Making Money Alert
Back to the Danger Zone?
08/11/2010
What do you get when you combine fears about a slowdown in Asia with an economic recovery that is “more modest” than anticipated? The answer is a big sell-off in equity markets around the globe. Indeed, the one-two punch thrown at equities this week started with the Federal Reserve’s acknowledgement that the nascent economic recovery, as the Federal Open Market Committee said Tuesday, “has slowed in recent months.”
The Fed also said that the pace of recovery going forward is “likely to be more modest in the near term than had been anticipated.” The translation here is that things are going to be tough economically throughout the rest of 2010 and likely into 2011, and that’s not what traders wanted to hear.
The second blow to stocks that knocked them for a loop in Wednesday trade was the weak economic data from Japan and China (more on China in the next section). When things are slowing down in the United States, the smart money looks for signs of growth in international markets. Lately, the strongest international markets can be found in Asia. Unfortunately, the data out of Asia left a decidedly bearish taste in traders’ mouths.
As you can see by the chart of the S&P 500 Index, stocks now have fallen below the technically significant 200-day moving average (red line). Wednesday’s big sell-off even pushed the S&P 500 close to its 50-day moving average (blue line).
The weakness in this market, particularly after such strong buying since early July, stresses that you need to have stop losses in place in all of your invested positions. With economic weakness wafting in both the domestic and international clouds, and with fearful traders on edge and ready to lock in recent gains, the bias right now is definitely in the sellers’ camp.
Now, one sector that’s benefitting from the bearish attitude in both domestic and international equities is the U.S. dollar. The value of the dollar, as seen here via the PowerShares DB US Dollar Index Bullish ETF (UUP), has surged this week. The fund now trades above its 200-day moving average.
I think UUP is an effective hedge against potential weakness in both the domestic and international equity markets. It’s also a way to profit from the announced move by the Federal Reserve to begin reinvesting the proceeds of maturing mortgages in U.S. Treasury debt.
Right now, my Successful Investing advisory service has a hedge-oriented allocation to the rising dollar. We also have exposure to investment-grade bonds, and both domestic and international equities. Of course, we have an exit strategy on each of these positions designed to keep us out of trouble if any of these respective sectors turn decidedly south.
If you’d like to find out how exactly how we’ve allocated to this volatile market -- and how the Fabian Plan’s safety net works -- then please check out Successful Investing now.
China's Escalating Woes
The mood in the Chinese markets has been very upbeat since about mid-July, with stocks that make up the iShares FTSE/Xinhua China 25 Index (FXI) breaking out above their 50- and 200-day moving averages. But this week, the fate of Chinese stocks has been decidedly lower, and one key reason is the latest batch of downbeat economic data.
According to government reports, China’s imports grew less than expected last month, with imports climbing 22.7% to $116.8 billion in July. That’s certainly not bad growth, but it was well below consensus forecasts for 30% growth. The report comes on the heels of June’s softening imports, which showed the smallest gains since growth resumed in November 2009.
There also was downbeat news on both the industrial output and inflation fronts in China.
China’s annual industrial output growth in July slowed to 13.4% from 13.7% in June, according to the National Bureau of Statistics. Meanwhile, China’s headline inflation accelerated to 3.3% in July from 2.9% in June.
I suspect that fears of a China slowdown also are weighing down both international and U.S. markets today, and while I don’t think China’s economy is in danger of a serious decline, the latest numbers certainly point to some challenges ahead for China and its equity markets.
Unfortunately for global equity investors, those challenges aren’t likely to remain solely within China’s borders.
ETF Talk: Using Technology to Overcome Economic Weakness
I am fast becoming a fan of technology as an investment opportunity. When I read the headline for the Aug. 4 lead story in The Wall Street Journal, it confirmed my view that technology is a sector that should hold up well during the current economic slowdown.
The article’s headline, “Tech Gadgets Steal Sales from Appliances, Clothes,” is based on an Aug. 3 report by the U.S. Department of Commerce. The report found that spending on televisions, computers, video and telephone equipment rose 1.8% in the first six months of 2010, while spending on appliances and furniture fell 3.6% and 11%, respectively, during the same period. For that reason, I think the Technology Select Sector SPDR (XLK) exchange-traded fund (ETF) is worth considering as an investment, especially given the latest market pullback.
