Making Money Alert
Tumult, I Say, Tumult!
05/19/2010
The belch from the entity I’m calling “Mr. Volatility” can be heard on Wall Street in a big way. The markets actually finished in positive territory last week, but the wild buying last Monday and Tuesday was followed by as nearly a wild sell-off on Thursday and Friday. So far this week, stocks have continued their downward flight, not just here in the United States, but in nearly every major market around the world.
Looking at the chart here of the S&P 500 Index, we see the benchmark U.S. index trading near its long-term, 200-day moving average (red line). Just a couple of weeks ago, the S&P 500 was almost back to breaking above its short-term, 50-day moving average, after a precipitous fall that began in earnest in late April.
The tumult in the U.S. markets may be giving you nausea, but the domestic markets are actually a bromide when compared to the markets of Europe and China. Take a look at the chart below of the iShares Europe 350 (IEV). As you can see, owners of this fund are closer to a heart attack than they are mere stomach cramps.
A look at the iShares FTSE/Xinhua China 25 (FXI) provides further evidence that international markets are no longer the place for your money. Unless you plan on shorting these two markets, I’d avoid both like the proverbial plague.
It’s clear that for now U.S. equities are holding up much better than most other big world markets. But within the U.S. market, there are certain sectors that have held up much better than others. In the table below, we see the performance of some of the biggest market sector exchange-traded funds (ETFs).
As you can see, there are a few funds that remain well above their respective 200-day moving averages, notably the SPDR Consumer Discretionary (XLY) and the SPDR Industrial Sector (XLI). The other sectors now either trade slightly above, or well below, their respective long-term trend lines.
The takeaway here from the current tumult is that you must be very, very cautious with your portfolio right now. I suggest that if you are thinking about putting money to work here, that you think a second time. Remember, there is no harm in being patient with your investment capital. In fact, patience in a time of tumult is often your greatest ally.
A Must-Read Article on the European Crisis and Its U.S. Implications
I do a whole lot of research each week trying to discern the machinations of these volatile equity markets. Most of what I read is basic information designed to give me the facts I need to make an informed judgment. Of course, I also read what others have to say about where they see the markets, the economy, politics, etc.
I have to admit that most of what I read out there is at best mediocre, and at worst downright awful. But every once in a while, I come across a very provocative piece that turns a learned eye on a complex issue and actually makes very good sense of it all.
Such was the case on Monday when I read an outstanding article on the Web site Minyanville, written by James Kostohryz. In his piece, titled “Could Europe Bring the US Down With It?” Kostohryz outlines the negative and the positive aspects (yes, there are some positives) of the European financial crisis as it relates to the United States. The piece is relatively short, and I assure you it is well worth the five minutes or so it takes to read.
In addition to bringing up the pros and cons of the European situation, the author offers his thoughtful opinion about what the crisis means for U.S. investors. Here’s an extremely well-written paragraph that gives you an idea of just how thoughtful this article really is:
“Exactly how all of these complex, conflicting, and interacting forces will ultimately play out in terms of US GDP growth is difficult to predict. Overall, based on measurable economic criteria, I believe there are substantial reasons to be relatively sanguine about the prospects for the ongoing US economic recovery to be able to withstand the negative economic, financial, and psychological shocks that could emanate from a crisis in Europe.”
Now that, in my opinion, is enough to make this a must-read article.
ETF Talk: Taking a Crude Path
The devastating oil spill off of the Louisiana coast has been followed by declining oil prices and increasing questions among investors about the future direction of the commodity. However, the oil spill does not appear to be nearly as much of a factor in oil prices right now as reduced demand and the strengthening U.S. dollar. While the price of oil currently is sliding, a potential buying opportunity will arise once the commodity starts a sustained recovery.
Clearly, oil is not a commodity that you want to invest in while it continues to fall. However, I am watching for when oil will begin to turn upward. When it occurs, I already have an exchange-traded note (ETN) in mind that you may want to consider. The investment that I am looking at to take advantage of the inevitable recovery in oil is the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL).
