Bitcoin (BTC=), the world’s most popular digital currency, has been on a roll — but no one is really sure why.
After dipping well below $200 in January, bitcoin traded at more than $410 Tuesday afternoon before cutting some of those gains, according to the CoinDesk Bitcoin Price Index. That’s about 25 percent higher than the same time last year but well below the historical high of about $1,150.
This upswing, which began about a month ago when bitcoin traded below $240, comes on the heels of a steady stream of good news for the digital asset and its associated ecosystem. But even with recent favorable regulatory rulings, press coverage and business investments, experts in the space are struggling to explain the one-month jump of more than 70 percent.
For comparison, gold (@GC.1) is down about 5 percent on the year, and slightly negative on the month.
Some have attributed the size of the recent jump to investors’ fear of missing out (FOMO), while others such as “Fast Money” trader Brian Kelly point to ecosystem headlines like the Winklevoss twins launching their exchangeand the Digital Currency Group announcing funding from Bain and MasterCard (MA).
But bitcoin has boasted a steady parade of media highlights and major investments from important financial firms all year, so it’s not immediately obvious why this past month would mark a turning point.
Brendan O’Connor, the CEO of bitcoin trading firm Genesis Global Trading, told CNBC he has no easy answers about the price jump. Although he said rumors were flying around the community about international rings of traders teaming up to drive up the exchange rate, O’Connor was unable to confirm anything he’d heard.
For its part, Genesis Global is experiencing a “dramatic increase in activity” from renewed interest in bitcoin as a tradable asset, O’Connor said.
“When the price starts going up, people start coming out of the woodwork,” he said. “We’re setting new records almost on a daily basis for amount traded and number of transactions.”
It should be noted that bitcoin is a relatively illiquid market, so its exchange rate against major world currencies has been historically volatile. Still, O’Connor said volume from the Chinese bitcoin market has been “off the charts,” so there may be a genuine upswing in interest from that region.
In fact, Kelly suggested in a Tuesday note that Beijing’s tightening of capital controls may have spurred some of the recent price gains.
Additionally, many in the bitcoin community insist that the daily price of the cryptocurrency is not a relevant metric, as it distracts from the world-changing potential of the technology.
Others worry that the cycle of mainstream media coverage on bitcoin’s price will recreate a story they’ve seen before:
Americans don’t spend nearly as much time at post offices as they used to, but that’s not only because postcards are being replaced by Evites. For more than half a century, from 1911 until 1967, the Postal Service also served as a bank. Customers could walk down the street to the post office with their money and deposit it in a savings account there.
The system made sense back in those days, when the country was more sparsely populated and banks were harder to find, but post offices were everywhere. Over the past 50 years, though, the total number of bank branches in the United States increased from 16,000 to 83,000. What’s more, people visit the bank less frequently these days, given the ubiquity of credit cards and direct deposit.
Still, there are still relatively few banks in many impoverished urban and rural neighborhoods, and Sen. Bernie Sanders (I-Vt.), a candidate for the Democratic presidential nomination, has a big idea for turning post offices back into banks. That’s because he sees them as a place where the 68 million low-income Americans who currently rely on payday lenders and costly cash checking services could manage their affairs less expensively. (And banking might help the beleaguered Postal Service’s bottom line as well.)
“What people are forced to do is go to payday lenders who charge outrageously high interest rates. You go to check-cashing places, which rip you off,” Sanders said recently. “And, yes, I think that the Postal Service, in fact, can play an important role in providing modest types of banking service to folks who need it.”
Postal banking is still a part of everyday life in many foreign countries, including the United Kingdom and France, and the U.S. postal inspector general issued a report endorsing the idea last year. The report argued the Postal Service should consider not only opening savings accounts again, but also expanding into short-term loans and debit cards as well.
Bricks and mortar The inspector general also noted several reasons why the Postal Service might be able to help those on the margins of the American economy bank more cheaply. Start with payday lenders, whom Sanders and other proponents see as the villains in the dark tale of unconventional financial services.
Maintaining a large volume of customers at each storefront is crucial for payday lending, according to a study of the industry published by the Federal Deposit Insurance Corporation. With more customers, lenders are able to defray the costs of keeping the lights on through lower interest rates. The most profitable payday lending branches have been open for a while and have established a base of customers in the neighborhood. The study found that on average, payday lending firms earn about nine cents on every dollar they loan.
The Postal Service already has locations all over the country, though, and everyone who walks in to buy stamps is a potential customer.
