(This is a summary of our exclusive live teleseminar with Doug Fabian on May 8th, 2012. If you’d like to hear the audio recording of the teleseminar, please click here.)
The Global “Big Picture”
If you listen to our podcast and read our blog regularly, you know the market forces that concern us: market volatility, uncertainty in Europe, public debts and deficits, slowing global growth.
Here’s a glimpse at those concerns and the big picture, region by region:
Europe: Belgium, Germany and the Netherlands are the only countries in the EU which are currently trading above their 200-day moving average. Eleven countries in the European Union are in recession, while Greece and Spain are in a depression. We are also seeing other countries start to contract – which means less tax revenue, less growth, more unemployment and more unrest in Europe. Remember that this news is important because the EU represents 24% of the trading of the world.
China: also trading below its 200-day moving average. Slowing economic growth and some news of political change there as well. China is not in serious trouble, but is contracting slightly with global trends.
Japan: also trading below 200-day moving average. Japan had a serious setback last year with the earthquake and tsunami, and they aren’t out of the woods yet. They just shut down all 54 of their nuclear power plants for safety reasons, which is causing an energy shortage, and Japan already has massive public debt to deal with as well. Japan is the third largest economy in the world, (right behind the US and China).
Emerging markets: Also trading below 200-day moving average. Their success is tied to established markets and they are export driven, meaning that contractions in the markets effect them heavily. You may have noticed that oil prices have been falling, and the emerging markets are very focused on commodities – so this global slowdown really impacts the emerging markets.
In all, global growth looks suspect and vulnerable to any shocks. Panic in the markets, bank problems or another crisis in Europe seems like the most likely place we can expect a shock to come from. However, in Europe’s case, it might also be a solution to this global growth problem as well.
If the Germans decide to borrow more money and step up to back the other countries in the European Union, this would be a positive for EU and the rest of the world. In that case, we would expect markets to come back and volatility to ease considerably. However, right now Germany seems set on austerity, and while we are watching closely for any changes, we also have to be knowledgeable and realistic about the current global situation.
In the United States, we are spending $1.40 for every $1 we bring in. This is creating a 9% budget deficit, which is unnaturally high and a bit disconcerting. However, the world doesn’t seem to care about the U.S. debt and deficit and we have been able to finance the debt so far, so its been a safe haven for the rest of the world.
Also in the U.S., the federal stimulus plan is currently in place, keeping the economy growing at about 2.2%. Despite the United States’ safe haven status and relative security, we believe that Investors have been lulled into complacency, which we think will be very dangerous. Risk is still at play in the financial markets, and the slowing global growth will influence the US markets fairly soon.
Because of these factors, we think it’s essential to have a game plan and an exit strategy for your investments. We believe that there’s a 70% chance that we’ve already seen the high in the US stock markets this year. The only caveat is that if Germany decides to fund the EU’s debt crisis, the markets could kick back into gear – which is why Europe and the debt crisis there is so important to watch.
Fiscal cliff: January 2013
There are four laws that are going into effect in January 2013. We are calling this a “fiscal cliff” and we think they will have serious implications for your investments. These can only be changed by an act of Congress and the President’s signature – so they need to be taken seriously – as of right now, this isn’t just political theater.
Bush/Obama tax cuts will expire in January 2013
Employees are not paying social security (payroll tax) which equates to approximately $45/pay period. This will kick back in to play in January 2013
Obamacare taxes on investors January 2013
Automatic spending cuts to discretionary and defense spending in January 2013
Between the November election and January 2013, there’s a very small window to change these laws, and these new taxes, and the political gridlock that may be unable to change them, means that a US recession is a very real possibility.
As we watch the markets – with all of these uncertainties in the US and abroad – remember that we want to invest during a “sale”. We want to get a good deal, and we think that capitalizing on sell-off, panics and sectors that no one else is buying is the way to do so.
Favorite Growth Strategies
Emerging Markets: Observe on the chart that during the 2008 decline, the emerging markets went down significantly. Emerging markets are very susceptible to panics and crisis. The main message to remember is that we need to buy them when everyone else is panicking and they have dropped out of favor. Emerging markets are developing countries – they don’t have entitlement programs, they are embracing technology and they are very likely to grow without all of the weight that developed countries face.
Check our exclusive ETF list for more details on emerging market opportunities.
Energy: Energy is a great long-term theme and it has yet to flourish in the markets this year. Big oil stocks are down, but we believe that natural gas is the big story for the future. New developments in how we discover and access natural gas have brought the price down, and this is presenting an excellent opportunity for investors.
Natural gas in Europe is $15/BTU, in Japan $17/BTU. Here in the U.S., natural gas is $2/BTU. This is actually creating a manufacturing boom in the U.S. and is a great opportunity for job growth and economic stimulation.
