generated in clean energy in the long term, I think an investment strategy should continue to incorporate some of the traditional forms of energy production at this time.

 

 Cameco Corp. NYSE Chart

                                                Chart courtesy of www.StockCharts.com

 

Of the big uranium names, I do like Cameco Corporation (NYSE/CCJ). The firm is beginning to see an increase in revenue and corporate earnings, all before news broke of Japan returning to the market. With a 1.7% forward dividend yield, the investor is being paid to wait for a rebound, which is always a nice addition to an overall investment strategy.

Naturally, the uranium market is slow-moving, as it takes a long time before new reactors are put online and old ones are checked and retrofitted. Long-term, I like this area as part of an investment strategy, since the world continues to need energy. Corporate earnings should benefit not only from Japan, but also from countries like China that are adding new nuclear power plants over the next decade.

By looking at the realistic picture of the world, I think that one can generate an investment strategy in an area such as uranium that will benefit from higher demand and lead to strong corporate earnings over the next decade.

 

This article Resource Stock Pays Investors to Wait for a Rebound was originally published at Daily Gains Letter

What’s Happening in This Stock Market Reminds Me of 1999…

What’s Happening in This Stock Market Reminds Me of 1999…
What’s Happening in This Stock Market Reminds Me of 1999…
What year is this—1999?

Some of you might have been active investors in the bull market during the late 90s, as I was, witnessing the S&P 500 soar during that decade. In fact, the bull market was so strong back then that it created a false sense of confidence, as many people quit their regular jobs to become traders. As we all know, this didn’t last forever and the S&P 500 bull market popped and sold off sharply.

Just a couple of days ago, I read an interesting article about how small investors are back, seduced by the bull market, which has resulted in a very strong performance for the S&P 500 over the past few years.

There is nothing wrong with enjoying this bull market move, but when everyone thinks they are an exceptional trader over a short period of time, this worries me.

In the article, the active investor is an equipment salesman who is now “considering quitting his job to trade full time.” (Source: Light, J. and Steinberg, J., “Small Investors Jump Back into the Trading Game,” Wall Street Journal, February 21, 2014.)

This is what happens in a bull market; the consistent strength lulls people into believing they are somehow able to predict the future, when just a couple of years ago, they had no clue how to make money in the stock market.

That is the real test for investors—will your strategy work through a bear market as well as through a bull market? Just because you keep buying every dip in the S&P 500 and have, so far, been rewarded, this is not an actual investment strategy that will work over the long-term.

I fully advocate more people becoming long-term investors, but this trend to short-term speculation will eventually lead to significant losses. It’s only a matter of time. The market is cyclical, meaning every bull market ends and becomes a bear market, which then ends and becomes yet another bull market, and so on.

The largest factor for this bull market, in my opinion, has been the Federal Reserve and its easy monetary policy. We are clearly in the ninth inning of easy money policies, as the Federal Reserve has already begun reducing its asset purchase program.

How strong do you think the bull market will be in the second half of this year as investors begin pricing in higher interest rates in 2015? I think the S&P 500 will continue moving higher until we get clarity regarding the timing of the first interest rate hike.

Until interest rates start increasing, both in the short-term and long-term space, I would look to companies that are benefiting from the monetary policy programs.

 Blackstone Group LP NYSE Chart

                                                Chart courtesy of www.StockCharts.com

 

The shares of The Blackstone Group L.P. (NYSE/BX) have clearly been a strong performer over the past year, and they will continue to benefit from the global push by central banks to keep interest rates low.

Blackstone is a very diversified company that has investments in many sectors around the world. The company has become the largest rental play in America, spending billions of dollars on buying thousands of homes. We all know how strong real estate has been since the Federal Reserve has stepped in to support that market.

Now Blackstone is looking at real estate in other cheap markets, such as Spain. In fact, I think this is a good move, since the European Central Bank is more inclined to lower interest rates than raise them when compared to the Federal Reserve.

This bull market is getting old, but the game of musical chairs continues. So long as the Federal Reserve continues its easy monetary policy, the S&P 500 will benefit and the flow of funds will be pumped into the market. But once the music stops, I think the S&P 500 will suffer a significant shock.

I would continue to recommend investments such as Blackstone that are benefiting from easy monetary conditions globally, for as long as the conditions hold, these stocks should see their assets and revenue increase.

 

This article What’s Happening in This Stock Market Reminds Me of 1999… was originally published at Daily Gains Letter

Top Two ETFs for When Interest Rates Increase, Investor Sentiment Plummets

Top Two ETFs for When Interest Rates Increase, Investor Sentiment Plummets
Top Two ETFs for When Interest Rates Increase, Investor Sentiment Plummets
This past weekend, a friend of mine made a statement that there must be a large amount of economic growth coming shortly because of the booming stock market, driven by investor sentiment.

As I told him, the two are not necessarily tied together.

Over the past few months, we have heard about how economic growth is about to accelerate here in America, and this has helped drive investor sentiment in the stock market higher. However, I think there are many questions that need to be answered before we can assume economic growth will reach escape velocity, and investor sentiment is heavily contaminated with a large addiction to monetary policy.

Some of the data has improved; however, many other reports only lead to murkier water.

For example, we all know that economic growth requires the consumer to be active, since consumption is approximately 3/4 of the U.S. economy. But for the holiday season, many retail companies issued disappointing results, even though there were signs that consumer spending was beginning to pick up. This is an interesting data point: during the fourth quarter of 2013, consumer debt increased by $241 billion from the third quarter, the biggest jump in debt since 2007. (Source: “Quarterly report on household debt and credit,” Federal Reserve Bank of New York web site, last accessed February 19, 2014.)