Another advantage is less tangible than bricks and mortar: trust, an invaluable resource for any financial institution. The Postal Service rates highly among government agencies in public opinion polls.
Perhaps above all, the Postal Service is an agency of the federal government. If borrowers failed to repay loans, the Treasury Department could seize their tax refunds at the end of the year, allowing post offices to limit their losses and offer more favorable interest rates than payday lenders.
Stiff rates Those seizures would be part of another, more dour aspect of postal banking.
People have neighborly feelings about their local post office, and proponents argue that postal banking could protect the public from loan sharks. Yet as the inspector general’s report makes clear, going to the Postal Service wouldn’t exactly be like borrowing $20 from your grandma. In a hypothetical example considered in that report, the Postal Service offers loans at no less than 25 percent interest and seizes borrowers’ money come April 15 if they don’t pay up.
The inspector general argues that 25 percent interest is still far cheaper than the fees charged by payday lenders, typically equivalent to 400 percent at an annual rate or even more. It’s hard to know whether Treasury’s strong arm, combined with the Postal Service’s existing infrastructure, could reduce costs enough to offer customers even that rate.
One way the Postal Service could control costs would be by lending only to borrowers who have a good chance of repaying, said Mehrsa Baradaran, a legal scholar at the University of Georgia who has long advocated for postal banking.
She said that if the Postal Service begins lending money to Americans, the program shouldn’t depend on funding from taxpayers to remain solvent.
“We’ve got to honor market principles,” Baradaran said. “We’re not going to offer a subsidy here.”
Some economists worry that because every borrower is potentially a voter as well, any public agency lending money will hesitate to deny loans for political reasons.
“We will always have higher rates of default here, because we don’t have investors with their money at stake,” said Robert DeYoung, an economist at the University of Kansas.
In any case, if the Postal Service were to underwrite loans, it wouldn’t really be competing with payday lenders at all. Underwriting takes time. Many people patronize payday establishments because they need cash immediately, said Eva Wolkowitz, an associate at the Center for Financial Services Innovation, which studies financial products.
Instead, the postal loans (at least as described by the inspector general) would be more akin to installment loans — another, more obscure type of short-term loan. Unlike a payday loan, installment loans are paid back in several increments, rather than in a lump sum. While there is a wide range of interest rates on installment loans, they generally cost less than payday loans.
Pawnshops and more Besides installment and payday loans, there are all kinds of alternative credit available, which is another limitation of postal banking. For the most part, postal loans wouldn’t offer consumers a real alternative to these other forms of credit.
Wolkowitz and her colleagues have estimated that Americans spent $103 billion on alternative financial services in 2013. Yet only about $15 billion of that amount was spent on the forms of credit comparable to the proposed postal loans. You can see the distribution of these loans in the chart below.
“I don’t think the post office would go into the business of operating a pawnshop or loaning out vehicles,” Wolkowitz said.
Payments and savings Much of retail banking has nothing to do with lending, though, and post offices could offer some of those other services.
The Postal Service could take advantage of existing networks established by other post offices abroad to help immigrants wire money cheaply to relatives at home. The agency could offer savings accounts, as it did in the past, along with basic debit cards to help customers manage their money safely and cheaply.
There would be competition, though. The basic debit cards known in the industry as reloadable prepaid cards are quickly becoming popular. Many of them allow customers to cash their paychecks without a fee and offer protection from overdraft charges. The cards are issued by major banks and retailers. Some charge nominal monthly fees. Others, such as the Bluebird card issued by Wal-Mart and American Express, don’t.
If any entity can match the Postal Service for bricks and mortar, it’s likely Wal-Mart. And Mike Moebs, the founder of the economic research firm Moebs Services in Lake Forest, Ill., asked whether the Postal Service had the technological know-how to administer the cards effectively.
“They’re still dealing with paper,” he said.
A public institution The debate about postal banking raises big questions. Some people probably doubt that the Postal Service can offer financial services more efficiently and cheaply than the private sectors. Others might feel that the government should ensure that everyone can take part in the modern economy, and that without savings accounts and debit cards, you really can’t.
Emperors and kings have minted coins for millennia, recognizing the benefits of a neutral, reliable and widely available mode of payment. Maybe it’s the responsibility of the U.S. government today to issue inexpensive plastic money alongside hard currency.
“Sure, we can outsource the needs of the poor to Wal-Mart,” said Baradaran of the University of Georgia. “I’d rather see the post office get this revenue.”
