Making Money Alert
The Debt Downgrade Deluge
04/28/2010
First, it was Greece, and then it was Portugal; now it’s Spain. Of course, I am talking here about the recent debt downgrades in these three PIIGS nations. PIIGS is the market acronym that stands for Portugal, Italy, Ireland, Greece and Spain, and so far three of these five little piggies have been taken out to slaughter by ratings agency Standard & Poor’s.
Today, Standard & Poor’s downgraded Spain’s long-term credit rating by one notch to double-A. The agency also gave a negative outlook on the EU nation, saying that Spain is likely to experience an extended period of subdued economic growth that will put pressure on the country’s federal budget and its ability to repay debt.
On Tuesday, Greece and Portugal were downgraded two notches each. In the case of Greece, that nation’s debt rating was downgraded to junk status. Portugal isn’t quite as bad as Greece, but that country also is having a woeful time managing its budget in the face of the current economic climate.
The debt problems in Greece, Portugal and Spain aren’t isolated cases, and I suspect we could see a lot more debt downgrades in Europe before this deluge is over. The thing that worries me about this situation is that the spend-and-borrow policies that pushed these countries into their current predicament actually are being followed, to a large degree, here in the United States.
We saw what kind of havoc these downgrades wreaked on stocks around the globe in Tuesday’s trade, and just think what could happen to global equities if the United States goes the same way as these three PIIGS nations. I shutter to even think about it, yet my reason forces me to keep this possibility on my list of future threats to investor wealth.
If our government keeps playing the big spend-and-borrow game for too much longer, we could begin to resemble Greece -- without the ouzo, the Mediterranean Sea and the Parthenon.
A Check on the Four Horsemen
As the market was hit with a sizeable amount of selling in Tuesday’s trade, courtesy of those aforementioned debt downgrades and the grilling of Goldman Sachs executives by the Senate, I thought this would be a good time to take another look at the four horsemen of the market. I’ve mentioned these four indicators before as key to getting a solid handle on where stocks, bonds and currencies are headed, so let’s check each one out now.
The chart below of the SPDR S&P 500 (SPY), an exchange-traded fund (ETF) that mirrors the performance of the S&P 500 Index, shows that despite yesterday’s downturn, U.S. stocks still are firmly ensconced in an uptrend. Before we can call any kind of market turn, I think stocks must first retreat down to the 50-day moving average (blue line) -- and we’re still a ways away from that.
Treasury bond prices have spiked of late, and that means a concomitant decline in bond yields. The flight to quality in U.S. Treasury bonds as a result of the debt debacle in Europe has helped push bond prices here higher, and helped to send Treasury yields lower, which can be seen in the chart below of the 30-Year T-Bond Yield.
The value of the dollar vs. rival foreign currencies also is higher, as investors scurry away from the euro and other European currencies in favor of the relatively stable greenback. The chart below of the ProShares DB U.S. Dollar Bullish (UUP), an ETF that moves higher along with the value of the dollar, clearly shows the uptrend that’s been in place since December. The dollar now trades above both short- and long-term trend lines.
Finally, we have the chart below of the iShares FTSE/Xinhua 25 (FXI), an ETF tied to the performance of the largest 25 China-based stocks. As you can see, the index has come down sharply during the past several weeks. The volatile measure of the China stock market now trades below its short- and long-term moving averages. Clearly, this is a bearish sign for Chinese stocks, so if you are long this sector and currently have unrealized profits in stocks or funds pegged to China, now may be a good time to take your gains off the table.
As you can see, just a brief glance of these four horsemen can give you a great sense of how well the domestic and international stock markets are performing, as well as how bonds and currencies are faring. Once again, the four horsemen prove an invaluable tool when assessing markets, so if you still haven’t made this a staple of your weekly market monitoring, I highly recommend you begin doing so immediately.
The Fed Cuts and Pastes
As expected, the Federal Reserve’s Open Market Committee (FOMC) concluded its two-day meeting today by issuing the statement that there would be no change in interest rate policy. The Fed’s move comes as no surprise to any market observer, but what we all were waiting for was the Fed’s assessment on the economy.
On that front, the Fed basically cut and pasted the language from its last FOMC meeting, leaving the “extended period” language in with respect to current monetary policy. My read here is that rates will remain low, and that the Fed is in no hurry whatsoever to do anything that could jeopardize the fragile economic recovery.
ETF Talk: Are Airlines Ready to Climb?
Airlines and their related exchange-traded funds (ETFs) recently got a boost, as they hit 52-week highs, given lift by the broader market rally. The recent Icelandic volcano eruption kept European flights grounded for a number of major carriers and caused the share prices of those companies to dip. The question is whether airline stocks will continue to fall or whether they might be ready to rise again.
Keep in mind that when the 50-day and 200-day moving averages that I track fall well below current equity prices, stocks typically pull back -- just as they did yesterday when the Dow Jones Industrial Average closed at its lowest level since April 7. However, such market retreats offer a chance to profit if you make the right trades.
