Making Money Alert
This Market Is Approaching a Critical Juncture
06/09/2010
The extreme flux continues in stocks, with traders flip-flopping on sentiment faster than a short-order cook flips hamburgers. Yet if we look at both domestic and international equity benchmarks, we realize that the overwhelming sentiment here is bearish.
Take a look at the charts here of the S&P 500 Index, and the iShares MSCI EAFE Index (EFA). Both the broad measure of domestic equities (SPX) and the broad measure of international equities (EFA) clearly show how much selling there’s been since the beginning of May.
I suspect that the longer stocks remain below their respective 200-day moving averages, the greater the odds are for a true change of sentiment that’s strongly in favor of the bears. If, however, we can get a substantial bounce in stocks here, it might mitigate the chances of a full-blown descent into bear status.
If you’d like more on how to read this market, including my take on various market charts like the ones shown here, then I invite you to take a look at my most recent online presentation that I call, “The Market Outlook After the Fabian Plan Sell Signal.”
Click on the link here to watch this FREE eight-minute video presentation.
NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.
Seven Reasons to Dump International Funds
I recently read an article in The Wall Street Journal that proffered the theory that there are seven reasons why investors shouldn’t dump international equity funds. Some of the key points in the article are that the euro already has fallen way off of its highs, and therefore cannot go down much more. The piece also argues that Europe will maintain its common currency, and that a weaker euro will bolster exports, which is good for European-based companies.
I think there is one huge reason why you should dump these funds, and that stems from the Fabian Plan recently issuing an international equity sell signal. But I thought that I would reply to this article directly, and address some of the common misperceptions about why things are going to be okay with international equities going forward. So, here are my seven reasons why you should dump your international equity funds.
Reason 1) The U.S. dollar is in a strong uptrend vs. the euro and other rival currencies. If the euro continues flailing, the flight of capital out of the eurozone will continue pounding stocks and, by extension, your international equity funds.
Reason 2) Europe is cutting spending, and the region’s economies are floundering in a no-growth soup of their own making. One reason why stocks in Europe are falling is due to a coming recession precipitated by the painful debt situation in Greece, Portugal and Spain. Simply put, the age of austerity is coming to all of Europe.
Reason 3) Europe has a huge debt problem. European countries have too many social programs, and they’ve made too many fiscal promises. Somewhere in Europe, there is going to be a massive debt default, and/or the servicing of existing debt will become such a burden that economic growth becomes virtually non-existent.
Reason 4) Mutual fund managers stay fully invested in down markets (they have to do so by charter), and that means they cannot manage risk. This holds true for international fund managers, who are essentially obligated to go down with the ship regardless of market conditions.
Reason 5) Nearly every major broad-based international mutual fund now trades well below its respective long-term moving average. The Dow Jones World Stock Index also trades below its 200-day moving average, meaning that risk continues to be high, and a new international bear market is on the precipice of becoming reality.
Reason 6) The slowing in the eurozone nations could begin threatening global economic growth and it could even cause a double-dip recession. China already has voiced concerns that its largest trading region is slowing rapidly, and this could be the economic “contagion” that many investors and economists fear.
Reason 7) Europe is raising taxes. From Greece to the United Kingdom, eurozone governments are trying to raise revenues to salvage their social programs and to service their debt. What’s really scary is that Europe could be a proxy for the United States in years to come.
These are just my top seven reasons why you should dump international equity funds, but the list is by no means complete. Suffice it to say, I am an international equity fund bear right now, so please don’t fall for the rosy proclamations in the financial press.
The worst is yet to come for Europe, and that means there likely will be much more pain in international stocks going forward.
If you’d like to find out more about the Fabian Plan and how it generates buy-and-sell signals that have beaten the market for more than three decades, then I invite you to check out my Successful Investing advisory service today.
ETF Talk: Watching for Further Declines in China
China offers both promise and risk. A key to investing often is to steer clear of markets when other investors become overly enamored with them and to look for a better time to buy. The advent of exchange-traded funds (ETFs) that go short now allows investors to profit from markets that are falling. China is one market where I have used this technique twice successfully in the past two months.