Revenue is one reason the American Postal Workers Union has advocated for the idea in contract negotiations with the federal government. At the same time, Mark Dimondstein, the union’s president, argued that the post office has been an important part of civic life in American towns for centuries, and postal banking would help sustain that tradition.
“The post office will be fulfilling its mission, in an ever deeper way, of binding the people together,” he said. Postal banking “just makes the entire public institution that much more vibrant and that much more vital.”
Foreign central banks spent most of the 2000s buying U.S. Treasury securities to build international reserves as a means of backing their currencies, financing imports, and otherwise maintaining the ability to absorb unforeseen external shocks. Recently, the trend reversed and foreign central banks became net sellers of U.S. Treasuries. Low commodity prices caused some commodity exporters to dump Treasuries while China, the largest foreign owner of Treasury securities, sold U.S. dollar reserves to manage yuan valuation against the dollar. Central bank buying helped to keep a lid on rates through 2014, but selling pressure this year has yet to cause a meaningful increase in Treasury yields. The 10-year Treasury yield has been range bound for most of the year, and while risk-off market movements create a bid for risk-free U.S. government securities, central bank selling is an opposing upward force on yields that may be causing the 10-year to hover just around 2.0%. Without central bank buying pushing Treasury yields lower, rates on the long end of the curve may begin to rise ahead of the first federal funds rate increase. The uncertain path of interest rate increases and yield curve movement underlines the need for a diversified fixed income portfolio.
For the full report, please click on the source link below.
America’s share of the global economy is potent. Our country accounts for 16 percent (after being adjusted for currency differences) of the world’s gross domestic product (GDP) and 12 percent of merchandise trade. According to The Economist, we dominate “the brainiest and most complex parts of the global economy.” Our presence is strong in social media, cloud computing, venture capital, and finance. In addition, the dollar is the world’s dominant currency.
While the view from the top is pleasing, we may not be there forever. The Economist explained:
“In the first change in the world economic order since 1920-45, when America overtook Britain, [America’s] dominance is now being eroded. As a share of world GDP, America and China (including Hong Kong) are neck and neck at 16 percent and 17 percent respectively, measured at purchasing-power parity. At market exchange rates, a fair gap remains with America at 23 percent and China at 14 percent… But any reordering of the world economy’s architecture will not be as fast or decisive as it was last time…the Middle Kingdom is a middle-income country with immature financial markets and without the rule of law. The absence of democracy, too, may be a serious drawback.”
It may be hard to believe, in light of recent economic and market events in China, but change is on its way. Regardless, the influence of the United States should continue to be powerful well into the future.
Equities markets finished last week lower, breaking an 11-week streak of flip-flopping back and forth between negative and positive gains. The S&P 500 fell 1.4 percent; the Dow Jones Industrial Average lost just 0.4 percent, buoyed on the last day by positive report from Nike; and the NASDAQ Composite dropped 3 percent. The NASDAQ suffered from a collapse in biotech shares following a proposal by Hillary Clinton to curtail rising drug prices. The NASDAQ’s biotech sector dropped 13 percent for the week and is now down 22 percent from its all-time peak in July.
Chair Yellen Stumbles, But Hints That Rates Will Rise This Year
Late last week Fed Chair Janet Yellen presented a 40-page speech at the University of Massachusetts in Amherst. The speech was notable for two reasons. First, Ms. Yellen conspicuously paused, coughed, and stumbled over a few words toward the end. She was later taken to the hospital and evaluated for dehydration before being released and resuming her busy schedule. Additionally, Ms. Yellen reinforced her belief the Fed will raise interest rates sometime in 2015. This comes just a week after the Federal Reserve decided not to pull the trigger at its September FOMC meeting to the surprise of many. Uncertainty about the Fed’s plan led to increased market volatility, and this may have been her way to add more clarity. Despite Chair Yellen’s claim, the markets are still in disbelief. According to Fed funds futures, the market expects just a 10 percent chance of a rate hike in October and only a 32 percent chance of a lift off by December.
Jobless Claims Support Improving Domestic Economy
The number of unemployed workers filing for initial benefits rose last week by 3,000 to a seasonally adjusted 267,000 claims. While this is up from the prior week, it is well below the expectations of most economists who predicted a figure of 275,000. This claims data tends to be volatile from week to week, but the trend has been steadily improving since the financial crisis. Weekly jobless claims have remained under 300,000 for 29 consecutive weeks. This is the longest streak since 1973. Even the four-week moving average, which smooths out the weekly variability, fell to 271,750 claims.