Should investor sentiment view this increase in consumer debt as a positive or negative for economic growth?

A large amount of the debt increase came from the automobile industry, but what really worries me that could impact future economic growth is the combination of higher debt with weaker retail sales and inventory levels that continue to build up.

What this tells me is that businesses were too optimistic about the level of economic growth, since even though consumers ramped up spending, it wasn’t enough to buy all of the goods now sitting as inventory. Unless consumption ramps up, economic growth will slow, as there is a lower level of demand for manufacturing over the next few quarters. Essentially, economic growth was pulled forward.

Personally, I think investor sentiment will continue to look past many data points on economic growth and focus solely on the Federal Reserve. As long as the central bank is pumping money, investor sentiment will remain bullish.

However, what happens later this year when economic growth is tepid, yet not weak enough to alter the Federal Reserve’s stated goal of reducing monetary policy?

Investor sentiment could be setting up for a double whammy—the Federal Reserve that is on the margin pulling back on monetary stimulus, and economic growth that is not strong, but not weak either. In this scenario, companies will begin to feel the squeeze, resulting in a decrease in profit margins.

We are already seeing companies reporting a deceleration in earnings growth over the past four quarters. As economic growth is cyclical, investor sentiment could be severely impacted, especially as the market begins to price in higher interest rates.

As long as the market believes that the Federal Reserve will continue to keep interest rates low, investor sentiment will remain bullish. But as soon as there are indications that the Federal Reserve will move beyond reducing asset purchases and actually increasing interest rates, investor sentiment will be hit hard.

There are several things you can do to help adjust your portfolio. One is to add a hedge that goes up if the market moves down, such as the ProShares UltraShort S&P500 (NYSEArca/SDS), although this exchange-traded fund (ETF) works better over a shorter time period. Another method would be to add stocks that aren’t as economically sensitive, such as the SPDR S&P Biotech ETF (NYSEArca/XBI). With new innovative medicine being developed that isn’t based on the overall economy, as well as the potential for buyout activity, I think biotech stocks will continue to do well this year.

 

This article Top Two ETFs for When Interest Rates Increase, Investor Sentiment Plummets was originally published at Daily Gains Letter

What to Consider Before Investing in These Two Lesser-Known Precious Metals

What to Consider Before Investing in These Two Lesser-Known Precious Metals
What to Consider Before Investing in These Two Lesser-Known Precious Metals
I have been in this business a long time, and I believe that the best tactic is to combine as many positive factors as possible in order to have the highest probability of success.

There are essentially three main methods to look at; this includes fundamental analysis, technical analysis, and quantitative models. You don’t need every single category of analysis to be completed; you just need enough evidence from all to indicate whether or not a stock or index will move up or down. Obviously, there is no 100% guarantee, only a level of probability.

Taking a look at the precious metals market, over the past couple of months, there has been an increasing number of signals leading me to conclude that there is a good probability that precious metals will move up in price in 2014.

Two of these precious metals that have gotten me interested are platinum and palladium. The fundamental analysis in these precious metals includes determining the level of demand and supply globally.

The fundamental analysis of supply for these precious metals is quite interesting and sad, as protests and violence are escalating in South Africa. For those unaware, platinum and palladium are primarily extracted from South Africa and Russia. Any disruption in the supply from these regions will cause an adverse price reaction.

So far this year, there are more than 70,000 South African miners on strike who are looking for higher wages. There have been 10 deaths this year by protests demanding better living conditions. With the South African currency continuing to drop, inflation is rising, causing instability in their economy and the political system itself.

Looking at a situation from a fundamental analysis point of view, is it more or less likely that things will get resolved shortly? I think it’s very unlikely, as the political process anywhere takes quite a while. This will continue to create a bullish environment for precious metals, with the supply situation questionable and physical demand remaining strong.

That was a very brief overview of some of the types of things to consider when looking at fundamental analysis for precious metals.

Taking a look at the technical picture, the following chart for platinum shows that a reverse head-and-shoulders pattern is being formed.

 Platinum - Spot Price (EOD) Chart

                                                Chart courtesy of www.StockCharts.com

 

Many precious metals trade off of technical indicators as much as a fundamental analysis point of view. Several things are important to note in this chart, namely that the recent low was above the lows reached in December, and the important level to watch to see if platinum is to continue rising would be a break above 1,475.

A move above 1,475 would be significant in terms of relative resistance, and it would also lead to a sustained period of time above the 200-day moving average, which is also an indicator that many precious metals investors watch carefully. The next level of resistance would be just above approximately 1,550.

One factor I haven’t yet mentioned in the fundamental analysis of precious metals is a continued easy monetary stimulus being pumped by central banks around the world. While the Federal Reserve appears to be reducing its asset purchase program, the current monetary policy is still very easy. Not to mention that central banks in many parts of the world continue to pump money into the financial system.

Another way to invest in precious metals, such as platinum and palladium, can be through exchange-traded funds or a mining stock, such as Stillwater Mining Company (NYSE/SWC). Stillwater is an American company that is the largest producer of these precious metals (platinum and palladium) outside of Russia and South Africa. For investors looking for precious metals themselves, one option is the Sprott Physical Platinum and Palladium Trust (NYSEArca/SPPP).

