Making Money Alert
Checking in on the Four Horsemen of the Markets
03/31/2010
Today marks the end of the first quarter, and what a quarter of action it’s been in the financial markets. We kicked off the year with a continuation of the buying we saw in December, but by mid-January, stocks began retreating. The decline lasted only until the first week of February, however, and since then, stocks have been on a run that’s taken them to new 52-week highs.
So, now that the quarter is over, let’s take a look at our “four horsemen of the markets,” i.e., the four major market indicators that I like to look at to get a sense of where the key action is taking place.
First off, we have the S&P 500 Index (SPX). As you can see, this broad-based measure of the U.S. equity market clearly shows the bullish action we’ve seen in stocks so far this year. Given the big gains we’ve seen in stocks since February, I remain skeptical about how much further we can climb. Right now, the risk in this segment is extremely high, and thus, you should approach buying into this market with extreme caution.
The second horseman to watch is long-term interest rates, i.e., long-term Treasury bond yields (TYX). As you can see via the chart below, yields now have climbed to their highest levels of the year. Although bond yields still are relatively low by historical standards, you have to think that with a debt of some $12 trillion to grapple with, that the big concern on the horizon is further increases in long-term Treasury yields.
Also on the move higher is the value of the U.S. dollar vs. rival foreign currencies. The chart below of the U.S. Dollar Index shows just how far the greenback has come since falling to its December 2009 lows. Back then, I remember the raging chorus of greenback naysayers suggesting that the dollar was doomed for good. Hey, whenever you hear the masses proclaiming the death of a sector, you can pretty well bet that a reversal is on the horizon. That reversal certainly has taken place in the dollar, thanks in large part to the fiscal problems in Europe.
Our final horseman is the movement in the world’s largest emerging market, China. After falling below both its 50- and 200-day moving averages, the benchmark iShares FTSE/Xinhua 25 (FXI) has started to recover. The move higher in FXI is a definite positive for stocks around the globe, but you must remember that China still has its problems. A brewing housing bubble, possible accusations of currency manipulation by the United States and rising inflation all are serious concerns for Beijing. If we see the Chinese market shrug off these concerns, it could bode very well for international equities going forward.
So, there you have it -- a quick analysis of the four horsemen of the markets. Remember that keeping a watch on these four sectors can really help you get a clear picture of the overall market, and that’s why I recommend all Alert readers spend a little time each week reviewing the action in each of these four market sectors.
ETF Talk: Looking Beyond Emerging-Market Debt
While the United States and much of the Western world struggle with an anemic economy, a number of emerging-market economies are among the world’s largest and fastest growing. Although the news may seemed filled with stories about debt-ridden Greece, now may be the right time to explore funds that tap into relatively stable emerging markets.
One way for investors to gain exposure to emerging markets is through the iShares JPMorgan USD Emerging Markets Bond Fund (EMB), a fixed-income fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the JPMorgan EMBI Global Core Index. EMB is a U.S. dollar-dominated, emerging markets debt benchmark that tracks the total return of actively traded external debt instruments in emerging market countries.
So far, EMB is reflecting a positive trend for debt instruments in emerging markets. The fund, which began in December 2007, rose an impressive 27.2% in 2009, after a rough 2008. It had total net assets of $1.27 billion and 12.3-million shares outstanding, as of March 29, 2010.
EMB invests in debt instruments from 26 emerging market countries. The fund’s top five holdings as of March 29, 2010, were: Russia (7.5% coupon, 3/31/2030 maturity, Baa1/BBB ratings), 9.16%; the Philippines, (7.75% coupon, 1/14/2031 maturity, Ba3/BB- ratings), 4.43%; Turkey (7.25% coupon, 3/15/2015 maturity, Ba3/BB), 4.35%; Brazil (8% coupon, 1/15/2018 maturity, Baa3/BBB-), 4.08%; and Turkey (6.88% coupon, 3/17/2036, Ba3/BB), 3.79%.
Those countries are expected to have higher economic growth rates in 2010 than advanced economies, according to a recent International Monetary Fund (IMF) forecast. While the advanced economies are expected to grow just 0.6% this year, the following growth rates are eyed for Russia, 1.5%; Brazil, 2.5%; Turkey, 1.5%; Mexico, 3.0%; and the Philippines, 1.6%.
Other economic-growth forecasts are more aggressive than the IMF projections. The European Bank for Reconstruction and Development (EBRD) forecasts economic growth for Russia of 3.9% this year. In Latin America, the Central Bank of Brazil projects economic growth for its country of 5.0%, and the Central Bank of Mexico is predicting 3.9% growth in its nation this year.
A prolonged period of low U.S. interest rates and indications from the Fed that interest rates will stay low for some time are reasons to consider heightened yields abroad. Meanwhile, U.S. government debt is rising quickly and it will grow further once the effects of the new health-care program take hold. If you share my concerns about the U.S. government’s profligate spending, you may be enticed by the attractive yields of foreign bonds, specifically in emerging markets. Such bonds are not risk-free by any means, but they offer a significantly higher return to compensate you for the potential loss of principal on your investment.
Emerging markets certainly can be risky, so I advise you to monitor your investments closely and to stick to your stop losses. If you’d like particular advice about ETFs, including appropriate stop losses, please sign up for my ETF Trader service. As always, I am glad to answer your questions about ETFs, so do not hesitate to email me at askdoug@dougfabian.com. You may see your question answered in an upcoming ETF Talk.
A Most Unhealthy Net Position
If you were ever in doubt about the unhealthy conditions of the federal government’s balance sheet, one look at the brilliant analysis by economist Veronique de Rugy of the Mercatus Center at George Mason University will quickly disabuse you of your doubts.
Rugy pointed out via a compelling and frightening chart just how in the red the United States’ end-of-year net position has become. In essence, net position is a metric calculated by netting the government’s assets against its liabilities, as recorded in the United States Government Balance Sheet. Just like the financial statement of any company, net position gives us a general picture of the fiscal health – or, in this case, extreme lack of health.
According to Rugy, the net position of the United States in 2009 was -$11.5 trillion; a 12% deterioration from 2008. Moreover, net position has been steadily declining since 2000. Rugy also pointed out that the declining numbers and the accompanying graphic, as bad as they are, don’t even depict how truly bad the situation is. That’s because the numbers don’t reflect exposures for future Medicare and Social Security expenditures, as these costs are not taken into account in the calculation of net position.
If you want to see for yourself just how unhealthy our net position has become, and/or if you want to arm yourself with the knowledge and economic insights of the great Veronique de Rugy, then I highly recommend that you go to the Mercatus Center at George Mason University.
Poetic Thoughts on Work and Success
“By working faithfully eight hours a day you may eventually get to be boss and work twelve hours a day.”
--Robert Frost
The great American poet pointed out quite beautifully that the more successful you are in life, the greater your responsibilities tend to become. Perhaps the folks in Washington should brush up on their Robert Frost. Maybe then, they’ll see that punishing the most successful among us is counterproductive to all of us.
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
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