Brazil Continues To Struggle
While economic data points at home continue improving, those abroad are still deteriorating, especially in the emerging markets. Few exemplify this better than Brazil. Early last week that country’s currency, the real, traded to its lowest point since 1994 at 4.066 Brazilian real to the U.S. dollar. So far this year, the Brazilian currency has lost approximately 35 percent of its value versus the dollar. Yields on its debt have risen to 16 percent, nearly double the emerging market average. And, inflation is running nearly 10 percent annually. Investors continue to expect political turmoil coupled with a worldwide commodity collapse to dampen Brazil’s economy. The best indicator of this is the rising value of credit default swaps for Brazilian debt. According to the Depository Trust & Clearing Corp, investors are now paying $464,000 a year to insure $10 million of debt. This is up from $200,000 at the start of 2015.
Fun Story of the Week
Baseball has long been known as America’s pastime, but anyone who strolls through a college campus on Saturday, or near an NFL stadium on Sunday, knows football wears the unofficial crown. Baseball’s new commissioner, Rob Manfred, has enacted rule changes this year to speed up the game as part of an effort to add new – and specifically younger – fans. While the jury is still out on whether this is working or not, the San Diego Padres successfully added a new young supporter last week. Literally. In Thursday night’s game against the San Francisco Giants, a pregnant fan gave birth to a baby boy (Levi) in the Padre’s stadium during the third inning. Firefighters were called, but did not make it to the park in time, so the team’s medical staff delivered the first baby born at the stadium in its 15-year history. During the same, the San Diego Padres tweeted “Great crowd of 31,137 here tonight”. Make that 31,138.
In theory, the founding fathers should be the ultimate financial role models. After all, they’re literally on the money. Warren Buffett might be every investor’s hero, but even he can’t count his earnings without seeing the faces of Washington, Hamilton, Franklin, and Jefferson. Even John Adams, perhaps the most neglected of the founding fathers, has been commemorated on the dollar coin.
What can the men who adorn our currency teach us about our own finances? Quite a lot, actually, but not because they were all as good with money as they were at creating a nation. Jefferson, for example, amassed a great fortune but later squandered it and ended his life all but penniless (despite, of course, the economic advantages of being a slaveholder). But others, including Washington — a shrewd and even ruthless businessman — died very wealthy men.
Here are some of the lessons, still applicable today, that can be drawn from these historic financial lives.
Alexander Hamilton may have been the greatest financial visionary in American history. After the Revolutionary War, as Washington’s Treasury Secretary, Hamilton steered the fledgling nation out of economic turmoil, ensured the U.S. could pay back its debts, established a national bank, and set the country on a healthy economic path. But it turned out that he was far better at managing the country’s finances than his own.
When Hamilton was killed in a duel with vice president Aaron Burr, his relatives found they were broke without his government salary. Willard Sterne Randall, biographer of multiple founding fathers, recounts that Hamilton’s wife was forced to take up a collection at his funeral in order to pay for a proper burial.
What went wrong? Hamilton’s law practice had made him wealthy and a government salary paid the bills once he moved to Washington, but he also had seven children and two mistresses to support. Those expenses, in addition to his spendthrift ways, left Hamilton living from paycheck to paycheck.
The take-away: Don’t stake your family’s financial future on your current salary. The Amicable Society pioneered the first life insurance policy in 1706, well before Hamilton’s demise in 1804, and term life insurance remains an excellent way to provide for loved ones in the event of an untimely death. Also, don’t get into duels. Life insurance usually doesn’t cover those.
Conventional wisdom holds that investors shouldn’t put all their eggs in one basket, and our nation’s first president prospered by following this truism.
During the early 18th century, Virginia’s landed gentry became rich selling fine tobacco to European buyers. Times were so good for so long that few thought to change their strategy when the bottom fell out of the market in the 1760s, and Jefferson in particular continued to throw good money after bad as prices plummeted. George W. wasn’t as foolish. “Washington was the first to figure out that you had to diversify,” explains Randall. “Only Washington figured out that you couldn’t rely on a single crop.”
After determining tobacco to be a poor investment, Washington switched to wheat. He shipped his finest grain overseas and sold the lower quality product to his Virginia neighbors (who, historians believe, used it to feed their slaves). As land lost its value, Washington stopped acquiring new property and started renting out what he owned. He also fished on the Chesapeake and charged local businessmen for the use of his docks. The president was so focussed on revenues that at times he could even be heartless: When a group of revolutionary war veterans became delinquent on rent, they found themselves evicted from the Washington estate by their former commander.