All of these factors—combining the fundamental analysis along with the technical picture—point to a high probability that precious metals will have a strong year in 2014. Just remember: don’t simply take one factor into account when making an investment decision; instead, try looking for as many possible catalysts before allocating your hard-earned dollars.

 

This article What to Consider Before Investing in These Two Lesser-Known Precious Metals was originally published at Daily Gains Letter

Why I Recently Turned Bullish on Gold Mining Stocks

Why I Recently Turned Bullish on Gold Mining Stocks
Why I Recently Turned Bullish on Gold Mining Stocks

A friend of mine asked me the other day about the best way to build a long-term investment strategy. This is a great question, but it’s also one of the most difficult ones to answer.

Obviously, different people have various goals and objectives, especially when it comes to risks. For me, the way I put together an investment strategy is by looking to buy things when they are on sale, including stocks.

Over the past couple of months, if you’ve been following my articles, you’ve likely noticed that I’ve started to become quite bullish on gold mining stocks. This is the classic investment strategy of buying when most people are selling. When you consider the current sentiment, it’s clear that gold mining stocks haven’t experienced this much negativity in years.

Of course, you can’t simply have an investment strategy to buy any random stock or sector when it goes down; that’s doomed to fail. At some point, for the investment strategy to work, there must be some fundamental strength over the long term.

We all know about the pain felt by most gold mining stocks. But don’t forget: the market is a forward-looking mechanism. Your investment strategy should not focus on what’s happening today, but what is likely to occur over the next several quarters and even years.

Why did I recently become bullish on gold mining stocks?

I believe part of the reason for the significant weakness in the precious metal, especially in December, was due to institutions continuing to play the trends. You have to remember that large funds are measured by their performance (yearly and quarterly), and with a strong 2013, very few institutions would initiate an investment strategy of buying gold mining stocks right before year-end, as this could hurt their bonuses.

Over the last few months, we have also seen a large number of gold mining stocks write off bad investments and reduce expansion plans. This has naturally hurt the financial situation over the short term, but I believe most of the bad news has now been priced into the market.

When the stock market bottomed in March of 2009, it was a great time to buy, even though this was a very difficult investment strategy because of all the negativity around the state of the economy at that point. I think gold mining stocks are currently being met with a similar barrage of negativity, which is certainly warranted, considering the state of their businesses.

But as we all know, the business cycle oscillates, and I think gold mining stocks are now at a point where they have written off most of the bad assets and the stocks are pricing in a terrible environment. I’m considering gold mining stocks because very few investors are talking about an investment strategy in this sector, and I think there is the potential for a rise in the price of precious metals in 2014.

Market Vectors Gold Miners NYSE ChartChart courtesy of www.StockCharts.com

Above is a chart of the gold mining stocks exchange-traded fund the Market Vectors Gold Miners ETF (NYSEArca/GDX). Since gold mining stocks bottomed out in December 2013, the index has quickly moved up to the 200-day moving average. As I noted earlier, the investment strategy to accumulate at the end of 2013 was correct, as large institutions stayed out of the market.

With gold mining stocks moving up quickly to an initial area of resistance, we should see some consolidation before the market continues moving higher. I would keep my eye on the 50-day moving average, as a break below this technical indicator might trigger additional selling pressure and lower prices over the short term.

With gold mining stocks writing off bad assets, and physical demand still remaining quite strong, I think the risk/reward ratio remains in favor of having some allocation to this market sector as part of your investment strategy.

This article Why I Recently Turned Bullish on Gold Mining Stocks was originally published at Daily gains Letter

How the Trend Is Changing for Silver

How the Trend Is Changing for Silver
How the Trend Is Changing for Silver
One of the interesting things about investors is how so many become complacent over time. When precious metals like silver were rising steadily, more and more people jumped on the bandwagon. But times have changed.

With few people in the media talking about precious metals, I think it’s a good time to take a look at silver, as 2014 could potentially be a very strong year for the metal.

Obviously, we know that 2013 was a tough year for most of the precious metals, as investors began to believe that economic growth was going to accelerate globally. Over the last couple of months, it is clear that global economic growth is far from certain.

Uncertainty is an important component for the precious metals market, and we have seen silver react much more sharply than the other commodities, both to the upside and the downside.

As people become more uncertain, they look to assets that they believe can help protect their wealth. The emerging markets are getting hit badly, including Turkey hiking rates massively in one day, Argentina and Venezuela having serious issues, the Ukraine experiencing riots, and China now exhibiting signs of a slowdown in economic growth. Considering all of this, it’s no surprise that many people in nations around the world continue to accumulate precious metals, including silver.

An interesting note from last week made by the European Central Bank (ECB) president, Mario Draghi, in his comments following the central bank meeting is the possibility that there could be additional monetary stimulus (money printing) coming shortly.

With economic growth nowhere in sight in Europe, to have yet another central bank increase its monetary stimulus is just further proof of the uncertainty in this world. We still have the Bank of Japan pumping a huge amount of monetary stimulus into its economy to try and gain any economic growth, and even though the Federal Reserve is beginning to pull back on its asset purchase program, this is not a tightening, but simply a slowdown in the torrential flow of cash into the system.

 

 Silver - Spot Price Chart

                                Chart courtesy of www.StockCharts.com

 

Silver is about to hit a significant downtrend line going back from late 2012. If the price of silver can break this downtrend as well as its 200-day moving average, I think it’s highly likely it will attain the 38.2% retracement level at approximately $24.70.

Precious metals do tend to trade off technical indicators, and it’s helpful to use them as a roadmap. You will notice that this 38.2% retracement level for silver from the highs in 2012 to the lows in June 2013 were also pivot points in May and August of 2013. Another key level for silver, and many markets, is the 50% retracement level.