Natural gas infrastructure is not well-established in the United States. This will take some development and will also be a great opportunity for investors. Five years from now, we think it will be fairly easy to convert cars to natural gas and this will drive the price higher as more people start to use it. We are now benefiting from low natural gas prices and the infrastructure does not exist yet – so this is going to be a great investment opportunity. IEZ, XOP and FRAK are the three best ETFs for natural gas investment in our opinion. Right now, price trends on natural gas are down – we don’t have these in our portfolios today, but we are watching them for our opportunity.
As we look at energy opportunities, owning traditional oil might be a good move too, if it “goes on sale”. China is still developing and will continue to need oil, so if the economy stabilizes, then oil will probably be a good investment.
Precious metals: Gold is setting up for a nice move to the upside. Why? Because of inflation and deflation.
Deflation: Reduction of the general level of prices in an economy. Deflation is what the banks are worried about, why we borrow money, why we bail out banks, etc. Jobs are lost during deflation and politicians don’t want that.
Inflation: A general increase in prices and fall in the purchasing value of money. Money has less value during inflationary times.
If any kind of crisis occurs, the Federal Reserve will step in and try to stabilize the economy, which means more debt and deficit, and more inflation. The reason gold has risen in value is because people know this, and they are concerned about the value of money and the effects inflation and deflation will have on their investments.
Also, because the United States economy is still struggling in some ways (2.2% growth isn’t exactly stellar, and jobs numbers are still lagging) this is a concern for many people. If we continue to see debt and deficits around the world, gold will continue to be a strong bid.
The other part of the precious metals equation is the emerging markets. In many areas of the world, gold is one of the few stable investments, so there is some competition to bid the price up.
The big story in the precious metals opportunity is in gold stocks. Gold mining ETFs are down, and pairing investments in precious metals as well as gold mining could be a smart move for growth investors. Again, this is not a “buy now” signal, but we are watching these for investment opportunities when gold prices stabilize.
All three of these growth strategies will be great opportunities – perhaps even in the very short term. Our philosophy is to buy when they present great value, when they are depressed in price. We will be talking about these a lot on our podcast and blogs, and you can always call for more information.
Action Items and Questions to Ask Yourself and Your Advisor
Prepare yourself for the next stock market decline. Be prepared for more European crisis, the fiscal cliff in the U.S. in 2013, and educate yourself on how to preserve your capital and survive this market volatility.
How are you going to take advantage of the buying opportunities in the three key areas we mentioned earlier? Are you monitoring these changes closely or do you have someone watching this for you?
What does your portfolio look like, and does it line up with your goals and objectives?
As always, here at Fabian Wealth Strategies we are available to discuss your portfolio and help you make these decisions in the best way possible. Call us at 800-391-1118 for your free portfolio review.
Note: The information expressed in this seminar is for educational purposes only and should not be construed as a recommendation to buy, sell, or hold any investment security. Doug Fabian is a registered investment advisor representative. The opinions expressed in the seminar are not considered personal investment advice. Consider the risks, fees, and expenses before making any change to your investment portfolio.
Over the weekend, we saw France select a new president - Nicolas Sarkozy, the incumbent conservative, lost to Francois Hollande, the socialist candidate. Hollande is pushing for less austerity and more pro-growth policies (a tactic which Germany disapproves of). This is why we saw a sell-off in French markets this week, and we’ll probably continue to see some downturn there as France transistions their government.
Elections also were held in Greece last weekend, in which many fringe political parties gained traction and no clear majority was found. This means that under Greek law, they will have to hold another election. Greece continues to have a lot of unrest and uncertainty about their economic situation, so that’s a section of the world that we still need to pay attention to.
Also, on top of this news from Europe, we believe that global growth is slowing. Europe is in a recession, China is slowing down and oil prices are falling, showing us that the global economy looks to be contracting. Slowdowns and sell-offs will likely create buying opportunities for savvy investors, but as always, be careful in the markets and stay informed about what’s happening domestically and globally.
Don’t forget to sign up for our next teleseminar, titled: Strategies for Growth in Uncertain Times, and will be presented by Doug Fabian, on Tuesday May 8th at 1:00 p.m. Pacific (4:00 p.m. Eastern).
While this teleconference is FREE, attendance is limited, so please be sure to register HERE and reserve your spot today.
We expect to invest in emerging markets this year, and want our audience to be aware of changes and trends in this area. Over the last 10 years, here’s what’s happened in emerging markets:
2003 ended the bear market and began a new bull market in the U.S. – 400% increase in emerging markets that year.
2007-2009 emerging markets fell 65%
2009-2011 emerging markets moved up 135%
There are over 100 Exchange Traded Funds for the emerging markets. You can invest broadly or even focus on a single country or industry group using ETFs. We think this is incredible, as it gives investors a chance to invest in as specialized of an area as they like.