Warren Buffett’s famous piece of investing wisdom is also a major lesson of Benjamin Franklin’s path to success. After running away from home, the young Franklin started a print shop in Boston and started publishing Poor Richard’s Almanac. When Poor Richard’s became a success, Franklin reinvested in publishing.
“What he did that was smart was that he created America’s first media empire,” says Walter Isaacson, former editor of TIME magazine and author of Benjamin Franklin: An American Life. Franklin franchised his printing business to relatives and apprentices and spread them all the way from Pennsylvania to the Carolinas. He also founded the Pennsylvania Gazette, the colonies’ most popular newspaper, and published it on his own presses. In line with his principle of “doing well by doing good,” Franklin used his position as postmaster general to create the first truly national mail service. The new postal network not only provided the country with a means of communication, but also allowed Franklin wider distribution for his various print products. Isaacson says Franklin even provided his publishing affiliates with privileged mail service before ultimately giving all citizens equal access.
Franklin’s domination of the print industry paid off big time. He became America’s first self-made millionaire and was able to retire at age 42.
Born in Virginia, he drafted the Declaration of Independence, signed 4th July, 1776. Original Artwork: Engraving by A B Hall of New YorkEveryone wants to impress their friends, even America’s founders. Alexander Hamilton blew through his fortune trying to match the lifestyle of a colonial gentleman. He worked himself to the bone as a New York lawyer to still-not-quite afford the expenses incurred by Virginia aristocrats.
Similarly, Thomas Jefferson’s dedication to impressing guests with fine wines, not to mention his compulsive nest feathering (his plantation, Monticello, was in an almost constant state of renovation), made him a life-long debtor.
Once again, it was Ben Franklin who set the positive example: Franklin biographer Henry Wilson Brands, professor of history at the University of Austin, believes the inventor’s relative maturity made him immune to the type of one-upmanship that was common amongst the upper classes. By the time he entered politics in earnest, he was hardly threatened by a group of colleagues young enough to be his children. Franklin’s hard work on the way to wealth also deterred him from excessive conspicuous consumption. “Franklin, like many people who earned their money the hard way, was very careful with it,” says Brands. “He worked hard to earn his money and he wasn’t going to squander it.”
In addition to being boring and generally unlikeable, John Adams was not very good with money. Luckily for him, his wife Abigail was something of a financial genius. While John was intent on increasing the size of his estate, Abigail knew that property was a rookie investment. “He had this emotional attachment to land,” recounts Woody Holton, author of an acclaimed Abigail Adams biography. “She told him ‘Thats all well and good, but you’re making 1% on your land and I can get you 25%.’”
She lived up to her word. During the war, Abigail managed the manufacturing of gunpowder and other military supplies while her husband was away. After John ventured to France on business, she instructed him to ship her goods in place of money so she could sell supplies to stores beleaguered by the British blockade. Showing an acute understanding of risk and reward, she even reassured her worried spouse after a few shipments were intercepted by British authorities. “If one in three arrives, I should be a gainer,” explained Abigail in one correspondence. When she finally rejoined John in Europe, the future first lady had put them on the road to wealth. “Financially, the best thing John Adams did for his family was to leave it for 10 years,” says Holton.
As good as her wartime performance was, Abigail’s masterstroke would take place after the revolution. Lacking hard currency, the Continental Congress had been forced to pay soldiers with then-worthless government bonds. Abigail bought bundles of the securities for pennies on the dollar and earned massive sums when the country’s finances stabilized.
Despite Abigail’s talent, John continued to pursue his own bumbling financial strategies. Abigail had to be eternally vigilant, and frequently stepped in at the last minute to stop a particularly ill-conceived venture. After spending the first half of one letter instructing his financial manager to purchase nearby property, John abruptly contradicted the order after an intervention by Abigail. “Shewing [showing] what I had written to Madam she has made me sick of purchasing Veseys Place,” wrote Adams. Instead, at his wife’s urging, he told the manager to purchase more bonds.
From a financial perspective, Thomas Jefferson was one giant cautionary tale. He spent too much, saved too little, and had no understanding of how to make money from agriculture. As Barnard history professor Herbert Sloan succinctly puts it, Jefferson “had the remarkable ability to always make the wrong decision.” To make matters worse, Jefferson’s major holdings were in land. Large estates had previously brought in considerable profits, but during his later years farmland became extremely difficult to sell. Jefferson was so destitute during one trip that he borrowed money from one of his slaves.
Yet, despite his dismal economic abilities, Jefferson also kept meticulous financial records. Year after year, he dutifully logged his earnings and expenditures. The problem? He never balanced them. When Jefferson died, his estate was essentially liquidated to pay his creditors.
