We’ve been talking about the European debt crisis for several months now, but we’ve recently coined the phrase “European Blind Side”. You might wonder why we’re so concerned about investors being caught off-guard by developments in Europe, so we thought we’d use an analogy from out here in California.
We see it all the time – it’s a sunny day on the beach, and people have driven in from all over to come to the ocean. Tourists and locals alike are stretched out on blankets in the sand with coolers and umbrellas, ready for a great day. However, it inevitably happens that those who aren’t as familiar with the water, or who just don’t pay attention, will place all of their beach-day accessories too close to the shoreline at low tide. When the tide starts to move in or a big set of waves appears – and they don’t even have time to react – their towels are soaked, their cell phone has gone for a swim and their beach day could very well be ruined.
We think that this is what will happen to many investors who aren’t watching Europe closely. They feel lulled to sleep by the “sunshine” of relative security and up markets here in the U.S., and may very well have their holiday ruined by a big, ugly wave from Europe. Investors who aren’t paying attention to Europe are going to be hit hard and not know what happened or why.
The moral of this little analogy is simple: pay attention and stay educated and aware. Listen to our recent teleseminar for more in-depth analysis of what’s happened in Europe and what is soon to come, and make sure that you are prepared to preserve your capital and keep your towel dry, so to speak.
This is a podcast summary. For more complete details, please listen to the full podcast here.
Lately, Monday mornings have been busy with news, and this week was no different. We are seeing a lot of change in the world right now that could change our investment portfolios, and we do our blogs and podcasts in an effort to help investors stay educated and aware. We think it’s essential to stay on top of the latest happenings and understand how it impacts the markets, so let’s a take a look at the news:
Despite what seems like an onslaught of bad economic news, we believe that growth opportunities are in front of us. We think that investor’s highest priority should be capital preservation, and we are waiting for our buying opportunities to come later this year.
This is a podcast summary. For more complete details, please listen to the full podcast here.
(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.
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 all know the phenomenon of “sell in May and go away” in the stock market. But is that really an effective strategy? Here’s a couple of articles we read recently on the subject:
“The argument for “going away”: Over the last 12 months, investors who held to this belief made out pretty well. From May 1-November 1, 2011, the Dow lost 6.7%. From November 2011 through April 27, 2012, it gained 10.7%.
If we open a historical window – specifically, The Stock Trader’s Almanac – back to 1926, we see the S&P 500 rising 4.3% on average during May-October and gaining an average of 7.1% from November-April.”
“On Wednesday April 18th, Jeffrey Hirsch provided election year statistics for the “Worst Six Months”, May to October. The results of that research began in election year 1952 and ran through 2008. 1952 was chosen as the starting point of the study primarily because the U.S. economy (and the global economy) was substantially different prior to that year than now. From 1901 to 1951 farming made August the best performing month of the year. This is no longer the case and August is now the second worst month of the year. In response to inquiries about years prior to 1952, the table from that post has been updated to include all election years from 1904 to 2008.
By including an additional 12 election years in the table, the results differ greatly, but this was expected because, Augusts’ top-ranking performance, the roaring twenties, a Great Depression and two world wars made those years significantly different (a great understatement). In fact, “Sell in October” would have been appropriate. Prior to 1952, May-October was up 32 of 51 years with an average gain of 3.3 % while November-April was up 29 of those same years averaging a gain of 2.4%. Since 1952, November to April (as of today) has been up 47 times and down 13 with an average gain of 7.5% while May to October has been up 35 and down 25 with an average of just 0.2%.
Before deciding if “Sell in May” in this election year is in the best interest of your investment objectives consider this; since 1940, there has been only one double-digit gain from May to October and the average gain is a paltry 0.3% (excluding the best and the worst, the average is 1.2%).”
Graphic from Stock Trader's Almanac
We believe that investors should be careful to not invest or pull their capital based simply on a season, time of year or “gut feeling”. This is definitely an interesting and risky time in the markets, and it’s important to know about the trends and thought-processes – but not necessarily to follow them.
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.
Before you go on a long road trip, it’s always smart to make sure you have water, flashlight and other emergency supplies in your car. We think of your life and your money as a long road trip – we all have a destination, goals along the way and a few unexpected turns in the road, but with a good road map, some emergency supplies and a little common sense, your financial road trip can fulfill your goals and get you to your destination. We think it’s wise to be educated and prepared in life and investing.
In investing, here are a few turns in the road that might be coming up: a weakening U.S. dollar, inflation or deflation, upheaval in the bond and stock markets, or changes in the real estate market. These can all risks to your capital, or can be used to your advantage, depending on how prepared you are.
Understanding market movements is like your road map on that long car trip. You have to realize what inflation and deflation will do to your capital, and what your on-ramps are (meaning when and why you put your capital to work) for investing.
You need to know what your “off-ramp” is as well – what is your exit strategy for your investments? What is the circumstance in which you would sell your stocks or bonds and are you even aware of what you own?
These changes in the markets can be very confusing if this is not your full-time job, which is why we are here – making podcasts, writing on the blog and helping you make decisions. If you are not sure about your financial goals or you just want a second opinion, please call us at 888-300-3684. Our advisors want to help this investing road trip be a pleasant one and help you get to your destination in the best way possible.
(This is a podcast summary. Please tune into Doug’s podcast this week for even more details on these topics, and feel free to share this information with others who might benefit from our perspective.)