Indeed, devices such as Apple’s (AAPL) iPhone 4 and the iPad, Corning Inc.’s (GLW) liquid crystal displays (LCDs) used by computers and flat-screen televisions, and Blu-ray video players are enticing consumers to spend money. The result is improving performance for technology companies. To that end, the latest quarterly earnings for Apple and Corning rose 78% and 49%, respectively, compared to the same quarter last year, the companies recently reported.
XLK is a fund that invests primarily in products developed by internet software and service companies, IT consulting services, semiconductor equipment and products, computers and peripherals, diversified telecommunication services and wireless telecommunications services. Apple ranked as the fund’s biggest holding, as of Aug. 10, with 10.71%. The other top ten holdings in the fund, as of that date, were: Microsoft (MSFT), 8.66%; International Business Machines (IBM), 7.67%; AT&T (T), 7.24%; Cisco Systems (CSCO), 6.31%; Google (GOOG), 5.53%; Oracle (ORLC), 4.34%; Intel (INTC), 4.27%; Verizon Communications (VZ), 3.87%; and Hewlett-Packard (HPQ), 3.72%. Corning ranked 15th on the list, with 1.34%.
Think about the last time you really wanted to buy something special and I am betting that it included some kind of advanced technology. Whether it was a new computer, a high-definition television or an e-book reading device, some of the most popular purchases these days feature technology.
The demand for technology products is important because the Department of Commerce found that personal saving as a percentage of disposable personal income was 6.4% in June, compared with 6.3% in May. In addition, personal consumption expenditures (PCE) decreased by $2.9 billion, or just under 0.1%. Further, the price index for PCE decreased 0.1% in June, the same decrease as in May. Those numbers mean that consumers are saving a bit more than usual. With people scaling back their spending, I like the idea of buying a fund that tracks the technology sector, which seems to be gaining sales at the expense of other parts of the economy.
To obtain my latest ETF advice and my stop prices for each recommendation, I invite you to subscribe to my ETF Trader service. As always, I am happy to answer 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.
Radio Show Update: Dangerous Munis
Last Saturday’s show was all about deflation and the fears over a general decline in the value of assets like equities and real estate. We also looked at some great dividend-paying ETFs tailored to the income investor, and we uncovered some of the worst (i.e., most expensive) investment products sold by brokers.
If you didn’t get a chance to listen to this show, then don’t worry. As an Alert reader, you have FREE access to my Radio Show archive, and all you have to do is go to the website and listen for yourself, at your convenience.
This week, we’re going to talk about dangerous municipal bonds and how a blowup in some remote municipality could result in a decline in all muni bonds. We’ll also discuss a few issues pertinent to the million-dollar portfolio, and we’ll take a look at some bond ETFs that continue outpacing the market.
To listen to the show live each Saturday morning from 10 a.m.-11 a.m. Pacific Time, just go to our website.
Remember also that we are back live on the air in Phoenix, with the show airing every Saturday morning, 10 a.m. Pacific Time, on KFNN 1510, Arizona’s premier financial radio network. If you live within listening range of KFNN 1510, then I invite you to tune in.
On How to Learn to Live
You gotta live to learn
You gotta crash and burn
You gotta make some stances
And take some chances
You gotta live and love
And take all life has to give
You gotta live and learn
So you can learn to live
--Darius Rucker, “Learn to Live”
Country music artist Darius Rucker’s song “Learn to Live” is a great example of finding deep wisdom in an unlikely place. This upbeat tune’s lyrics emphasize the virtues of living by principle, taking risks and learning from mistakes. Now I ask you, what better lessons can one learn?
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 radio show, newsletters, seminars or anything else, click here to ask Doug.
Sincerely,
Doug Fabian
P.S. It’s not too early to start making plans to join me at the MoneyShow in San Francisco, August 19-21. This year’s event will be held at The Marriott Marquis and will feature 50 of the world’s smartest investors, traders and analysts. To join me in San Francisco, you can register FREE of charge by calling 800/970-4355 and mentioning priority code 018509 or by visiting the MoneyShow’s website at The MoneyShow San Francisco!
P.P.S. My publisher, Eagle Financial Publications, is now on Facebook. Click here to see our page and be sure to become a fan when you get there.