There are two guys taking center stage in the market right now. The first guy’s name is “Cliff,” and the second guy's name is Ben.
Well, “Cliff” isn’t really a guy. Rather, “Cliff” is short for the “Fiscal Cliff.” As long as this issue remains unresolved, Wall Street will continue its tentative and nervous trading patterns. For more than a week, stocks have edged higher, as traders figure that the path of least resistance for stocks is to the bull side.
The chart here of the S&P 500 Index shows that broad measure of the domestic stock market now has surged back above its short-term, 50-day moving average.
This technically positive development is good for bulls. But I suspect that given the uncertainty about the fiscal cliff and the uncertainty of how tax policy will change, as well as how that situation will affect the entire global economy, we are likely to see a quick sell-off that would put stocks back down below the 1,400 level.
Now, the other guy affecting the markets today (and for the past four years) is Federal Reserve Chairman Ben Bernanke.
The Fed chairman announced that the U.S. central bank would keep its foot on the monetary throttle by committing to another series of monthly purchases of $45 billion in Treasuries. That’s on top of the $40 billion per month in mortgage-backed bonds the central bank started buying in September.
The new bond buying scheme was widely anticipated by analysts; however, the one surprise from the central bank’s Federal Open Market Committee (FOMC) policy meeting featured the new numerical thresholds for how long the Fed would keep interest rates at the current low levels. The Fed announced it likely will keep official rates near zero for as long as unemployment remains above 6.5%. The Fed also indicated that inflation remains low, and that long-term inflationary expectations remain contained.
Here’s the key quote from the FOMC statement:
“The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.”
Translation -- the Fed still thinks the economy and the job market are weak. Who could disagree?
Interestingly, while the domestic equity markets slowly trend higher, the gains in other global markets have been anything but slow. Stocks in Japan recently have begun to trade higher. And stocks in China have been outstanding performers of late.
The chart here of the iShares FTSE China 25 Index Fund (FXI) clearly shows the big move in the 25 largest stocks traded on the Shanghai Exchange. This trend has been evident since September. In addition, that trend is one reason why we own FXI in our Successful Investing advisory service.
I suspect there will be more upside in China in 2013, and FXI is just one of many ways we are taking advantage of this secular bull market. If you’d like to find out how to jump on the latest buying wave in China, then check out Successful Investing today.
ETF Talk: Banking on International Finance Fund
Banks have been on the recovery trail this year. Recent concerns about the spendthrift U.S. government going off the fiscal cliff likely will take weeks to resolve, giving investors a chance to buy bank stocks that should trade lower due to the uncertainty and the potential economic problems that would result from the lapse of the Bush tax cuts and sequestration. Those reasons could make now a good time to look outside of the United States for investment opportunities in the financial industry. An international finance exchange-traded fund (ETF) worth considering is the iShares S&P Global Financials Sector Index Fund (IXG).
IXG seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P Global 1200 Financials Sector Index. That index is a composite of 31 local markets from seven other indices, which combine to capture roughly 70% of the world’s capital markets.
IXG, along with banks in general, has been on an upward climb in recent months. The fund is up 24.15% year-to-date. With a worldwide recovery in housing markets starting to take hold, look for financial institutions to benefit. Once the fiscal cliff is resolved, the path should be clear for bank stocks to climb. IXG includes some U.S.-based banks but foreign holdings should help to lift the fund until the U.S. government resolves its current problem of spending so far beyond its means that it is nearing a fiscal cliff.
As you would assume from a fund with “Financials Sector” in the title, IXG is invested for the most part in banks: 88.92% of the fund is held by the financial services sector. The only other notable percentage is held by real estate, comprising 10.20% of the fund.
While one sector makes up most of IXG’s holdings, the same cannot be said for any one individual company. The fund’s top 10 holdings only make up 25.06% of its total assets, and none of these holdings represents more than 4% of the whole. The top five holdings are, in order (followed by their percentage of total assets): HSBC Holdings PLC, 3.82%; Wells Fargo & Company Common St, 3.34%; Berkshire Hathaway Inc Class B, 3.32%; JP Morgan Chase & Co. Common St, 3.21%; and Bank of America Common, 2.18%.
Recent trends indicate that the financial sector (which makes up most of IXG’s holdings), as well as the real estate market (which makes up most of the rest), will keep improving in the future. Any eventual resolution in Washington to the fiscal cliff situation should only aid IXG’s advance.
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 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.
I Need Your Input on the Radio
From time to time, I like to make sure I am doing what my readers and listeners want. This is true of the content of my newsletters, the content here in the Alert, and it's especially true of my Monday Morning Market Outlook podcast.
As a new year approaches, now is a great time for me to ask you, the listeners, what you want to hear when I do my podcast each Monday. Would you like more macro-economic news, or would you prefer I get a bit more political? Or, would you like me to concentrate on specific stocks and ETFs? Or, maybe you want me to do more personal finance segments?
Whatever suggestions you have, I would love to hear them. Just drop me a note here and let me know what's on your mind. And if you aren't already a listener, then please check out my Monday Morning Market Outlook podcast today!
NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.
Freedom is Better than Equality
“A claim for equality of material position can be met only by a government with totalitarian powers.”
--Friedrich von Hayek
There has been a lot of talk about fairness lately, particularly when it comes to who is paying their “fair share” of the federal tax burden. Presumably, this is some type of march toward equality, not just in terms of equal rights, but in terms of equal material possessions. The problem here is that nothing in the world is “equal” and most of life isn’t fair. The great Austrian School economist Friedrich von Hayek knew this reality, and he warned that the ultimate result of forced equality is tyranny. I don’t know about you, but I can deal with a little unfairness if it means I also can be free.
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 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.
To keep up on the latest investment activities, check out Eagle Daily Investor, where my e-letter appears each week. To read my e-letter from last week, please click here.