Making Money Alert
Of Equity Bulls and Bond Bears
09/01/2010
Throughout August, it was a case of equity bears succumbing to bond bulls. Well, the first day of trading in September basically reversed the game. It was the equity bulls who were back in charge, and the bond bears finally started to come out of hibernation. A quick look at the following charts will give you an idea of the kind of divergence we’ve seen in the market of late.
First off, we have a six-month chart of the S&P 500 Index. As you can see, we are right in the middle of a trading range from about 1025 to 1130. Today’s big surge nearly across the board has helped lift the market higher, and that’s good news for what was a really tough August for the bulls.
In contrast, the chart below shows the skyrocketing surge in Treasury bond prices, as represented by the iShares Barclays 20+ Year Treasury Bond (TLT). This fund -- as well as the entire Treasury bond sector -- really soared in August. In fact, the surge has many observers talking about bubble-like conditions in the bond market.
I think what we could be seeing is the beginning of a reversal of fortune for both stocks and Treasury bonds. Though one day does not a trend make, I certainly think that stocks are way overdue for an extended bounce -- and bonds are way overdue for a pullback.
In terms of bonds, it appears as though the market already has priced in the so-called double-dip recession. But what happens if we don’t drop into double-dip territory? I suspect that interest rates (long-term bond yields) will go on a protracted run higher. And, because of the inverse relationship between bond yields and bond prices, that means that the value of funds like TLT could fall precipitously in the weeks and months to come.
My advice to you is that if you have a heavy Treasury bond allocation, then it behooves you to set stop losses on all of your invested positions. You don’t want to get caught in the throws of a busted bond bubble, and the only way to protect yourself from this very possible occurrence is to know exactly when to exit every position you have. The best way to do this is via stop losses, so if you haven’t done so already, now is the time to make sure your bond positions are protected against a pullback.
The Emerging Market Breakout
Today’s news that China enjoyed better-than-expected gains in its manufacturing sector really pushed stocks in the emerging market segment higher. The state-affiliated China Federation of Logistics and Purchasing announced that its purchasing managers index, or PMI, rose to 51.7 in August from 51.2 in July and 52.1 in June. Any number above 50 represents manufacturing expansion, and the fact that the August number was up after declining in the previous four months was crucial to the buying that took place in the emerging markets.
Midway through Wednesday’s trading session, the iShares MSCI Emerging Markets Index (EEM) -- an exchange-traded fund (ETF) designed to reflect the performance of a host of emerging market stocks -- was up nearly 3.5%. As you can see here by the six-month chart of EEM, the fund is now back above its long-term, 200-day moving average.
In my opinion, this segment of the equity market is going to lead the way forward as we head into the final third of 2010. The main reason for this likely market leadership is the tremendous growth in so many emerging markets, including Brazil, China and Taiwan, to name just a few.
This ETF is so powerful that I actually am recommending it to subscribers of my Successful Investing advisory service. And though the fund has seen its fair share of volatility of late, the trend now clearly is headed in a bullish direction.
If you’d like to find out how you can allocate some of your serious money to funds such as EEM, then I invite you to check out my Successful Investing advisory service today.
ETF Talk: Germany Is Leading Europe's Recovery
News coming out of Europe has been pretty bleak this year, to say the least. As if Greece’s debt woes weren’t bad enough, dismal news from Ireland, Portugal and Spain (the so-called PIGS) further complicate Europe’s debt mess. Fortunately, good news emerged from the euro-zone in the form of second-quarter reports that indicated stronger-than-expected gross domestic product (GDP) growth.
Germany may be the country in Europe where the economic news is the most encouraging. The country notched an unexpected surge in GDP that helped to give a much-needed boost to the struggling euro-zone. With Germany serving as the economic engine, the combined second-quarter 2010 GDP of the 16 countries that use the euro jumped an average of 1%, compared to the first quarter of 2010, and 1.7% versus the second quarter of 2009. The gains mark the fastest economic growth for the euro-zone in four years.
One way to take advantage of the economic gains in Germany is to invest in the iShares MSCI Germany Index Fund (EWG). This fund seeks to provide investment results that correspond to the price and yield performance, before fees and expenses, of the publicly traded securities in the German market, as measured by the MSCI Germany Index. The index itself seeks to measure the results of the German equity market. It is a capitalization-weighted index that aims to capture 85% of the publicly available market capitalization. As you can see from the chart below, the fund has been beaten down lately amid the market’s retreat. When market conditions improve, EWG likely will benefit nicely due to Germany’s economic gains.
In addition, the fund is well diversified through its holdings in a wide array of companies and sectors. Its top ten corporate holdings, as of July 30, are: Siemens AG-REG, 10.62%; E On AG, 7.11%; BASF SE, 7.1%; Allianz SE-REG, 7.02%; Daimler AG, 6.43%; Bayer AG, 6.29%; Deutsche Bank AG-REG, 5.11%; Deutsche Telekom AG-REG, 5.07%; SAP AG, 4.5%; and RWE AG, 3.89%. EWG’s five biggest sector holdings, also as of July 30, are: financials, 19.36%; industrials, 15.63%; consumer discretionary, 14.83%; materials, 13.66%; and utilities, 11.31%.