In a market, buyers and sellers move the price. For most of 2013, we saw a large amount of selling pressure in many precious metals markets, including silver. Over the past couple of months, it appears as though buyers are regaining this battle, and we could see prices move up, as there is less supply of silver at current levels.

If uncertainty continues to escalate globally, I think you will certainly see additional upside for silver as well as other precious metals like gold.

 

This article How the Trend Is Changing for Silver was originally published at Daily gains Letter

When Foreign Investors Pull Out of U.S. Bonds…

When Foreign Investors Pull Out of U.S. Bonds…
When Foreign Investors Pull Out of U.S. Bonds…
As everyone is celebrating the market at record highs, another record was just broken and no one appears to be celebrating it.

Of course, I’m talking about the fact that the U.S. government debt total has just exceeded $17.0 trillion.

No one should be really surprised, since we continue running deficits each year. This just means that our government debt will continue to climb, with no end in sight.

Government debt totaling $17.0 trillion is a staggering amount of money. That equates to almost $149,000 per taxpayer. Of course, this doesn’t include unfunded liabilities. When you add in Medicare, Social Security liabilities, and a vast assortment of other levels of government debt, the total is well over $100 trillion.

Again, this may not be much of a surprise to our readers, as most of you are aware of our government debt problem; what may be a surprise to many, however, is the continued global demand for U.S. bonds.

Because we have been able to sell U.S. bonds for so long to investors around the world, this has enabled us to keep spending and to procrastinate when it comes to getting our house in order.

However, I don’t believe this can go on forever. At some point, foreign investors are going to start getting worried that all those trillions of dollars they pumped into U.S. bonds might be worth a whole lot less in the future.

This political circus that we are witnessing in Washington just barely scratches the surface of how much work really needs to get done to solve our government debt problem.

Because the rest of the world is a mess, foreign investors continue to pile into U.S. bonds while hoping that our politicians can actually fix the problem. If you were a large foreign nation with hundreds of billions of dollars invested in our U.S. bonds, wouldn’t you at some point get nervous that you might not get your money back? I know I would be very nervous, especially at these low yields.

We’ve already seen China begin discussing moving away from the U.S. dollar as a reserve currency, and this would mean they could then begin shifting their investments away from U.S. bonds. Even a small, marginal shift would be massive for U.S. bonds.

What disturbs me is that none of these facts seem to worry politicians. They simply care about the next year or two. But piling on ever-higher levels of government debt just means that we are taking wealth from future generations.

If foreign investors do decide to diversify away from our government debt, selling U.S. bonds would mean higher interest rates. When a bond declines in price, interest rates increase (they move in opposite directions).

One type of investment to hedge and profit from higher interest rates is exchange-traded funds (ETFs) that move inversely with the price of U.S. bonds, which means they follow interest rates.

One such ETF is the ProShares UltraShort 20+ Year Treasury (NYSEArca/TBT). The chart of this ETF below also has the 30-year U.S. bond interest rate overlaid versus the price of this ETF. As you can see, from the summer of 2012, long-term interest rates moved from a low of approximately 2.46% to a recent high of 3.9%. During that time, this ETF moved from a low of $56.32 to a recent high of $82.80

ProShares UltraShort Chart

Chart courtesy of www.StockCharts.com

Just a note: many exchange-traded funds won’t move completely in sync, as there are lags and issues over a long period of time. The general idea is to look for ways to add assets to a portfolio that would actually move up if interest rates also increased.

The current $17.0-trillion government debt is just the tip of the iceberg. With over $100 trillion in unfunded liabilities and no real plan to fix this mess, over the next decade, I believe foreign investors will begin to sell U.S. bonds due to an ever-increasing government debt—meaning higher interest rates to come.

This article When Foreign Investors Pull Out of U.S. Bonds… originally published at Investment Contrarians by Sasha Cekerevac

Why Having Cash Sitting Idle May Be Your Best Investment Strategy Right Now

Why Having Cash Sitting Idle May Be Your Best Investment Strategy Right Now
Why Having Cash Sitting Idle May Be Your Best Investment Strategy Right Now
Another day and another record-high stock market is what it seems like these days. That must mean that the economic recovery in America is close at hand, right?

Not so fast; the data on job creation appears to show that the situation is actually worsening.

Job creation is crucial to this economic recovery. While it is true that job creation is a lagging indicator, we do need to see an increase to verify whether or not the economic recovery is actually accelerating.

While the stock market might be cheering the Federal Reserve’s decision to continue pumping out money, I worry that all of this excess cash is losing its effectiveness. We are not seeing any positive impact of this monetary policy on Main Street, and things are beginning to deteriorate.

The latest monthly release of the ADP National Employment Report, produced by Automatic Data Processing, Inc. (NASDAQ/ADP), showed that job creation from September to October amounted to just 130,000 new positions, worse than the expected 151,000. (Source: Automated Data Processing, Inc. web site, October 30, 2013.)

I know what you’re going to say: this decline in job creation is not a sign of a poor economic recovery, but rather a result of the U.S. government shutdown.

