Last Wednesday, the market suffered a big sell-off, thanks in large part to rumblings from the Federal Reserve that the punch bowl of easy money will, at some point, be taken away from Wall Street. Then on Monday, word of what's being called a "hung parliament" after the tumultuous Italian election rocked equities here at home, and that caused stocks to fall more than 200 Dow points.
On Tuesday, and again today, stocks have come back and regained their bullish mojo, and that's due largely to Fed Chairman Ben Bernanke and his testimony to Congress. The central bank chief made it quite clear that the easy money spigot isn't going to be turned off anytime soon. Hence, we're seeing a resumption of the pell-mell buying across the board.
Still, the latest bout of selling on what I call "real news" is something that's telling me a change in the zeitgeist of the market is taking shape. In fact, I see the last two big down days as the beginning of a correction in the works. Given the extreme run higher in stocks so far this year, a correction could be very painful for those with excessive equity exposure.
So, what "real news" events are going to keep putting pressure on this market going forward?
First off, the hike in the payroll tax of 2% already has put pressure on discount retailers such as bellwether Wal-Mart (WMT), and I suspect the real pain of this tax will be felt once discount retailers begin coming in with first quarter earnings in April. Then we have higher gasoline prices, which keep going up, up, up. In fact, according to AAA, last week the national average for a gallon of regular unleaded gasoline was $3.78, which is one of the highest on record for February. Moreover, up until last week, we saw gasoline prices rise for 36 consecutive days, the longest such string of increases in nearly two years.
The latest point of real-news worry for investors is the so-called sequestration, which will trigger automatic federal spending cuts this Friday if the president and Congress can't come to an agreement on a deficit reduction package. According to the nonpartisan Congressional Budget Office, the automatic spending cuts set to begin March 1 will slow economic growth by 0.6% and cut 750,000 jobs.
All of these headwinds, along with the grossly overbought equity market, make me extremely cautious about this market going forward. As such, I think now is not the time to tempt fate and buy in.
Finally, what passes for real news out there in the financial media these days really just amounts to an endless parade of bullish talking heads promoting the "buy, buy, buy" Wall Street party line. Rarely do I see anyone talking about how to accomplish the goal of getting safe, rational returns.
I've always been of the opinion that protecting assets and getting rational returns on your money is the best way to invest. In fact, one of the goals of the Alert, and of my Successful Investing advisory service, is to help you do just that.
So, don't believe the hype or the bullish heads out there. Study the real news, and act accordingly.
ETF Talk: This Fund Could be a Gas
High and rising gas prices, causing pain at the pump, are sweeping across the nation like an epidemic right now. And while the contagion surely has spread to you and me, the best revenge could be to capitalize on this trend by investing in oil and gas companies. For the next few weeks, we will discuss exchange-traded funds (ETFs) which focus on different segments of the energy industry. We start today with the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
This non-diversified fund seeks investment results which, before fees and expenses, correspond generally to the performance of an index derived from the oil and gas exploration and production segment of a U.S. total market index. While XOP is similar to PXE, a recent ETF Talk pick, this week's fund differentiates itself from the latter's exclusive focus on a 30-company index by tracking a much broader index. This broadened approach makes the fund more stable. Its price fluctuations, both positive and negative, generally should not be as large as those of a fund with a narrower investment focus.
After a steady 2012, XOP has gained 1.82% so far this year. And, as the chart below shows, the fund has recovered nicely since last June. For those of you interested in dividend income, XOP offers a yield of 1.13%. Oil prices can go one of two ways. If they rise, then XOP will benefit. If they go down due to exploration into new American sources and production methods, like fracking, being allowed and becoming common, then XOP will make further gains.
As an energy ETF, the vast majority, 98.75%, of XOP's holdings are in the energy sector. The balance resides in the basic materials sector. However, no single company dominates the ETF's assets, and no company composes more than 2% of XOP's total assets. Its top 10 holdings make up only 16.46% of the fund's investment. The top five are Valero Energy Corporation (VLO), 1.74%; Hess Corporation (HES), 1.73%; Delek US Holdings, Inc. (DK), 1.72%; CVR Energy Inc. (CVI), 1.66%; and Rosetta Resources Inc. (ROSE), 1.65%.
As demand for energy in the form of oil and gas will rise for quite some time, both exploration and production of those energy sources will continue to be valuable. As XOP has its invisible hand in a broad spectrum of companies across the energy sector and industry, it also will do well, especially in light of the win-win situation mentioned above.
If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.
Schwab ETFs Lower the Bar on Expenses
By David Fabian
I recently attended an industry event hosted by discount brokerage pioneer Charles Schwab that highlighted the company's line of exchange-traded fund offerings. The hosts meticulously outlined the history, track record, and asset allocation of their funds, which feature 15 well-known index-based strategies. While none of the funds were earth-shatteringly unique in their construction, they all can be used as tools that investors can tap to help build a well-diversified portfolio.
According to www.schwabetfs.com, these funds are "designed to be core building blocks of a diversified portfolio. Each fund provides exposure to a specific segment of the market, offering low cost, trading flexibility, and transparency."
The Schwab ETFs have some of the lowest internal expense ratios in the industry with their Broad Market and Large Cap funds charging only 0.04% annually. In addition, investors who purchase these ETFs from their Schwab brokerage accounts are able to buy and sell the funds without being charged a transaction fee.
Domestic Equity ETFs
Schwab U.S. Broad Market ETF™
Schwab U.S. Large-Cap ETF™
Schwab U.S. Large-Cap Growth ETF™
Schwab U.S. Large-Cap Value ETF™
Schwab U.S. Dividend Equity ETF™
Schwab U.S. Mid-Cap ETF™
Schwab U.S. Small-Cap ETF™
Schwab US REIT ETF™
Domestic Equity ETFs
Schwab International Equity ETF™
Schwab International Small-Cap Equity ETF™
Schwab Emerging Markets Equity ETF™
Fixed Income ETFs
Schwab U.S. Aggregate Bond ETF™
Schwab Short-Term U.S. Treasury ETF™
Schwab Intermediate-Term U.S. Treasury ETF™
Schwab U.S. TIPS ETF™
I was surprised to hear that the Schwab ETF family now has surpassed the $100 billion mark in total assets, and that puts the investment firm in a position to control approximately 10% of total ETF dollars domestically. Clearly, Schwab has done an excellent job of marketing their funds' rock-bottom expenses to investors, both to its own client base, as well as to non-Schwab clients.
Schwab currently boasts eight domestic funds, three international funds, and four bond funds (see the table above). However, the Schwab ETF expert giving the presentation did mention that the company has several more funds in registration that will be available soon.
If you are a cost-conscious ETF investor, then I recommend giving these funds thorough consideration when building a diversified portfolio.
Careful What You Read
"If you don't read the newspaper you are uninformed. If you do, you are misinformed."
The great American writer had one of the best takes on the media that I've ever read, and his words are truer now than they've ever been. The lesson here: Be very careful about what you read.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.