Making Money Alert
When China Sneezes
05/23/2007
This week the Chinese and U.S. trade representatives are conducting talks, and chief on the agenda is the Chinese treatment of their currency, the yuan. I think that these talks are liable to result in a few fireworks down the line as a stronger yuan will hurt Chinese business -- and potentially their equity markets.
Let's face it. China is now the big dog in the worldwide economy. And, we all know what happened last time China stocks suffered a setback. The sharp pullback in late-February and early March (seen here in the chart of FXI, the FTSE/Xinhua China 25 Index) knocked down equity markets worldwide. As the saying goes, "When China sneezes, the rest of the world catches a cold."
At one time, the U.S. equity markets were like China, in that if we sneezed the world would catch a cold. To some extent, this situation still is the case. However, as the hottest part of the world's economy clearly has demonstrated over the last year or so, China now is calling the shots when it comes to international economic influence.
For more on China and its newfound prominence in the world's economy, I invite you to check out Todd Harrison's insightful piece.
If China and its highly extended market decide it wants to sneeze again, I know I will be reaching for the cold medicine right quick.
ENERGY ‘EN FUEGO'
There has been no market more "en fuego" (a little Spanish for you) than energy stocks. The Energy Select Sector SPDR (XLE) has surged 7.59% over the past four weeks, 11.54% over the past eight weeks and an astounding 20.01% over the past 12 weeks.
One look at the chart below should leave no doubt as to how well this sector has performed over the past year.
I am pleased to say that we've ridden the wave of higher energy prices to big profits in not one, but two of my investment advisory services. In my Successful Investing service, we are sitting on an unrealized gain of nearly 12% in XLE. Not too shabby, especially considering we've only held this position since late March.
In my High Monthly Income service, we are using income-generating energy trusts to help power our portfolio higher. Like XLE, our energy trusts have enjoyed the trend of higher oil and gas prices, and with the summer driving period just getting underway, I think there probably will be a lot more room for this sector to run.
Despite my thoughts on the summer driving season, I do think that in the short run the energy sector is ripe for a pullback. The chief reason is simply because it's been so extended lately. Now if this sounds contradictory, it really isn't.
You see, when you take positions in these fast-moving sectors, you better know how to manage risk. In all my advisory services, we never enter a position without an exit strategy. This way, we will always know how much risk we are willing to accept.
If you want to know how to take advantage of sector bull markets, and how to manage downside risk while racking up big profits, I invite you to check out all of my services here.
Click here to learn more about High Monthly Income
Click here to learn more about Successful Investing
Click here to learn more about ETF Trader
ARE EFA & SPY LOSING STEAM?
The Dow Jones Industrial Average keeps plodding forward and setting a lot of record highs along the way. But is this the case for the broader domestic equity market and for international stocks, as well?
One way to answer this question is by examining charts of two of the biggest exchange-traded funds (ETFs) -- the S&P 500 SPDR (SPY) and the EAFE Index (EFA).
To get a sense of the broader domestic market, we need to look no further than SPY. This ETF mirrors the price movement of the S&P 500 Index, a benchmark when assessing the best entire domestic equity market. SPY represents the large-cap segment of the domestic market, and it's what most market watchers look at when determining overall strength in domestic equities.
SPY has a market capitalization of $61 billion and an average daily trading volume of 110 million shares. With those kinds of numbers, we can get a very good sense of what everyone is thinking about large-cap domestic equities.
In the chart below, we see that SPY is also hitting record highs. Although not quite as pronounced as the Dow, we do see that broad-based domestic equities have enjoyed a stellar run, particularly since March.
This kind of price action always worries me, as there likely will be another pullback of the sort we saw in late February. Markets don't go straight up, and any sign of SPY losing steam likely will be a signal that its magnificent run has peaked.
When measuring international equities, all you need to do is look at EFA. This ETF, whose long name is the iShares MSCI EAFE Index, has a market capitalization of $46 billion and an average daily trading volume of 6 million shares a day.
What this ETF measures is the price movement of Morgan Stanley Europe, Australian and Far Eastern markets index. Basically, EFA is the best of the world's international equities. I liken it to an international equity version of the Dow or SPY.
In the above chart of EFA, we can see that while it too has enjoyed a great run higher, it hasn't performed as well over the past several months as SPY. It certainly appears that -- judging by EFA -- international equities have indeed begun running out of steam.
The question here, of course, is what's next? Will we see a continuation of the stellar run in SPY, or will domestic stocks start behaving more like their international brethren? Nobody knows for sure, but by monitoring the price action of SPY and EFA, you'll be a lot closer to figuring it all out.
WHO NEEDS LIFE INSURANCE?
