The Federal Reserve Open Market Committee (FOMC) acted as just about everyone expected, serving up a dovish dose of more of the same when it comes to monetary policy. The Fed kept its $85 billion per month quantitative easing (QE) program, while leaving interest rates unchanged.
The only thing different about this Fed meeting was the actual makeup of the FOMC. There are four new voting members on the committee -- James Bullard, Eric Rosengren, Charles Evans and Esther George. The new voting members replace Jeffery Lacker, Sandra Pianalto, Dennis Lockhart and John Williams.
Interestingly, the makeup of the FOMC, in terms of members considered to be dovish vs. hawkish, hasn’t changed with the rotation. In fact, Esther George took over the Jeffrey Lacker role as the lone dissenter on keeping rates unchanged. George warned that the Fed’s policies are setting us up for inflation, which in my opinion is the single biggest no-brainer of the century.
All of the easy money provided by the Fed is at the root of the recent market surge to new five-year highs. The chart here of the S&P 500 Index tells the tale of a market on the rise over that period.
The Fed’s easy-money policies have been good for Wall Street. But in terms of the real economy, things haven’t been so great. Today’s news of the 0.1% decline in Q4 gross domestic product (GDP) tells me that the real economy is divorced from Wall Street. It also represents an ill canary in a potentially toxic coal mine for investors down the road.
The bottom line here is that stocks are, in my view, way too risky an investment at current levels, especially considering the anemic economic growth numbers here at home, and a relatively unimpressive Q4 earnings season that’s seen more than its share of poor reports.
As of last Friday, we had received results from 47% of the S&P 500 companies. According to a Goldman Sachs’ midterm Q4 earnings analysis, earnings so far are tracking about 6% below consensus estimates.
If the current trend continues, earnings in Q4 2012 will be about 1% better than they were in Q4 2011. That’s not much upside year over year, especially when you consider that Q4 2011 was when Europe was in a tailspin, and when central banks around the world were running to the rescue trying to stimulate us out of another meltdown.
So I ask you, can stocks keep powering higher if both GDP and earnings are contracting?
The ETF Turns 20
This week, we celebrate a birthday. This birthday is for the exchange-traded fund (ETF).
It was 20 years ago that a smart group of innovators from State Street Bank came out with the first ever ETF, which was the SPDR S&P 500 ETF (SPY). The “Spiders,” as they became known, now are touted by State Street as “the one that started it all” and that view is spot on.
Most of us in the industry back in 1993 probably didn’t think that from these humble ETF beginnings, a $1.4 trillion industry would emerge some two decades later. We never would have thought this industry would offer more than 1,400 different funds of nearly every variety, sector, risk tolerance, country, etc.
As you likely know, I am a big fan of ETFs, as I think they will continue to grow in terms of assets, offerings and innovations. And as more and more investors shun underperforming asset managers and opt for index-type investment strategies well-suited to ETF use, I expect that in another two decades, the ETF landscape will be gigantic when compared to today.
So, happy birthday ETFs -- long may you run!
Fiscally Fit for the New Year, Part IV
For the past several weeks, we’ve outlined the steps toward becoming fiscally fit for 2013. This week, we have Part IV of our series, which is all about getting a grasp of your expenses.
When it comes to expenses, many of us act like an ostrich and put our heads in the sand. That’s because tallying up your expenses can be both disconcertingand quite revealing. I recall that just a few short years ago, many of my friends, acquaintances and colleagues were on spending binges like you couldn’t believe.
I saw many upper-middle class people behaving like they were Arab sheiks, throwing money around lavishly (and in my view, frivolously) on cars, boats, vacations, home improvements and other goodies. A few years ago, expenses didn’t really matter, because the economy was booming and home values and stock portfolios were sky high.
As we all know, times have changed. And even though the economy and the markets have made headway during the past year, the lesson most of us learned is not to overextend ourselves, and to keep expenses down.
The first step in getting a handle on expenses is to do a simple list of what you owe, to whom, and at what interest rates you’re paying. Doing so allows you to identify where you can make adjustments, and making the right adjustments can help you increase your wealth.