While established markets like the U.S. and UK have had centuries of equity investing, the emerging markets are relatively new, and have much greater earning potential than developed markets. We believe that emerging markets offer great potential, and that this is an area that you need have in your portfolio long-term.
This year we plan to invest in emerging markets, but our approach holds that we do not want to buy until the rest of the market starts to panic. When that happens, emerging markets will go on “sale”, and we think that is the best time for investors to jump at this opportunity. If you have questions about when to invest and why, please call us at 800-391-1118.
Thanks for reading our podcast summary. If you want more details on what is discussed on the blog, please listen to the full podcast here.
“Two weeks ago, the iShares FTSE China 25 Index Fund (FXI) broke down below its 50 and 200-day moving averages (DMAs) just 5-6 weeks after an important breakout above these MAs.”
Remember, China is the second largest economy in the world, right behind the U.S. An economic slowdown seems to be on its way in China, (as shown by the performance of the Chinese ETF referenced above) and there is some debate over whether the Chinese economy will undergo a “hard” or “soft” landing. What does that mean?
Soft landing: the economy contracts at a rate that is manageable.
Hard landing: just like in an airplane, can be bumpy and a little scary – inflation can get out of control, along with possibilities for civil unrest and burst bubbles.
The European debt crisis and recession contributes to the Chinese slowdown, and we continue to believe that this will be an interesting year for investors, both domestically and globally. Because of this, we are watching the global markets carefully and we are actively promoting caution to our clients and readers. For more details on our investment philosophy for the next three years, click here.
This is a podcast summary. For more complete details, please listen to the full podcast here.
Doug Fabian’s next live public speaking event will be in Las Vegas at the Money Show, where we’ll have about six different opportunities to present. Please check out moneyshow.com to register or for more information. Also, if you’re not already receiving it, be sure to sign up for our free e-newsletter, the Making Money Alert, here.
Growth is slowing in China. Auto sales are up 5% (but should be up about 8%). As the global economy slows, production is slowing and property prices are falling in China, and as the world’s second largest economy, we believe this is worth noting for savvy investors.
Europe
Europe’s debt problems are not solved, and people are pulling their money out of banks because of widespread distrust. This makes it very difficult for banks to loan to businesses, which forces even more contraction in the economy.
As this BBC article notes, it looks as though Spain might be the new Greece, and as we’ve said for a while now, Europe’s debt crisis is far from over.
U.S. Stock Market
Wall Street analysts are feeling bullish about the stock market, but we see some challenges with their optimistic analysis.
We have to contend with the slow-down in the global economy.
Plus high gasoline prices.
As we wrote yesterday, taxes are going up in 2013, and we also have an election year to contend with.
The moral of this story is: pay attention, and be ready to grab your gains and get out. As we mentioned yesterday, know your exit strategy, as we expect this market to change very quickly, and we still believe that risk is very high.
In a word, no; we don’t believe so. To use a cliche, the proverbial can has been kicked down the road, and pain from the European debt crisis is far from over.
Some people are tempted to liken the debt crisis in Europe to our own struggles a few years ago here in the United States. However, there are three important variables to remember when contrasting the European debt crisis of today and the U.S. fiscal crisis in 2009.
The U.S. implemented TARP, (basically, a way for banking institutions to borrow from the Federal Reserve)
The U.S. created the Stimulus package
The U.S. has had little to no austerity measures (in fact, there was the opposite, with expansive unemployment benefits provided)
In contrast, the Europeans are requiring austerity and struggling through very high unemployment and cut pensions, plus much higher taxes. Add to that the very high cost of energy and basic living costs in Europe, and we feel this is bound to be a slow recovery, if a recovery at all.
We mentioned the triple threat to your financial portfolio last week, and we encourage our readers and listeners to not get caught up in the idea of “lost opportunity” during these first few months of 2012. We are still convinced of the risks that weak fundamentals and global economic contraction pose on our investment capital, and we encourage you to be cautious when investing.
This is a podcast summary. For complete details on the items discussed today, please listen to the full audio here.
This is a podcast summary. For complete details on the items discussed today, please listen to the full audio here.
In keeping with our conservative investment style, we believe four things this year:
This is not a new emerging bull market
The global economy is slowing
Stocks are high-risk
Our overall investment posture should be conservative, waiting for opportunities to come to us
You may wonder why we hold this view when the market seems strong, and again we are going to point to fundamentals. We believe that in 2012, Europe will continue to be weak, which causes China to weaken, which effects the global economy and, finally, the U.S.
