Making Money Alert
Death By Interest Rate?
06/06/2007
The markets have been riding high since they took a break back in March, with the Dow and S&P 500 hitting multiple all-time highs over the past several weeks. Yet we've seen stocks tumble during the past two trading days.
Why the pullback in stocks here? Simply put: interest rates.
Today's data showing an increase in labor costs fanned the flames of worry over inflation and interest rates. The result is a spike in bond yields. The heightened fears over higher interest rates also pushed the Dow down over 100 points.
Adding to fears over higher interest rates was the European Central Bank's decision to raise its key interest rate by a quarter percentage point to 4%. Not surprisingly, stocks in Europe fell sharply after the move.
What this situation means for the domestic markets is that a widely held notion that the Federal Reserve will cut interest rates this year has all but evaporated. In fact, just the opposite may happen, especially if we continue receiving inflationary economic data.
One look at the above chart of the extremely extended Dow Jones Industrial Average shows that its phenomenal gains are balanced tenuously at this juncture.
There's a huge crowd of participants who want to cheer the market higher. The main reason to tout higher prices is the global economic expansion. The world finally has gotten the memo that capitalism works. There is no greater evidence of this precept than the tremendous gains in China, India and Brazil.
On the flipside are people such as Fed Chairman Ben Bernanke and the heads of the European Central Bank. They see inflation as the main boogey man and are prepared to hike the cost of capital to keep that boogey man in his cage.
One consequence of higher interest rates in Europe, and possibly here at home, is a trailing off in the value of the U.S. dollar versus rival foreign currencies. The dollar has been trending lower for some time now, but it managed to rebound a bit in May.
As you can see from the above chart of the US Dollar Index, the greenback is now heading right back into the doldrums after a brief stint toward recovery.
I have to say here that I am old enough to remember the market in 1987. The current investment environment reminds me of the conditions back then. Two decades ago, we had a frenzied stock market set against a backdrop of rising interest rates. Well, that one ended badly -- with the October crash.
I bring this event up to remind you that market confidence is a fragile proposition. If we see a continuation of rate hike fears, or actual rate hikes strike here at home, it will be a big test of just how strong the bullish conviction really is out there.
Before we put the above hypothesis to the test, many short-term investors are wondering what to make of the last two days of Dow selling. In my ETF Trader advisory service, we actually are short the Dow -- chiefly because of the highly overbought conditions in the bellwether index.
So far, our decision to short the Dow has been a really good call for us. We expect to continue reaping short-term profits from this pick.
Want to learn more about how to profit from short-term reversals in the market? Want to see how we use ETFs to leverage the trends in the equity, gold and currency markets? Then you'll want to click here to learn more about my ETF Trader advisory service.
Click here to learn more about ETF Trader
BLOGS AWAY 6
Most of you probably already know that I am no longer broadcasting a daily radio show. But that doesn't mean I no longer have much to say about the markets and all matters financial. In fact, I now record a special message to Alert readers each week on my new, free audio blog.
In this week's blog, I discuss interest rates, why they are going up and what this situation means for the stock market. I will talk about the trigger points for key technical levels that, if broken, could really put a hurt in the equity uptrend.
Finally, I'll review the latest on the ETF front, and the battle in the financial media between the editorial departments and the sales department. It seems as though some people want to curtail much of the positive coverage ETFs are getting in favor of some positive mutual fund reporting.
Why?
Well, mutual funds spend a lot of money advertising in the financial media. It's another dirty little Wall Street secret that gets exposed in this week's edition of my audio blog.
To listen to this week's audio blog, click here.
ETF NEWS: A MAY EXPLOSION
There was a plethora of new exchange-traded fund offerings released in May. Many of these offerings might be a bit intimidating to many investors. One of my main goals is to break these new offerings down into simple, bite-sized pieces for you to digest easily.The first noteworthy new funds to break into the marketplace last month were five new real estate ETFs from the iShares family. Higher interest rates are not slowing the advance of new real estate funds that take advantage of commercial, residential, retail, and mortgage REITs.
For more on these new real estate ETF offerings from iShares, click here.
Many people are wondering when the first actively managed exchange-traded fund will make its debut. Well, the folks over at First Trust brought us one step closer this month by releasing 16 new sector ETFs that are based on indexes known as AlphaDEX.
These AlphaDEX funds employ a strategy where stocks need to meet certain criteria to remain in a given AlphaDEX index. The indexes are re-balanced quarterly, based on several different growth and valuation factors that screen stocks for continued inclusion within the composite.
For more on these new AlphaDEX ETFs, go here.
Turning now to the international front, May brought us many intriguing new funds designed to give investors unique exposure to specific countries and industries. A new fund from the Van Eck family is the Market Vectors Global Alternative Energy (GEX) fund.
GEX gives investors direct access to a number of the world's leading alternative energy stocks. Not to be outdone in the global arena, we also saw Claymore Securities launch the first Global Water Index Fund (CGW). I often talk about liquidity when investing in ETFs and this fund got off to an amazing start in the first two weeks of the month with an average daily trading volume of more than 300,000 shares.
Finally, a new entrant into the red-hot overseas markets is the First Trust Chindia Index (FNI). This fund offers returns of the 25 most liquid ADRs from China, as well as India.
I have only begun to scratch the surface of the many ETF offerings issued in May. If you want to find out more about the latest ETF news, please go to this Web site that I highly recommend.
There is simply no better ETF news site on the Web.
ANOTHER VEGAS RUN
You may recall that I just returned home from a fantastic week in Las Vegas where I attended the annual Money Show. Well, get ready Sin City because my team and I soon will be making another Vegas run real soon.
This time we'll be there for FreedomFest 2007, July 5-7, at the Bally's/Paris Resort.
At this conference, I'll be conducting two investment workshops. One will feature the future of investing using exchange-traded funds, while the other will identify the next hugely profitable market sector.
For more details on FreedomFest 2007 and/or to register for the event, simply point your browser here.
Hope to see you there.
THE COACH IS IN 5
Once again, I am really happy to report that so many of my Alert readers have taken me up on my offer for a free annuity coaching session. The issues you've brought to my attention have really helped me to learn about the difficulties annuity investors face in this current market.
Your input also has helped me to see the kind of marketing and sales pitches many of you are subjected to when trying to make annuity decisions. I probably don't have to tell you, but there are a lot of promises being made out there that, well, let's just say are laced with too much optimism and not enough realism.
If you are an annuity investor, or if you are planning on buying an annuity anytime soon, you owe it to yourself to take advantage of my offer for a free coaching session. I know I can help you to learn more about this often-complex investment tool.
One thing you've got to realize is that understanding annuities requires experience and knowledge. I want all my Alert subscribers to know all of their options before making decisions. If I can help you with your annuity questions, please just pop me an e-mail and let me know.
If you want to get your FREE annuity coaching session with Doug Fabian, simply send an e-mail here.
Comedic Wisdom 2
"Communism is like one big phone company."
—Lenny Bruce
As the world's fastest-moving economies continue their rapid wealth ascent, they do so largely because they've embraced free markets. One has to wonder if these countries, many of them former communist nations, finally realized what one of the greatest comedic social commentators ever put so eloquently several decades ago.
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.