If that’s true, then why has job creation been decelerating for the past few months? Take a look at the job creation table below, and tell me whether our economic recovery is accelerating or decelerating:

Month Nonfarm Private Employment
Jun-13 190,000
Jul-13 161,000
Aug-13 151,000
Sep-13 145,000
Oct-13 130,000

While I would agree that the government shutdown did impact the economic recovery, that’s just an excuse. There is no way that business owners began worrying about a two-week government shutdown in July

In reality, it’s quite disappointing, since there was a glimmer of hope last winter that perhaps the economic recovery might take hold and job creation would begin accelerating. Looking at the past few months, I don’t know how anyone believes that our economy is on the verge of booming.

Compare the last few months of private sector job creation to the stock markets, like the S&P 500.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Clearly, there is a vast difference between the trend over the past few months in our economic recovery and the stock market.

While there were positive signs that perhaps job creation was about to pick up at several points over the past year and a half, clearly since the summer, we have seen very little encouraging news.

If job creation and a strong economic recovery aren’t pushing up stocks, what is?

I believe the vast majority of the move up this year has been primarily generated by the Federal Reserve and its easy monetary policy.

The Federal Reserve’s goal was to improve job creation. However, things appear to be worsening. If the Federal Reserve has its foot on the gas and the economic recovery sputters and fails, what other options are really left?

That’s a real concern for me, since the emergency action taken by the Federal Reserve has been overused. It is now creating bubbles in many markets, and as you see, it’s having little impact on job creation.

Bubbles are fun on the way up, but they’re painful when they pop.

With the stock market at all-time highs and the economic recovery failing to accelerate, something has to give. We can’t continue having an ever-higher stock market on ever-decelerating job creation and companies are having difficulty growing revenue.

As I stated over the past couple of months, trying to time a market top is impossible, but I believe we are getting ever closer to a peak in the market. I would recommend taking profits and raising cash. Yes, I do realize that you don’t want to have funds sitting idle, but impatience and “rushing” to follow the herd is never a good long-term strategy.

This article Why Having Cash Sitting Idle May Be Your Best Investment Strategy Right Now originally published at Investment Contrarians by Sasha Cekerevac

BlackRock CEO Reports QE Causing Bubbles in Markets

BlackRock CEO Reports QE Causing Bubbles in Markets
BlackRock CEO Reports QE Causing Bubbles in Markets
As most readers know, I have been calling for a reduction in the Federal Reserve’s quantitative easing (QE) program for some time. My worry has been that the current level of quantitative easing is not doing much to help Main Street, and it is building potentially dangerous risks to our economy over the long term.

I’m worried about the future of this country, and yes, even my investments. I don’t want my hard-earned wealth to disappear due to mistakes made by the Federal Reserve in continuing to pump quantitative easing.

And I’m obviously not alone in this sentiment, as recently the CEO of BlackRock, Inc. (NYSE/BLK), Laurence Fink, stated that the Federal Reserve’s current quantitative easing policy is creating bubbles in various markets. (Source: Bloomberg, October 29, 2013.)

Fink’s opinion that the Federal Reserve should begin tapering quantitative easing immediately comes from the long-term viewpoint of the overall economy and the damage that is being done. Even though money managers like Fink might benefit from quantitative easing over the short term from the boost in asset prices, if bubbles get bigger, the damage over the long term could be extremely serious.

This has been my viewpoint for some time. Sure, it’s great that the market has gone up recently, but if it’s not sustainable, what’s the point?

Much like real estate a decade ago, we all enjoyed the party on the way up, but the hangover has taken years to work off.

Because the Federal Reserve has been so aggressive in its quantitative easing policy, it’s not just the stock market that is going up. Investors who are desperate for yields are piling into even the riskiest of assets, just to try and get some income.

This is where things can get dangerous. It goes beyond just one investor losing their hard-earned wealth. What about pension plans that are now placing your funds into junk bonds for just marginal yields?

The long-term implications of such an aggressive quantitative easing program by the Federal Reserve are unknown, as the central bank has never made such drastic moves in its history. We are in uncharted waters, and that’s a dangerous place to be.

Ultimately, reality will set in whether the Federal Reserve likes it or not. In fact, the Federal Reserve might lose the ability to impact the long-term bond market if foreign investors decide to pull out.

This means that even if the Federal Reserve continued pumping quantitative easing into the U.S. economy and short-term interest rates remained low, if investors in long-term bonds decide to sell, long-term interest rates will rise.

As well as increased interest rates, all of this excess quantitative easing could eventually lead to inflation moving significantly higher. This, too, would result in ever-higher long-term interest rates.

The fact of the matter is that no one knows what will happen, since the Federal Reserve has never taken such unorthodox action.

I think that over the next few years, we will see higher interest rates. One way investors can profit from a drop in bond prices (when bonds drop in price, interest rates move up) is through an inverse exchange-traded fund, such as ProShare Ultrashort 20+ Year Treasury (NYSEArca/TBT).

Of course, another approach is to diversify your investments by including such assets as gold or silver, which obviously can’t be printed at will. Regardless of what foreign investors do with our bonds, we know they can’t get enough gold and silver.

This article BlackRock CEO Reports QE Causing Bubbles in Markets originally published at Investment Contrarians by Sasha Cekerevac

Why Investors Are Piling into This $3.5-Billion Tech Stock with No Revenue…

Why Investors Are Piling into This $3.5-Billion Tech Stock with No Revenue…
Why Investors Are Piling into This $3.5-Billion Tech Stock with No Revenue…
As someone who’s been involved in this business for many years, one thing that never surprises me is that people make the same mistakes over and over again.

Taking a look at different sectors, it’s quite interesting to see how market sentiment has gotten so poor in one area but is so exuberant in another. The funny part is that corporate earnings appear to have nothing to do with the current level of market sentiment.