I advised subscribers of my ETF Trader service to buy the ProShares UltraShort FTSE/Xinhua China25 (FXP) and the investors who purchased and sold the ETF when I recommended were able to notch combined profits of almost 20% from the trades. I first recommended FXP on April 19 and opted to issue a sell signal on May 25 to produce a gain of more than 16%. When the Chinese market began showing further signs of weakness, I chose to recommend the fund again on June 3 to earn additional short-term profits. I decided to lock in another profit on June 8 when I advised selling the position as the market began to recover. Stock markets worldwide are up today, but such rallies have proven to be short lived in recent weeks.
For those who want to consider shorting China again, here is a brief description of FXP. It seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the FTSE/Xinhua China 25 index. That index essentially represents the top 25 stocks in China. So, if the Xinhua China 25 falls 2%, FXP is designed to rise 4%.
FXP’s underlying index, FXI, has dropped precipitously since April, as the preceding chart shows. Indeed, FXI broke below its 50- and 200-day moving averages in late April. This is good news for FXP, even though you can see in the chart above that FXI has taken occasional but fleeting turns for the better in the last month or so. There is no compelling reason to think that the downward trend in FXI will reverse anytime soon.
Right now, China appears to be the weakest emerging market of all. If global emerging markets have had a rough 2010, China has taken the biggest beating. The Shanghai Stock Exchange has lost 20.9% since the start of the year, putting it officially into bear-market territory. The market dropped more than 9.7% in May alone -- its worst monthly performance since September. Notwithstanding China's strong growth rate of 11.9% in Q1, Shanghai is now the world’s worst-performing stock market in 2010 -- just behind crisis-ridden Greece.
I believe the downward trend in Chinese stocks has further to go. One reason is the country’s deflating real estate bubble. A typical 1,000-square-foot apartment in Beijing now costs about 80 times the average annual income of the city's residents, compared with historic levels of three or four times annual income. Higher down-payment and mortgage rates have already started to let the air out of the Chinese real estate balloon.
Although real estate prices rose more than 12% year over year across China through April, Bloomberg reported that property prices in the capital have dropped 31% in just the past month alone. The property sub-index of the Shanghai Composite already has slid 28.5% since the start of the year and 46% since its July 2009 peak. That is an abrupt reversal.
The brunt of that financial pain no doubt will be felt by Chinese banks. Analysts warn that Chinese banks can withstand a decline in home prices of 30% to 40% before collapsing. Property sales in Beijing, Shanghai and Shenzhen fell as much as 70% in May. With the market in Beijing, Shanghai and Shenzhen already dropping, it's only a matter of time before the erosion in real estate prices spreads throughout the country and causes big trouble for China's banks.
Another major concern is that China reported a trade deficit of almost $8 billion in March, compared with a $24-billion surplus in October. That's a huge change in just six months.
If you are reluctant to make a leveraged investment on China’s continued decline, there is now a single-beta fund that allows investors to short the Chinese stock market. The ProShares Short FTSE/Xinhua China 25 (YXI), launched on March 16, 2010, seeks daily investment results, before fees and expenses, which correspond to the inverse of the daily performance of the FTSE/Xinhua China 25 index. So, if the Xinhua China 25 falls 2%, FXP is designed to rise 2%. This fund has less risk than FXP, but the bet against the Chinese market is the same. I think China’s decline is a major theme for 2010, so you now have two ways to short Chinese stocks.
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
If you missed last Saturday’s radio show, you missed a whole lot of great information.
Among the topics discussed were:
• The 10 reasons why risk is so high in the market right now.
• What the recent Fabian Plan sell signal means for your equity holdings.
• How fixed-income ETFs are working in this difficult market.
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.
This Saturday’s show topics include:
• 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.
• More on the seven reasons why you should sell your international mutual funds.
It’s all going down live, Saturday, June 12, from 10 a.m.-11 a.m. Pacific Time. To listen to the show live each week, simply click here.
Country Wisdom
Looking back now on my life I can’t say I regret it
And all the places that I ended up, not the way Ma woulda had it
But you only get one chance at life to leave your mark upon it
And when a pony he comes riding by you better set your sweet ass on him
--Zac Brown Band, “Let it Go”
In a completely homespun, folksy way, country music artist Zac Brown reminds us that when opportunity confronts you in life, the best thing to do is seize the moment and take full advantage of the situation.
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. 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.