To put this in perspective, the European Union is the world’s largest economy and accounts for 28% of the global economic output (in contrast, the U.S. is 25%) and 17% all S&P 500 company earnings. The other part of this equation is that China is the EU’s largest trading partner, which means their fates are linked in some ways.
The most recent data suggests that Europe still has some significant economic problems. We’ve all heard about the problems in Greece, but now others, such as Spain and Italy, are following suit. Today we read this is the Wall Street Journal:
“China’s manufacturing activity contracted for the third straight month in January, according to one early indicator, in the latest sign that growth in the world’s second-largest economy is slowing.”
We’re not saying all of this to be fear-mongers, but we are still waiting for opportunities to buy. We’re constantly reassessing our data and our opinions, but for right now, we are holding to our conservative approach.
Remember what we’ve said, that there’s a 5% potential upside in this market and a 20% potential downside. Sounds pretty risky for your hard-earned capital, and we don’t think it’s worth the risk, since we believe better buying opportunities are sure to come later in 2012.
For several months now, we’ve believed that there would be a lot of risk in the first part of this year, and some great buying opportunities in the second half of this year. However, the stock market has been performing quite well so far in 2012, so you might have missed some upside opportunity if you followed our advice. There are two belief systems about what this means:
The European debt crisis is either fixed or doesn’t matter, and investors should engage in this market as soon as possible. The economy is improving and markets are rising.
Europe is entering a recession and if Europe is entering a recession, it will effect China and the U.S. and create a global economic slowdown. Risk is high and investors should be cautious and conservative with you capital.
We are in the second group, as we have been for some time, and we are still encouraging our audience to be cautious. We do believe that good investment opportunities are coming soon, but the time to buy is not right now.
If you want more information on this, please check out our special report for more information on how to invest wisely. If you have questions about your personal portfolio, please call us at 888-300-3684 or email askdoug(at)dougfabian(dot)com
The promise of the Chinese market is both alluring and foreboding at the same time. It is enticing due to the country’s estimated average 9.3% economic growth rate for the past 25 years, 1.3-billion population and the opening of its markets to foreign investment after decades of anti-free market policies carried out by backward-thinking communist leaders. However, skeptics point to empty buildings constructed with funds from the questionable loans of Chinese government-controlled banks as one of many reasons not to be swept up in the belief that China has transformed itself into a stable, world economic leader.
My view is mixed. I acknowledge that China holds great potential as a market to sell goods, especially as its people begin to earn more money to buy them. I also think China is gaining clout in the world as a net exporter of goods that has helped the country to hoard U.S. dollars. Further, China is keeping its goods relatively inexpensive to maintain its exporting advantage with most other countries by artificially limiting the value of its currency, the yuan.
On the other hand, a significant part of China’s annual growth could well be coming from government spending to pursue projects that may not generate a legitimate return on investment. One example is the so-called “Bird’s Nest” stadium in Beijing that still has not found a significant use since its role as the high-profile venue for the opening and closing ceremonies at the 2008 Summer Olympics. Also keep in mind that just because something has potential does not mean it will be realized anytime soon. Even though certain Chinese companies may claim sharply rising profits and revenues, the absence of any requirement to use Generally Accepted Accounting Principles (GAAP) in reporting financial information in the country leaves reason for doubt.
For those who believe in a Chinese miracle, you may want to consider investing in the iShares FTSE/Xinhua China 25 Index (FXI), which has outperformed the S&P 500 (GSPC) convincingly during the past five years.
FXI, an exchange-traded fund (ETF) launched October 5, 2004, seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE/Xinhua China 25 Index. When the index rises 1%, FXI should gain 1%, too. It is well-established and has a large average daily trading volume of 21 million shares.
If you want to double up a bullish bet on the Chinese market, you can try the ProShares Ultra FTSE/Xinhua China 25 (XPP), which seeks daily investment results, before fees and expenses, that would be twice the daily performance the FTSE/Xinhua China 25 Index. With this leveraged ETF, a 1% increase in the index ideally would be accompanied by a 2% boost in XPP. That fund started June 2, 2009, so it is the newcomer of the pair and has an average daily trading volume of 33,244 shares. I generally like to see a fund generate an average trading volume of 100,000 shares before I recommend it.
If you’re a skeptic about China and think its market is vulnerable for a big hit, consider the ProShares UltraShort FTSE/Xinhua China 25 (FXP). That fund, launched November 6, 2007, it is intended to seek daily investment results, before fees and expenses, that correspond to twice the inverse of the daily performance of the FTSE/Xinhua China 25 Index. However, the compounding of daily returns will cause the fund’s returns to differ in the amount and direction of the target return for the same period.
Finally, I urge you to stay cautious about going double-long or double-short of the Chinese market. Those leveraged funds can be volatile, and they may take you and your investment for a wild ride in either direction.