Investors who have been in the markets for a while will remember the “dot-com” bubble of the late 90s. During that time period, market sentiment for any stocks that had “.com” in the name was through the roof in optimism. Sure, the stocks had no corporate earnings or real path to generating corporate earnings, but the web sites had plenty of viewers.

It’s too bad that views on a web site don’t translate into corporate earnings or cash.

We all know what happened next: reality eventually hit market sentiment, and these high-tech flyers crashed hard.

Ah, but this time is different, you might say.

It is true that many of the high-tech companies are extremely strong fundamentally, generating high levels of corporate earnings, including firms like Google Inc. (NASDAQ/GOOG). However, it appears we are reaching a level of market sentiment frenzy in technology stocks that I haven’t seen since the late 90s.

The latest example is a report that the company Snapchat, Inc. has just secured an additional round of financing that values the company at $3.6 billion! (Source: “Snapchat Is Mulling Another Huge Round at a $3.5 Billion Valuation,” AllThingsD.com, October 25, 2013.)

You might ask, what’s wrong with a $3.6 billion valuation for a company?

Valuing a private company can be difficult, especially one that is growing revenue and corporate earnings. However, there’s one slight problem with trying to value Snapchat: it has neither revenue nor corporate earnings! (That’s not a misprint.)

While the firm is private and we don’t know for sure, sources say the company essentially has no source of revenue. That’s right; the company with absolutely no revenue and certainly no corporate earnings is being valued at $3.6 billion. Yet companies that actually make products and sell them are seeing market sentiment decline and their stocks languish.

Perhaps I’m a bit old-fashioned, but I like investing in companies that actually generate revenue and even corporate earnings. But my point is not to be negative on Snapchat; I certainly wish the company all the best. I’m simply trying to point out that market sentiment has gotten skewed, as investors have moved away from looking at fundamentally strong companies that actually generate corporate earnings to simply gambling and hoping that the next high-tech company can quickly give them a profit.

Just as we saw over a decade ago, this type of short-term thinking does not work. To see the stock price collapse in companies with no corporate earnings won’t surprise me. However, at some point over the next decade, we will see fundamentals emerge and the focus will once again be on companies with strong corporate earnings. Of that I am certain; timing it is a whole other matter.

With the market at multiyear highs and more firms reporting trouble generating corporate earnings growth, I really don’t believe the answer is to start looking for firms that have no potential for generating real revenue or corporate earnings.

As a long-term investor, these types of stories worry me, as they indicate that market sentiment is beginning to become frothy. Calling a market top is always dangerous, as the market can continue being irrational for some time. Don’t forget, the bubble in the dot-com stocks lasted for several years.

I would look to begin raising cash by getting out of the highflyers that have outperformed this year. I would also look at the market laggards. One sector that has been hammered over the past year has been mining stocks. I think over the next decade, it’s far more likely that mining stocks will still be around as compared to some company that makes an application for teenagers to take pictures of themselves.

This article Why Investors Are Piling into This $3.5-Billion Tech Stock with No Revenue… originally published at Investment Contrarians by Sasha Cekerevac

How to Protect Your Portfolio as Government Debt Cripples America

How to Protect Your Portfolio as Government Debt Cripples America
How to Protect Your Portfolio as Government Debt Cripples America
Whenever I’m asked what I think has the biggest potential impact not only on the stock market, but also on our way of life, I always point to the continued increase in government debt.

Over the short term, the Federal Reserve has attempted to stimulate the economy partially by buying U.S. Treasuries. Under normal monetary policy, the Federal Reserve only directly impacts short-term interest rates. To reduce long-term interest rates, the Fed began buying U.S. Treasuries, pushing up the price and lowering the yield.

Over the short term, we can look around today and notice that the sky is not falling. However, as government debt continues to pile on, approaching $17.0 trillion (which doesn’t include unfunded liabilities), at some point, this will impact not only U.S. Treasuries, but also our entire economy.

Part of the reason that U.S. Treasuries are still in demand worldwide is that the U.S. dollar remains a reserve currency. There are benefits from a logistical standpoint in conducting business using the reserve currency to also use U.S. Treasuries for investment purposes.

However, as I’ve mentioned in other articles, large investors in U.S. Treasuries, such as China, are increasingly calling for a new global financial system that relies less on the U.S. dollar.

That sentiment alone should shock the politicians into action and make them realize that our biggest lenders, the ones buying our U.S. Treasuries, are questioning our ability to manage the rising pile of government debt.

The most recent data from August was that China actually reduced its holdings in U.S. Treasuries to a six-month low, according to the U.S. Department of the Treasury. (Source: “Major Foreign Holders of Treasury Securities,” U.S. Department of the Treasury, October 22, 2013.)

China still remains the biggest holder of U.S. Treasuries, and our continued accumulation of government debt certainly must be a worry to not only China, but the rest of the world, as well. After all, as the reserve currency and leading economic power, how we run our economy will make an impression on the rest of the world. The way we’re going now, it appears we’re running our economy into the ground.

Is this reduction in U.S. Treasuries by China just a temporary blip or will foreign investors once again begin buying up our government debt going forward?

Over the short term, these types of variables are difficult to predict. As I said before, we are lucky that the rest of the world is in such a mess. However, that is no excuse for continuing to add on ever-increasing levels of government debt.

Look, we can’t be hypocritical and look down our noses at nations like Greece, which also ran up its level of government debt until it was unsustainable. While we are obviously much stronger as a nation, we are nevertheless on the same path.