The iPath ETNs are senior, unsubordinated debt securities issued by Barclays Bank PLC that are linked to the total return of a market index. In the case of OIL, the index is the S&P GSCI Crude Oil Total Return Index. The ETN is designed to provide investors with cost-effective exposure to crude oil, as measured by the index.
Today, benchmark crude for June delivery continued a three-week drop when it slid $1.19 to $68.22 a barrel on the New York Mercantile Exchange. Earlier today, prices had slipped to $67.90 to hit the lowest point for an oil contract since Sept. 30. On May 3, a barrel of oil sold for $87.15 -- the highest price in 18 months. Oil prices briefly rallied toward $72 a barrel Tuesday but ultimately slumped further due to growing investor concerns that the European debt crisis could disrupt the global economic recovery. Do not be surprised to see a number of short-lived rallies in the days ahead.
During the past few weeks, prices for WTI -- the benchmark U.S. oil contract traded on Nymex -- plunged by more than 20% amid investor worries that big government spending cuts and rising government debt will curb economic growth, as well as demand for oil.
A $1-trillion bailout package announced last week by the European Union and International Monetary Fund has failed to reassure investors and did not prevent the euro from falling to a four-year low of $1.2237 on Monday. The rising dollar has hurt oil prices, since crude has become more expensive to foreign buyers who do not pay in dollars. The euro’s slight uptick in the past couple of days has not stemmed the drop in oil prices.
With the current bearish market sentiment, there is no telling how much further oil prices may drop. Demand actually has been aided by increased consumption in faster-growing economies such as China and India. It is possible that U.S. demand could rise in the second half of 2010, if the budding economic recovery gains momentum.
However, austerity measures announced by debt-laden European countries such as Greece will hurt economic growth and consumption in that important region of the world. Demand elsewhere does not seem to be assuaging the concerns of oil investors who are worried about Europe’s ongoing woes.
As I look at the future of OIL, there are several reasons for my optimism:
First, the massive BP oil spill in the Gulf already has been factored into the price of oil. It also is likely that efforts to combat the spill will result in at least modest success in the weeks ahead.
Second, energy is a great way to hedge against impending inflation. And, oil is a fine alternative to the most common inflation hedge -- gold and other precious metals -- which recently hit record levels before pulling back today.
Finally, as we are about to enter the summer months at the end of the Memorial Day Weekend, we typically see significantly more driving and, thus, more demand for gasoline. Of course, forecasters expect gasoline prices to ease between now and Memorial Day in the United States, so that situation could keep OIL trading close to its current lows for the year -- at least for a while.
If you want my 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.
Listen to My Latest Fixed-Income Strategies Teleconference
Last week, we conducted our latest teleconference, titled “Sound Fixed-Income Strategies in an Uncertain World.” In this seminar, I outlined the conservative fixed-income strategies that I am implementing during this time of unprecedented financial challenges.
No doubt you’ve been following the news of late in Europe. The continent is facing a crisis in terms of its debt, currency and financial stability. The euro has fallen more than 10% so far this year, while short-term interest rates in some countries have risen to more than 20%. Countries such as Greece, Portugal and Spain all have had their credit ratings cut, and all face debt-ridden economic futures.
For months now, I’ve been saying that these problems in Europe were bound to spill over into U.S. investor portfolios -- and that’s exactly what’s happening right now.
Here are five key points you’ll learn in this seminar:
• How does the crisis in Europe affect your stocks and mutual funds and what should you do now?
• What will be the next big move in interest rates and our economy?
• What fixed-income investments should be avoided right now?
• What are the right fixed-income strategies for the current market environment?
• My outlook for the U.S. stock market and equity markets around the world.
To download the seminar, please click here.
NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.
The Body Sovereign
“Over himself and over his own body and mind, the individual is sovereign.”
John Stuart Mill, “On Liberty”
There is perhaps no more basic proposition that as an individual, you own your own life. Yet the basis of most political theory over the last several millennia has actually argued against this notion. The concepts of freedom and the associated idea of sovereignty over one’s own body and mind are relatively new political concepts. The greatest manifestation of this idea is only about 230 years old, and it dates back to the early days of America. Let’s hope that as the decades pass, this basic supposition remains at the heart of this nation’s political milieu.
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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