Rising GDP growth, consumer confidence and business confidence in Germany are upbeat signs. Increased demand from around the world for German products helped its economy to grow 2.2% in the second quarter -- marking the fastest quarterly rate since the country’s reunification in 1990. That growth rate beat expectations by almost an entire percentage point.
German consumer sentiment is set to rise in September, fueled by positive news on the economy, market-research group GfK reported on Aug. 26. Germany’s consumer confidence index for September 2010 edged up to 4.1 points, up from the previous month, according to an Aug. 26 article from The Wall Street Journal. The August 2010 consumer confidence index previously had been reported at 3.9 but GfK revised it to 4.0 points.
Business confidence in Germany rose in August, despite a global slowdown that could hurt demand for the country's exports, the research institute Ifo reported. Ifo’s German business-climate index rose in August to 106.7, up from 106.2 in July, to reach the highest level since mid-2007, when the first warning signs of the financial crisis had yet to emerge. Analysts polled by Dow Jones Newswires had forecast an index reading of 106.0.
One concern is whether Germany’s current economic growth is sustainable. Certain economists think that Germany’s economy has been fueled by temporary factors such as a rebound in construction. Although construction gains may continue through year-end 2010, they may fade a bit in 2011.
Another concern is that Germany's budget deficit more than doubled in the first half of 2010. The Federal Statistics Office, Destatis, announced that the government budget deficit for the first half of 2010 rose to €42.8 billion ($54.2 billion), or 3.5% of gross domestic product. The rising deficit reflects the cost of bailing out German banks during the financial crisis. Roughly €900 million of the deficit stemmed from bad debts of Düsseldorf-based WestLB. Those WestLB debts moved to the balance sheet of Soffin, the country’s bank rescue fund. However, the deficit still is below original finance ministry estimates for 2010 of around 5% of GDP, due to the economy having rebounded better than government officials expected, according to an Aug. 25 article in The Wall Street Journal.
If you’d like 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.
The Next BIG Opportunity: High Yield
No doubt you have been reading the negative news on the economy. How can you not, it’s everywhere!
We just witnessed a slowdown in economic growth, and recently we saw second-quarter GDP revised downward. No doubt you have seen the downbeat news on the housing front, as overall sales and home prices are once again headed south. No doubt you’ve been talking to friends who are worried about the falling value of their stock portfolios, and about the direction our country is headed. And there is likely no doubt that you have your own concerns about what to do with your investment nest egg.
Well, I have good news for you! In my opinion, the world is NOT coming to an end. America will not slip back into a recession anytime soon, and a big Congressional victory by conservatives in November could set us up for a fantastic buying opportunity -- if you know where to invest your money.
Throughout most of this year, I have been warning investors about the risks of owning mutual funds and about the mindless strategy of buy and hold that most stockbrokers and advisors constantly advocate. Throughout most of 2010, the best strategy has been a high cash position combined with a healthy dose of patience. Now, however, my research is pointing to opportunity.
Taking advantage of this opportunity is easy. All you have to do is join me for an informative teleseminar on Saturday, Sept. 11, at 12:00 p.m. Pacific Time. I’m calling this seminar “The Next Big Opportunity: High Yield.”
As the title suggests, we believe there is a HUGE opportunity coming for investors seeking high-yield investments. High-yield investing comes with its own set of risks and rewards, and we’ll be focusing on these risks and rewards in this teleseminar. If you’re an investor who wants to increase the income generated from your assets, then you’ll want to join me on Saturday, Sept. 11, at noon Pacific Time.
During this one-hour teleseminar, I will share with you these key points:
• How to build a high-yield portfolio fit for these chaotic economic times
• Which high-yield securities are appropriate for your portfolio
• How you can plan for, and protect yourself from, the bubble now forming in bonds
• How stocks are likely to perform in a slow-growth economy
In addition, you’ll receive my complete “High-Yield Watch List.”
Our previous teleseminars have been very popular with radio show listeners, newsletter subscribers and Fabian Wealth Strategies clients. For this seminar, we have room for just 800 attendees. This event is absolutely FREE if you attend on Saturday, Sept. 11, at 12 p.m. Pacific Time. There will be a nominal charge for listening to the replay of this event, so make sure you register for the live event by right now by clicking here.
NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.
Radio Show Update: The Anti-Bearish Warning
Last week, we talked about the bearish sentiment permeating the market -- a sentiment that seems to have vanished in Wednesday’s trade. Recall that last week I warned about becoming too bearish, and today’s action tells you why. If you didn’t get a chance to listen to the 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, I’ll be talking about what I see as a huge opportunity on the horizon for both high-yield investors and growth investors. I’ll also be discussing the current bubble-like conditions in the bond market -- conditions that every bond investor must be acutely aware of right now. And, as always, we’ll be taking your phone calls.
To listen to the show live each Saturday morning from 10 a.m.-11 a.m. Pacific Time, just go to our website.
On Analyzing the Obvious
“It requires a very unusual mind to undertake the analysis of the obvious.”
--Alfred North Whitehead
The English mathematician and philosopher brilliantly points out that sometimes, we need to actually look at what seems most obvious before we can make any real progress. This is true in nearly all walks of life, but it’s especially true when analyzing the financial markets. Often, it is what’s most obvious to everyone that actually may be the thing we need to study most -- if we want to be truly successful investors.
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.
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.