It is true; the budget deficit has been cut significantly. But when was the last time any politician talked about generating significant budget surpluses to actually begin paying down our government debt? It’s almost as if politicians don’t even know the word “surplus” exists.

One way for government debt to be reduced, other than actually paying it back, is through inflation. By creating inflation, the government debt is paid off with tomorrow’s dollars, which have less buying power.

What’s an investor to do?

While diversifying into other currencies would be one way to hedge, there aren’t any strong alternatives at this point. I might consider the euro if the weaker nations were to leave and only strong nations like Germany remained; however, I don’t see this occurring anytime soon.

The other option would be to buy assets that move up with inflation, and this certainly includes precious metals, such as gold and silver. From what I see, diversifying your portfolio into a variety of assets that include some hedge protection against inflation is a prudent course of action at this point.

This article How to Protect Your Portfolio as Government Debt Cripples America originally published at Investment Contrarians by Sasha Cekerevac

Two Precious Metals with a Compelling Supply-Demand Dynamic

Two Precious Metals with a Compelling Supply-Demand Dynamic
Two Precious Metals with a Compelling Supply-Demand Dynamic
As readers of Investment Contrarians are probably well aware, precious metals have been hit hard this year. Along with the drop in the price of precious metals, mining stocks have also significantly declined in price.

However, I think we might be entering a period of increased demand that should see higher prices for the precious metals sector and the associated mining stocks.

Longtime readers won’t be surprised when I mention two precious metals that are developing increased demand from industrial use: platinum and palladium.

In past articles, I have written extensively on both of these white precious metals and that there will be significant imbalances in the market—not the financial (paper) market, but actual physical demand for these precious metals.

As the majority of demand for both of these precious metals comes from industrial use, specifically in the construction of catalytic converters for the automotive industry, it’s quite easy to see where demand and supply will be moving forward.

Mining stocks involved in both of these precious metals are having difficulty increasing supply. The two nations that supply most of these two precious metals are Russia and South Africa. Mining stocks have had a significant amount of trouble over the past year especially in South Africa, with labor issues causing disruptions in production and higher costs.

Demand comes from vehicle sales, and with the cheap money being pumped worldwide, this means affordable financing for millions of people. As you probably know, car sales in America are booming once again. But a huge market over the next decade will be China.

When you consider there are still hundreds of millions of people who don’t have a car but will, over the next decade, likely begin buying vehicles, there is a huge potential opportunity here. And it’s a strong driver of demand for both platinum and palladium.

While most precious metals have suffered this year, palladium is actually positive year-to-date and close to its highs. This just shows how strong industrial demand is and how low supply is coming from the mining stocks.

However, this is one difficult situation with both of these precious metals, since many of the mining stocks involved in producing both platinum and palladium are located in South Africa. Because of the potential for labor strikes, costs are beginning to rise and supply is not guaranteed.

While supply disruptions might be positive for the price of the actual commodity, mining stocks themselves could face pressure in earnings if a violent strike were to erupt in South Africa. Last year, there were labor clashes and even deaths involved, with the related mining stocks ultimately raising salaries.

In my opinion, both of these precious metals will be priced much higher over the next decade, simply from the increased demand and lack of new supply. However, one needs to be careful to avoid mining stocks in that region, as they could be extremely volatile.

There are two ways to consider investing in these precious metals. One is through a company called Stillwater Mining Company (NYSE/SWC), which is an American-based firm that not only produces platinum and palladium from mining operations, but also has recycling facilities for spent catalytic converters. The company is the largest producer of platinum and palladium outside Russia and South Africa.

Another option for playing mining stocks in this area is The Sprott Physical Platinum and Palladium Trust (NYSEArca/SPPP), a closed-end fund that holds both metals physically.

Let’s face it: both of these precious metals are difficult to find and are located in only a few places around the world. We simply can’t print more platinum and palladium. However, industrial demand will continue to rise, especially as hundreds of millions of people start driving cars. The supply-demand dynamic over the next decade is quite compelling, in my opinion, for mining stocks in both of these precious metals.

This article Two Precious Metals with a Compelling Supply-Demand Dynamic originally published at Investment Contrarians by Sasha Cekerevac

What Caterpillar’s Big Drop in Earnings Means for the General Stock Market

What Caterpillar’s Big Drop in Earnings Means for the General Stock Market
What Caterpillar’s Big Drop in Earnings Means for the General Stock Market
With the S&P 500 hovering around its all-time highs, I think it’s quite interesting to read some of the latest corporate earnings reports and get a sense of what’s really happening in the global economy.

One of the most international companies within the S&P 500 is Caterpillar Inc. (NYSE/CAT). The firm recently released its third-quarter 2013 corporate earnings report, in which the firm poured some cold water on expectations. Revenue during the quarter was down 18% year-over-year, and corporate earnings were down 44% year-over-year. (Source: Caterpillar Inc., October 23, 2013.)

That’s not even the worst part. The company also brought down guidance for both revenue and corporate earnings for the foreseeable future.

In its corporate earnings release, Caterpillar cites several issues that it’s worried about, including uncertainty regarding U.S. fiscal and monetary policy, the health of economic regions globally (including the eurozone and China), and a lack of demand from customers.

Because revenue and corporate earnings growth is questionable, the company is taking the only smart action it can—reducing its own cost base. Obviously, no company can force a customer to buy their product, but it can keep its operations as lean as possible. To that end, the firm has cut 13,000 jobs globally over the past year, reduced pay and incentives, and initiated the “implementation of general austerity measures across the company.”