For example, if you have toys like a boat, a sports car or a motorcycle that you aren’t using very much, why not consider selling them and shedding those payments? Also, if your home mortgage is north of 6%, then you need to consider refinancing. I know it’s almost impossible to refinance if you’re underwater in your home. But if you do qualify, you can save thousands and thousands of dollars during the life of the loan by getting that rate lowered.
If you have high-interest credit cards, then consider putting a plan in place to pay that debt down to manageable levels. There’s nothing worse than constantly paying each month on purchases with high interest, because you end up increasing the overall cost of those purchases. The longer it takes to pay them off, the more money you’re losing.
When it comes to protecting your net worth, think about how you can keep more of what you make by reducing expenses. If you’d like to hear more about how you can get a handle on expenses, or if you’d like to get my take on all of the latest market action, then I invite you to sign up here for my weekly audio podcast.
ETF Talk: Putting Industrials to Work for You
Let’s look at the housing recovery. The rebound actually began last year, about five years after the housing bubble burst. Key reasons for the resurgence are an improving labor market and low mortgage rates, which have caused an increase in home buying. One way to capitalize on what is projected to be a continued and successful recovery for the housing market is to buy an exchange-traded fund such as the Industrial Select Sector SPDR (XLI).
This non-diversified fund seeks investment results that, before expenses, correspond generally to the price and yield of companies in The Industrial Select Sector Index. That index includes companies in the industrial conglomerates, machinery, road & rail, electrical equipment, construction & engineering and building products industries.
XLI rose 10.14% in 2012, and it already is up 4.83% so far this year. If you like income, the fund yields 2.27%. The housing recovery should continue to boost XLI’s per-share gains. Increased housing prices also boost the wealth of homeowners, and a byproduct can be further spending and economic growth.
As expected with a sector ETF, XLI has 99.51% of its holdings in the industrials sector. The remaining 0.49% is invested in basic materials. The fund’s top ten holdings comprise 48.83% of its total assets. The top holding is General Electric, which constitutes a sizable 12.06% of XLI’s assets. The next four top holdings are United Technologies, 5.31%; Union Pacific, 4.76%; Caterpillar, 4.62%; and 3M, 4.48%.
As the housing recovery continues, the industrials sector and XLI should benefit. If you invest in the fund, you will have a chance to ride the momentum, too.
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 just may see your question answered in a future ETF Talk.
Opportunities and Risks for Investors in 2013
Do you know about the tremendous opportunities in the right market sectors in 2013?
Do you know how to avoid the pernicious risks populating the markets in 2013?
This teleconference, aptly titled "Opportunities and Risks for Investors in 2013," will give you our latest outlook on the equity markets as we embark on another year of uncertainty and unknowns.
During this one-hour interactive presentation, we discussed how to position your portfolio to protect your principal, generate the income you need and achieve your growth objectives.
In 2013, we're expecting an increase in market volatility, and that situation is likely to provide outstanding opportunities for investors -- but only if they are properly prepared.
Here are just some of the topics we covered during the teleconference:
The impact of new, higher taxes on the U.S. economy from the fiscal cliff deal.
What to expect from the looming battle over spending cuts and the debt ceiling.
What strategies you can put in place now to shelter and protect your money from the decisions made in Washington.
The best opportunities for income investors if interest rates rise in 2013.
The best opportunities for growth in light of a slowing U.S. economy and the continued recession in Europe.
Plus much, much more…
As with all of our teleconference events, it's our objective to help you make good decisions about your portfolios. Now more than ever, making sound decisions with your money is the key to achieving success. Let us help you do that in 2013 -- and the first step is our upcoming Fabian Wealth Strategies teleconference.
To listen to this presentation, simply click here.
NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.
Wisdom from Another Ben
“Even the intelligent investor is likely to need considerable will power to keep from following the crowd.”
- Benjamin Graham
I think Ben Graham has it a lot more right than Fed Chairman Ben Bernanke. In the quote above, noted value investor Benjamin Graham offers us timely advice, especially given the latest run higher in stocks. Remember, crowds usually get in too late, and get trapped inside too long. Don’t be part of the herd. Think for yourself, and make sure you always act in defense of your own money.
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.