There has been some market weakness lately, and three recent news items can help us make sense of this:
Jobs report – 120,000 jobs created in March, 200,000 expected
In the last week, we’ve seen a market high and several dips. As we often say here at Fabian Wealth Strategies: the stock market falls 3-5 times faster than it goes up, and today we are seeing that come true. Yet another reason to be suspicious of any rallies in this fragile global economy.
Remember that bonds and stocks have an inverse relationship. If we get bad economic news, bonds will do well and stocks will do poorly, just the opposite during good news.
If you’d like an opportunity to hear Doug’s take on your questions or opinions, please send an email to askdoug(at)dougfabian(dot)com
Also, if you want to see and hear our perspective in person, hear some other great speakers and enjoy a getaway in Las Vegas, sign up for the Money Show, May 14-17 2012. Doug will have six different opportunities to present and it’s always a great event, so please check out moneyshow.com to register.
As always, if you have questions about your personal portfolio, please call us at 888-300-3684 and one of our advisors will be glad to help.
Things are changing in the market. The concerns that we’ve had all year about the strength of the global economy are coming to fruition, especially in Europe.
Spain, Italy and Portugal are undergoing tough budget cuts, and this is causing some real pain in those economies. Spain, for example, has about 23% unemployment, and as much as 40% unemployment in young people – a circumstance which will likely lead to some significant civil unrest. Spain is the 12th largest economy in the world, and we believe that it will be the “new Greece” – a serious problem for investors to keep their eyes on.
The Federal Reserve meeting minutes this week revealed that QE3 is not coming in the near future, even though we expect a program of some kind to roll out soon. Obviously, we noticed a reaction in the market to this news. As always, pay attention to the risk factor and have an exit strategy for your capital.
We appreciate your feedback as well! Please email any thoughts, questions or concerns to askdoug(at)dougfabian(dot)com
(If you read this blog and enjoyed it, listen to Doug’s podcast this week, and please share this information with others who might benefit from our perspective.)
There are long and short-term implications to your investments because of public debt, deficits and unfunded liabilities, and you need to be aware of these policies in order to protect your capital. Stockton, California is just one example of cities, counties and states around the country that are in serious financial trouble.
“Stockton couldn’t afford this rich program (public employee salaries and pensions) even in boom times, so officials played risky investment games. In 2007, the city borrowed $125 million and put the money into Calpers, the giant California pension fund, betting that investment managers could earn more than the interest Stockton owed on the debt. When the market tanked, Calpers lost 24%-30% of the loan’s principal, according to city budget documents.
Now Stockton is stuck with interest costs on top of pension obligations that pile an additional 48% onto basic employee pay. Thus a public safety worker earning $70,000 annually costs the city another $33,000 in interest and pension-borrowing costs.
Perched precariously atop this mountain of obligations are retiree health benefits. Stockton officials awarded these to city employees in a series of votes in the 1990s but made no effort to fund them, intending simply to pay costs out of their budget as workers retired. As hundreds did just that over the years, the costs grew. Next year, the city’s fiscal documents project, retiree health costs will surpass those of the city’s regular work force. At last count the city’s unfunded liabilities for retiree health care are above $400 million.”
As the article concludes:
“The big question is whether Stockton is only the tip of an iceberg. The 50 states alone have promised their employees retirement health-care benefits amounting to a $627 billion future liability—and funded only 4% of that cost, according to a recent accounting by Bloomberg Data. Unfunded state and municipal pension liabilities range up to $4 trillion, depending on what future investment assumptions you make.
Most local governments may never reach insolvency, but the rising costs of these benefits already crowd out other spending, including on police and fire protection. Thanks to unaffordable promises made by politicians who never bothered to total up the costs, we’re in a new era of local government in America: Taxpayers can expect to pay more but get less.”
Unfortunately, Stockton is not an isolated incident. We all know about the troubles in Greece, Spain just released the “most austere” budget yet, and Detroit is another U.S. city (amongst many) that is on its way to insolvency.
At the Federal level, debt and deficits are also a problem – one look at the U.S. Debt Clock will tell you that. Sometime in the next year or two, politicians will have to start addressing our fiscal problems, and as we see with austerity in our cities, states and around the world, we believe this will not be a pleasant conversation for most Americans.
Don’t lose sight of these fiscal issues facing us, both domestically and globally. You never know when the market is going to recognize these problems and start to slow down. Higher taxes, spending cuts and slower economic growth are a drag on the markets and the economy, which creates a risky environment for investors.
(If you read this blog and enjoyed it, listen to Doug’s podcast this week for even more details on this topic, and please share this information with others who might benefit from our perspective.)
The markets are up, and they continue to be flooded with “easy money”, which is solving some of the Eurozone’s short-term debt problems. Here in the U.S., we’re also still seeing very low interest rates, thanks to the Federal Reserve. We read some opinion pieces today, saying that 80% of stock market rally relates to “easy money” policies by Ben Bernanke and the Fed.
Here’s a few of the articles we read this week about these “easy money” strategies:
The largest asset pool that we have clients in here at Fabian Wealth Strategies is bonds, and we think that this will continue to be a safe harbor for investors, as we wait to see what happens with the European crisis and global slowdown. Remember, be careful out there, as we believe that these are risky markets and wise investors should focus on capital preservation right now.