Considering Caterpillar is a large firm within the S&P 500 and it has its fingers on the pulse of the global economy, do any of these comments give you hope or confidence that either the domestic or international economies are about to surge upward in growth? Not to me, it doesn’t.

This is where I raise serious questions about the strength and health of the S&P 500. Caterpillar is one of the largest international companies, a component of the S&P 500, and would not be issuing such a weak forward guidance regarding potential for corporate earnings growth unless management was truly concerned about the future.

CAT Caterpillar Chart

 Chart courtesy of www.StockCharts.com

I think that the chart above, which places the price of Caterpillar against the price of the S&P 500 (black line), is very interesting. From late 2006 until early 2008, the S&P 500 moved far ahead of the price of Caterpillar. Then, there was a convergence and both the S&P 500 and Caterpillar literally moved lockstep until the middle of 2010, when Caterpillar outperformed.

From 2010 until mid-2012, Caterpillar continued to diverge from the S&P 500, primarily due to the strong corporate earnings gained from selling equipment to mining companies. Currently, the S&P 500 has continued moving higher, while Caterpillar has stalled.

Generally speaking, markets tend to overshoot, moving from oversold into overbought territory. After reading the outlook for corporate earnings and revenue given by company management, it’s hard to logically believe that Caterpillar’s stock price will accelerate.

If that’s the case, is it more likely that the S&P 500 will decline in order to revert to the mean? In my opinion, if a company that has extensive operations around the world is telling me that it’s extremely cautious about the outlook, I find it hard to recommend investors put new money into the S&P 500 at such lofty levels.

In fact, I think many of these concerns are legitimate, and you will see more companies having difficulty increasing revenue and corporate earnings going forward. While the market is being fueled by cheap money from central banks, at some point, corporate earnings will matter.

Similar to a balloon, it takes quite a bit of work to keep pumping up the numbers, but it deflates very quickly.

To help protect your portfolio, advanced investors might consider using options, such as buying puts, which move up in value when the market or stock declines. Another possibility is buying an inverse exchange-traded fund (ETF) like the ProShares UltraShort S&P500 (NYSEArca/SDS). A note on some of these inverse ETFs: they are great for the short-term, but not well suited to long-term holdings, as they can erode in value and not mimic the exact inverse relationship between the underlying asset and the ETF price.

This article What Caterpillar’s Big Drop in Earnings Means for the General Stock Market originally published at Investment Contrarians by Sasha Cekerevac

How to Invest in This Fundamentally Broken Economy

How to Invest in This Fundamentally Broken Economy
How to Invest in This Fundamentally Broken Economy
Well, the latest numbers related to job creation were recently released and to no one’s surprise, they were worse than expected.

For the month of September, job creation totaled 148,000, down from expectations of 180,000. (Source: Bureau of Labor Statistics, October 22, 2013.) While most people are simply writing off the latest data by saying that the U.S. government shutdown was the primary reason for the lack of job creation, I think there’s much more going on behind the scenes than simply a couple of weeks of not going to work.

This lack of job creation extends beyond simply the past few weeks; the trend over the past couple of years has remained far below potential. Even with the Federal Reserve throwing literally trillions of dollars into the U.S. economy for the past few years, there are no signs of life.

However, looking at the total level of job creation is not enough. Two other key figures you should pay attention to in addition to the total level of job creation are wages and hours worked. The Federal Reserve takes these additional metrics into account when trying to develop a picture of the economy.

The average hourly earnings increased by 0.1% in September, slightly below expectations of 0.2% from the previous month. The average hourly workweek did not change at 34.5 hours.

I don’t know about you, but seeing a mere 0.1% increase in my pay would not cause me to run out and spend more money or feel more secure about my financial future.

Before job creation takes place, you will usually notice hours increasing as employers use existing workers for longer hours through overtime, rather than hiring new employees right off the bat. Therefore, the fact that average hours worked per week is not rising indicates that businesses are not seeing an increase in demand for their products.

If this is the net result stemming from the most aggressive monetary policy ever put in place by the Federal Reserve, I can only think of one word to describe the situation: pathetic.

Even though the lack of job creation shows that our economy remains weak, stocks are moving upward. This tells me that people aren’t buying stocks based on true fundamentals, but because of the promise of continued Federal Reserve-induced stimulus.

The problem now for the Federal Reserve is that they are running out of arrows in their quiver. I think that the Federal Reserve’s monetary policy is losing its effectiveness—meaning, the central bank is pushing on a string. At some point, this will begin to impact stocks.

However, once the Federal Reserve begins to reduce its aggressive monetary policy stance, I think the economy and job creation will get hit significantly.

Look at it this way: if job creation was only at 148,000 new positions last month with the most aggressive monetary policy stance by the Federal Reserve in history, does that give you any confidence that the U.S. economy can stand on its own two legs?

Not to me, it doesn’t, as it appears that the fundamental nature of the economy is broken and needs significant structural reforms. But try telling that to the stock market.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

You would think that with a weak economy, muted job creation, and no real income growth, the stock market would have trouble moving higher—wrong. The S&P 500 is at its all-time highs.

While the market was oversold in 2009, I would say most of this year’s move has been fueled by the Federal Reserve’s monetary stimulus.

Considering where the job creation is today, I would certainly look at raising cash, because at some point, the fundamental picture of the economy will begin to impact the stock market and bring prices back down to reality.

This article How to Invest in This Fundamentally Broken Economy originally published at Investment Contrarians by Sasha Cekerevac