Making Money Alert
The World Cup of Debt
06/16/2010
I have to admit that soccer is not part of my normal sports-viewing habit. Yet this year, I am really getting into watching the World Cup. It’s always fascinating to see athletes who are the best at what they do compete for the glory and pride of their respective countries.
One thing the World Cup matches got me thinking about was the state of the global economy, and the horrendous fiscal condition in many of the countries that make up the European Union. Just think of all the debt issues facing Greece, Portugal, Spain, Italy, et al.
Those countries are competing in a virtual World Cup of debt, as each seems to be fighting for top honors as the world’s most fiscally inept nation. Now, I don’t want to make light of the situation in Europe, as this game is no joke -- either for Europe’s citizens or its equity markets. I’m simply using the bailout analogy to highlight to you just how dire the circumstances in Europe have become.
As you can see here by the chart of the iShares MSCI EAFE Index (EFA), a broad-based measure of international equities, the decline in Europe has really taken its toll on global markets. And while it’s true that we’ve seen a nice bounce in international stocks since early June, EFA remains well below both its short- and long-term moving averages.
By comparison, U.S. stocks now have managed to break above the S&P 500’s 200-day moving average, albeit just barely, as can be seen by the chart below. The move higher in domestic equities is a nice sign of hope for the market at large, but so far, we haven’t seen as strong a move higher in international markets.
Moreover, if we look at the performance of a number of international equity exchange-traded funds (ETFs) for the past three months and year to date, we see that all of the major international ETFs have traded decisively lower. The table below shows just how tough things have been for international equities.
As you can see, the past week has seen sharp gains in all of these ETFs. However, for the past several months, and throughout this tough 2010, international stocks have been anything but the place to be.
So, will things continue getting better for international stocks? I suspect that despite the recent gains in the space, Europe’s debt problems will continue plaguing international markets for some time -- and that means if you have significant exposure to international funds, it might be time to sell into strength.
Seven Reasons to be Very Cautious
You know that famous song by The Who, “Won’t Get Fooled Again”? That’s the kind of attitude I recommend when approaching this market. Simply put, there still are many reasons to be über-cautious with your money. In fact, I’ve identified what I think are the top seven reasons to be very cautious right now, and here they are…
Reason 1) The European debt crisis is far from over. As we discussed in our World Cup of Debt section, there seems to be no end in sight to Europe’s fiscal difficulties. Promises to pay pensions, fund social programs and provide bank bailouts top the list of Europe’s debt woes, and each issue has the potential literally to bankrupt the continent.
Reason 2) Warnings from bellwether companies. Best Buy and FedEx are two companies we all know well. The electronics super store and the overnight delivery service are both struggling to beat Wall Street expectations, and that’s not a good sign for future earnings. We also recently saw retail sales numbers that were far from robust.
Reason 3) Don’t forget about Asia. We all know about the China miracle and the story line that points to Asia leading the world out of the Great Recession. But there seems to be some problems with this theory, as we’ve come to discover that most of Asia’s growth is dependent on Europe and America. If there is a significant slowdown in Europe that spills over into the United States, you can forget about growth in Asia.
Reason 4) Most international indices are still below their 200-day moving averages, and that signals a high level of risk. We can look to the United States and take some comfort in the recapture of the 200-day average over the past week, but if this rally fails, look out below.
Reason 5) The sign of the black cross. Another troubling technical occurrence I’m seeing here is that in many international market charts, the 50-day moving average has fallen below the 200-day moving average. This “black cross” is truly the sign of an impending bear, and that’s a big reason for caution.
Reason 6) The “flash crash” unsolved. I just can’t help thinking that there is a systemic problem on the exchanges that has yet to be corrected. We still don’t know the real cause of that 1,000-point Dow plunge on May 6 in less than an hour and, until we do, the potential for such a problem occurring again remains.
Reason 7) The geopolitical theatre is heating up. If we wake up one morning and find that Israel is engaged in armed conflict with Iran, or that North and South Korea are lobbing bombs over the 38th parallel, there truly will be trouble in River City -- and that means big trouble in that little island called Manhattan, and particularly on the corner of Wall and Broad.
Finally, I don’t want to sound like a pessimist, as pessimism is foreign to my natural tendencies. I am, however, a realist. And as a realist, I know that there are a lot of reasons out there for caution -- so be careful out there!
ETF Talk: Ripening Real Estate Recovery?
Real estate was hit hard during the recession, and the recovery of real estate prices has been shaky at best. Economic problems continue putting pressure on the sector, and an unexpected drop in May’s retail sales has a number of economists doubting the strength of a fledgling recovery.
Today’s news that housing starts fell to a five-month low in May also indicate that residential real estate remains weak. One likely reason is the April 30 end of the U.S. government’s tax incentives for home purchases. It should not be surprising that new home building dropped 10% in May to a seasonally adjusted annual rate of 593,000 units, the lowest level since December 2009, according to the Commerce Department.
But positive signs are starting to emerge. The Conference Board reported that its index of consumer confidence in the United States grew in May for the third month in a row. That reinforces my view that the slump in commercial real estate, including shopping malls and office complexes, could be about to bottom.
Recent data suggest that property values may be stabilizing. We will know more about that trend in the next couple of months, as the market will show whether it can retain housing valuations without the government’s recently expired tax credit for homebuyers. With mixed data about real estate and the economy, I am not ready to recommend the sector to investors right now. But it is one that I am watching closely.
The rapid rise of real-estate investment trusts and real estate exchange-traded funds have made it easy for individuals to gain access to low-minimum, low-cost, highly diversified real estate portfolios. Vanguard REIT Vipers (VNQ) is a large and liquid fund that boasts a low expense ratio of just 0.13%. It offers broad exposure to office buildings, shopping malls, apartment complexes, storage facilities and hotels. The fund invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real property. The fund’s goal is to track closely the return of the MSCI US REIT Index, a gauge of real estate stocks. In addition, the fund is up more than 13% year to date. As the chart below shows, VNQ has begun to rally and it recently broke above its 50-day moving average.
Many investment professionals, including many endowment managers, advocate an allocation to real estate as part of a broad diversification strategy. Real estate traditionally has provided a hedge against inflation, as well as a cushion against equity market volatility, since it hasn’t been highly correlated with equities.
Of course, an exception occurred amid the market’s plunge in 2008-09, when real estate prices collapsed along with virtually every other asset class. But diversification of your asset holdings makes sense. The ten stocks in the table below show the fund’s biggest holdings. Those ten organizations accounted for 43.4% of the fund’s total assets as of May 31, 2010.
If you want my advice about buying and selling specific ETFs, I invite you to check out my ETF Trader advisory service. I now have six profitable trades in a row, including three double-digit percentage winners. As always, I am pleased 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 Radio Show Update 6-16-10
If you missed last Saturday’s radio show, you missed a really great discussion on multiple subjects.
Among the topics discussed were:
• Why investors are choosing the United States over BRIC countries.
• Why our $13-trillion debt soon will overtake GDP.
• Warren Buffett’s warning to municipal bond investors.
• Seven reasons why you should sell your international mutual funds.
Fortunately, all Alert readers have FREE access to my Radio Show archive, and all you have to do is go to the Webpage and listen for yourself, whenever you have time.
Or, to listen to the show live each Saturday from 10 a.m.-11 a.m. Pacific Time, simply click here.
Hugoesque Wisdom
“Life is the flower for which love is the honey.”
--Victor Hugo
Few men understood -- or could write more powerfully about -- the human condition as well as the great French author. Here his musings on love are enough to move even the most intransigent soul.
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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