Spain has 14 public holidays (here in the U.S. we have eight) and workers are guaranteed 22 paid vacation days on top of those public holidays. If they work in Spain and get married, they are guaranteed 15 days off (paid, of course), if they have a wedding, birth, hospitalization, death or other family emergency, they get four paid days off. If they fall sick, Spanish employees get wages for 18 consecutive months. If employers want to fire anyone, they have to pay 24 months of severance.
Pretty generous, to say the least. Spain and Italy are having big fiscal problems and high unemployment because of these kinds of work rules, and it appears that there’s no end in sight.
Unfortunately, many countries in Europe don’t seem to see that these kinds of laws are continuing to add to their fiscal issues. Sicily’s regional government has 1800 employees, and 26,000 auxillary forest rangers (compare that to 1500 forest rangers in British Colombia!) 100,000 Sicilians work for the government, and most have massive pensions and healthcare plans.
Some countries are trying to do the right thing, while others are doing the wrong things: France recently raised the highest tax bracket to 75% and lowered retirement age to 62, (compared to the German retirement age of 67).
With these kinds of work rules, high taxation and growing deficit, we again hold that Europe is not fixed, and risk is extremely high in the markets. Stay careful with your investments, and remember to pay attention to the fundamentals.
This is a podcast summary. For more complete details, please listen to the full podcast here.
This is a podcast summary. For more complete details, please listen to the full podcast here.
We saw this fascinating statistic today: Yesterday was the eighth Monday in a row that the Dow has been down. Internationally, we are seeing decoupling from the U.S. and the rest of the world. There’s a big difference between the two, and the question is, is the U.S. going to slow to match the rest of the world, or will the rest of the world catch up to the U.S.?
In Europe, Spain and Italy are both struggling this week. Cities are running out of cash in Italy, and we also saw the headline recently that there will be no more aid for Greece, which is on the verge of default.
Debt needs income to service it. In Spain, for example, they don’t have a growing economy (their economy is shrinking) and so they don’t have the income to meet their debt obligations. Debt needs growth to combat it, and in Europe, the economies are not growing and so the debt is not being serviced, and this is creating more debt problems.
Stateside, when we’re less than 5% above 200-day moving average, we call that an alert mode, (meaning keep a close eye on short-term market action). When markets pierce the 200-day average, we tend to see follow-through selling, and also, that’s a signal of a potential bear market emerging. In good domestic news, the bond market is still a bull market and is still doing well.
Announcements:
If you’d like a great educational experience and to see Doug present live, we will be at the San Francisco Money Show on August 24 – 26, 2012. Doug will be offering four presentations, and we encourage investors to consider attending, as it is a great experience.
Also, if you missed the teleconference last week, we are making it available for you. Please check out our complete recap and recording, here.
In our teleseminar a couple of weeks ago, we discussed some growth opportunities – one of which was to buy emerging markets in a market panic.
Emerging markets revolve around commodities, and are export based. When you look at the “BRIC” economies (Brazil, India, China and Russia) you notice that all of them are reacting to the contracting global economy. Obviously, growth of the global commodities market is key to how these economies perform, and as we go into a global slowdown its clear to us that these emerging markets will underperform.
U.S. markets are down 9-14%, so we’ve fared much better than most international markets. However, it’s all about policy response. The EU is dealing with Spain, their economy is contracting, tax revenue is falling and people are nervous. We are expecting central bank action at some point as these economies contract – trying to create soft landings around the world – but we don’t know for sure when or what these central banks will decide to do.
As we mentioned earlier, opportunities are still to come in this market. We are watching the emerging markets and the other growth opportunities we mentioned in the teleseminar, and we believe that the next few weeks will be critical to your portfolio. Stay alert! This is a day-to-day economy and needs constant monitoring. The crisis in Europe has not been solved, and we think the best posture right now is a defensive one.
Politics are swinging between left and right as the European Union tries to deal with their debt crisis. Watching this news unfold is important for investors – we think it’s important to know how austerity, deficit spending, taxation and other economic news affects your portfolio.
That said, here’s some of the news we’ve been following about the political and economic climate in the Eurozone:
Just to bring this a bit closer to home, local politics affects our portfolios as well. Here in our home state of California, we have similar deficit, taxation and spending issues to the EU. Here’s a few of those news stories:
Be careful in the markets and stay aware of how politics affects your portfolio – listen to our podcast every week for up-to-date details and analysis, or call us today for a personalized consultation at 1-800-391-1118
First, Europe represents 25% of the global economy. Spain is the fourth largest economy in Europe and it is in economic shambles. The Spanish government is cutting severely in entitlements (unemployment benefits, pensions, etc.) and there is no job growth in Spain. People in Spain are more conservative with their money right now, causing a contraction in their economy, looking to contract a total of 7% this year. (To put that 7% in perspective, that’s about how much the U.S. contracted in 2008 – we all know how that affected the markets and economy.)
Second, Apple Computer is a phenomenal company, and it’s almost a stock index in itself. Apple stock alone accounted for 36% of all the earnings in the S&P 500 in the first quarter. We bring this up because if APPL was to falter, we would see some serious issues in our stock market.
Lastly, we want to remind you that stock markets go down 3-5 times faster than they go up. This is an unfortunate reality, but one to keep in mind as you watch the fundamentals and the global economy in changing times.
(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.)
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.
First it was Greece, and then it was Portugal, now it’s Spain. Of course, I am talking here about the recent debt downgrades in these three PIIGS nations. PIIGS is the market acronym that stands for Portugal, Italy, Ireland, Greece and Spain, and so far three of these five little piggies have been taken out to slaughter by ratings agency Standard & Poor’s.
Today, Standard & Poor’s downgraded Spain’s long-term credit rating by one notch to double-A. The agency also gave a negative outlook on the EU nation, saying that Spain is likely to experience an extended period of subdued economic growth that will put pressure on the country’s federal budget and its ability to repay debt.
On Tuesday, Greece and Portugal were downgraded two notches each. In the case of Greece, that nation’s debt rating was downgraded to junk status. Portugal isn’t quite as bad as Greece, but that country also is having a woeful time managing its budget in the face of the current economic climate.
The debt problems in Greece, Portugal and Spain aren’t isolated cases, and I suspect we could see a lot more debt downgrades in Europe before this deluge is over. The thing that worries me about this situation is that the spend and borrow policies that pushed these countries into their current predicament are actually being followed to a large degree here in the United States.
We saw what kind of havoc these downgrades wreaked on stocks around the globe in Tuesday’s trade, and just think what could happen to global equities if the United States goes the same way as these three PIIGS nations. I shutter to even think about it, yet my reason forces me to keep this possibility on my list of future threats to investor wealth.
If our government keeps playing the big spend and borrow game for too much longer, we could begin to resemble Greece—without the ouzo, the Mediterranean Sea and the Parthenon.