If you think airlines will recover from the recent market turbulence and fly to new heights, the Claymore/NYSE Arca Airline ETF (FAA) may be the right fund for you. The FAA ETF is designed to mirror the performance of the NYSE Arca Global Airline Index, which tracks the largest and most liquid common stocks and American Depository Receipts (ADRs) of airline companies that are traded on the exchanges in developed markets. The index holds shares in 25 companies from 14 countries, with market capitalizations ranging from $750 million to more than $9 billion.
News of a possible merger between United (UAUA), Continental (CAL) and US Airways (LCC) has helped fuel anticipation that FAA could be on its way up. Even a merger between United and Continental on their own could mean upside, if the airlines consolidate resources to boost revenues and margins.
As you can see below of the five-day chart of FAA, the fund fell during this past week, as news of suspended transatlantic flights worried investors.
A small blip in the ETF’s upward trend could be a good entry point.
1-year Chart
I am not currently recommending FAA, but I am watching it closely for key technical signs that could cause me to book a flight on this airline ETF. If you want advice about buying and selling specific ETFs, including appropriate stop losses, please sign up for 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 may see your question answered in a future ETF Talk.
A Very Special Fabian Anniversary Offer
It's hard to believe, but 33 years ago this month, my father, Dick Fabian, wrote the first issue of what was then called the Telephone Switch Newsletter. His approach back then was simple and straightforward; follow the market's trend and you will stay out of trouble.
After living through the bear market of 1973-74, Dick realized that you could not leave it up to your mutual fund manager to keep you out of harm's way. His major innovation was to tell investors that they could exercise their rights, and move their money to cash during periods of major market decline. Back then, this process involved picking up the telephone and switching your holdings between stock funds and money funds -- hence, the name Telephone Switch Newsletter.
Of course, the technology is completely different today, yet the underlying principle remains the same in what is now the Successful Investing newsletter. That principle is your right to take control of your money -- and to put it to work when the markets are in an uptrend, and to get it out of harm's way when stocks are trending lower.
Now, I am pleased to announce that in honor of the 33-year anniversary of our flagship Fabian publication, my publishers have agreed to a special offer for a one-year subscription to Successful Investing for only $77. That's the same rate you would have paid 33 years ago!
Your subscription includes my weekly market commentary sent directly to your email inbox, our monthly newsletter, special reports, timely buy and sell alerts and our one-hour instructional DVD.
If you don't already subscribe to Successful Investing, now is your chance to get our flagship publication for the same price we charged 33 years ago -- so, I encourage you to act right now.
The Top 10 Income ETFs
In a recent radio show broadcast, I offered my listeners a free special report, “The Top 10 Fixed-Income ETFs for 2010.”
I made this report available for free, because I believe most fixed-income investors are using the wrong investment vehicles to achieve their goals. Many people still are using expensive mutual funds and/or individual bonds to generate a steady income stream but, in my opinion, the best tools for generating income are low-cost ETFs.
To help you identify the best income ETFs out there, I decided to compile a watch list -- and to make it available to my listeners. Now, I’ve taken this offer one step further and I’m making this top 10 income ETF list available to you, the Alert reader, absolutely free.
Unfortunately, the current low interest rate environment has prompted many fixed-income investors to take on more risk than they should, precisely at the wrong time. Most investors have forgotten that fixed-income investments can and do go down significantly, especially during periods of credit distress.
At Fabian Wealth Strategies, we specialize in actively managing fixed-income exchange-traded fund portfolios for our clients. We build portfolios that deliver monthly yield with the protection of a sell discipline on all positions. In addition, we have the capability to own funds that take advantage of a volatile interest rate environment.
Do you want help to assess your fixed-income portfolio’s current position in the market ahead? If you have any questions about the assets you own or strategies to increase your fixed-income exposure, call us right away at 800/391-1118 to schedule a free portfolio analysis.
This offer is available for goal-oriented investors with more than $250,000 in their investment portfolios. Please be prepared to discuss and/or fax us your latest portfolio statements so we can know exactly what holdings you currently own. We look forward to working with you to achieve success in 2010.
NOTE: Fabian Wealth Strategies is a Securities and Exchange Commission registered investment adviser, and is not affiliated with Eagle Publishing.
A Magician's Business Wisdom
“I’m a big fan of huge populations of people, so you’d think with 300 million people in the country, you don’t even have to please 1% to be phenomenally successful.”
--Penn Jillette
The magician and humorist, best known for his work in the duo Penn & Teller, reminds us that you don’t have to please everyone to be a success in business, or in life. By carving your own niche and sticking to what you do best, enough people are likely to find your contribution worthwhile that it will make you a success. This is a great lesson to remember, particularly if you’re starting a new business or if you are trying to improve your existing business.
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. Don’t miss out on the 22nd annual MoneyShow Las Vegas, May 10-13, 2010, at Caesars Palace. This event will be your one-stop resource for the comprehensive education, efficient research, and valuable advice you need to make smart investment decisions in 2010 and beyond. Join me and hear leading experts reveal where they see growth opportunities in stocks, bonds, ETFs, commodities, and options. Also hear about which overseas markets may outperform in the near term. Visit The MoneyShow Las Vegas to register FREE online, or call 800/970-4355 and mention priority code 017444 today!
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.