If you asked the above question to the life insurance industry or a commissioned agent who sells life insurance, I'm sure the answer would be everybody. This weekend on my new radio show, Doug Fabian's Wealth Strategies, I will address this question in a simple and straightforward manner.
I think life insurance is a fantastic tool. It is a bargain when purchased correctly, and it can provide the financial security every family should have. But everybody does not need life insurance. Many families are fine without it. Find out the real story about life insurance this weekend.
If you miss the show live, Saturday morning from 10 a.m. to 11 a.m. Pacific Time on KRLA News Talk 870 AM, or tape delayed in Phoenix, Ariz., at 1:00 p.m. on KFNN 1510 AM, you still can hear the show at my Web site, www.dougfabian.com.
For those of you outside the Los Angeles and Phoenix areas, you can listen live via the Internet. To find out how to listen to the show live online, just click on the link below. If you can't listen to the show live, don't worry. We archive all of our shows at our Web site, so you can listen to them whenever it's most convenient for you. Again, click here for all of the information on how to be a part of the new show.
I am very excited about the new radio show and its format. I believe there is a big knowledge gap in America when it comes to personal finance and my goal is to help close that gap. I invite you to listen in on my mid-week audio blog to get my latest thoughts on finance.
In my opinion, Americans are just not paying enough attention to what matters when it comes to money. I'm making it my mission to change that. As most of you know, I am no longer doing my daily radio show. Being relieved of my daily show prep has freed me up to do more writing and research into the areas that will make you wealthy.
Here's an example of one question I received, along with my response, from a listener to the new show.
Question: My wife and I are big fans and have been listening to you for about five years. We just moved from California to New Jersey and have been picking up your shows on your website archives. Thank you for providing your show in an MP3 format, as that is the only way I can have access to your show here. I listen to it on my iPod on my way to work.
I'm sorry to hear that the daily show is gone, but I'm glad you are keeping the weekend show and I love the new format. We're finally getting the opportunity and nerve to start investing for our retirement. I hope I can have a few minutes of your time to ask a few questions I have.
I am self-employed and I'm wondering if I should invest in a SEP IRA or a Roth IRA. I think I'd like it to be tax free at the beginning, but I don't know if that is the best solution. What do you think Doug?
Answer: First off, thanks for the kind words on the show, and thanks for continuing to listen. My first inclination in answering your question is that if you are self-employed, you should probably go with the SEP IRA. You can contribute 25% of your total earnings up to $45,000 per year into the SEP IRA, as opposed to only $4,000 per year in a Roth IRA. Now granted, I don't know the full story of your tax and business situation so the best course of action from here is going to be to speak with your CPA to see what makes the most sense for you.
If you've got a question you'd like me to address, or if you just want to find out more about the Fabian services, please contact me here.
CLOSING THE ANNUITY KNOWLEDGE GAP
I am enjoying my daily conversations with readers around the country on the subject of variable annuities (VAs). I am fulfilling my passion for helping people, and I'm becoming more aware of the various issues facing annuity owners.
Should you rollover your existing annuity? Should you spend it? What is the most tax effective way to get money out? Do indexed annuities make sense? Are all the promises that annuity companies make true? Honestly, I don't have all the answers myself, but if you know what questions to ask you're usually able to make a well-informed decision by seeking out the right assistance.
W.I.I.F.M. This is the acronym for "What's In It For Me." So, W.I.I.F.M., Doug Fabian, to do these free annuity coaching sessions? Well, one benefit is that I am able to build relationships with people, and that's the best way to build a business in financial services. You'll all soon be hearing about my new business ventures in the not-too-distant future, so stay tuned.
These annuity coaching sessions are specifically geared toward helping individual investors understand the sometimes confusing landscape of variable annuities. To make the right decisions with your VA, it is critical that you become aware of all your VA's details and options.
Understanding annuities requires experience and knowledge. I want all my Alert subscribers to know all of their options before making decisions. If I can help you with your annuity questions, please just pop me an e-mail and let me know.
If you would like to get your FREE annuity coaching session with Doug Fabian, simply send an e-mail.
WISDOM FROM A SCIENTIFIC GENIUS
"We are the offspring of history, and must establish our own paths in this most diverse and interesting of conceivable universes -- one indifferent to our own suffering, and therefore offering us maximum freedom to thrive, or to fail, in our own chosen way."
—Stephen Jay Gould, author, paleontologist and evolutionary biologist
As humans, we have the "maximum freedom to thrive, or to fail, in our own chosen way," as Stephan Jay Gould so aptly points out. Remember this when you are making financial decisions, as it is the choices you make that determine whether your portfolio thrives or fails.
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.