The recent market downdraft and related uncertainty in China have led to many investor questions. The strong 6.5% rebound in the S&P 500 over the last three trading sessions (August 26, 27, 28, 2015) has cut the S&P 500’s losses from the 2015 peak (2130 on May 21, 2015) to 6.7%. In response to the S&P 500’s recent 12% correction—the first decline of more than 10% since 2011—we answer 12 investor questions. Bottom line, we do not expect the latest correction and China uncertainty to lead to the end of the U.S. economic expansion or the end of the six-and-a-half-year old bull market. We reiterate our forecast for stocks to produce mid- to high-single-digit returns in 2015* on improving earnings over the second half of 2015 and into 2016.
1 Will the slowdown in the Chinese economy send the U.S. economy into recession?
We do not think so, especially given our belief that China will continue to add stimulus, both monetary and fiscal, to shore up its economy and markets. The indicators that we watch—in particular the Leading Economic Index (LEI) discussed in the recent Weekly Economic Commentary, “Forecast for Clear Skies”—continue to point solidly toward U.S. economic expansion for at least the next 12–18 months, and we believe the next recession may be a good bit further out than that. (U.S. gross domestic product [GDP] grew 3.7% during the second quarter of 2015 and is on track to grow about 2.5% in the third quarter.) Putting China into economic perspective, the country is the destination for only about 7% of U.S. exports, about one-fourth the amount that goes to Europe and Japan [Figure 1], which means that the Chinese economy directly represents less than 1% of U.S. GDP. As a result, the overall impact on U.S. corporate profits from slower growth in China is likely to be limited (outside of the commodity-linked sectors). A weaker yuan may even result in cost savings for U.S. multinationals sourcing supplies in China. (China devalued its currency on August 11, 2015.)
2 Will the latest stock market correction lead to the end of the bull market?
We do not think so. Bear markets are almost always accompanied by recession, which we do not expect for quite some time. We do not see evidence of the excesses in the U.S. economy or financial markets (e.g., in terms of leverage, confidence, or spending) that have historically led to bear markets and recessions. We do not believe the slowdown we are seeing in China’s economy is enough to outweigh improving growth in the U.S., Europe, and Japan in 2015 and 2016, and we expect global growth to continue to improve gradually over the next 18 months.
3 Are you sticking with your 5–9% total return forecast for the S&P 500 in 2015?
Yes. We continue to expect improved U.S. economic growth and second half earnings gains to propel stocks to mid- to high-single-digit total returns in 2015. Other possible factors we expect to be supportive: 1) better growth in Europe and Japan (along with the potential for more stimulus), 2) low interest rates that make bonds relatively less attractive than stocks, 3) a Federal Reserve (Fed) that may keep rates “lower for longer,” 4) low but stable oil prices, 5) historically strong fourth quarter seasonality, and 6) price-to-earnings multiples that have fallen to long-term average levels.
4 Do you expect China to do more to stimulate its economy and markets?
Yes. But the bigger question is: Will it work? Efforts thus far have been met with mixed success; however, we expect the Chinese government to do more, including fiscal stimulus, to help stabilize its economy and markets, and we believe it will eventually be successful. Three things to keep in mind: 1) the Chinese stock market is disconnected from the Chinese and global economy; 2) stimulus works with a lag; and 3) the Shanghai Composite A-share market (mainland Chinese stock market) is actually up year to date, despite dropping more than 40% from mid-June through late August [Figure 2]. The index rose about 160% in the 12 months leading up to the bear market decline that began June 15, 2015.
5 Will China’s currency be devalued further and, if so, what might the impact be?
China will likely again widen its currency trading band, which will effectively be a devaluation given the peg to the U.S. dollar is keeping the Chinese currency artificially strong. We would expect additional moves to be gradual and have limited impact on the U.S. given the small amount of U.S. exports to China. The move has the benefit of lowering costs for U.S. companies sourcing goods in China and may help support U.S. company profit margins. The biggest impact may be on other Asian nations competing with China in trade.
6 Besides more China stimulus, what potential fundamental catalysts do you see that could help stocks continue last week’s turnaround?
U.S. economic data for August to be released in September (Institute for Supply Management [ISM] Purchasing Managers’ Index on September 1 and the jobs report on September 4), the start of third quarter earnings season (late September), and the upcoming Fed meeting (September 17) are among potential market catalysts. In addition, more stimulus from central banks in Europe and Japan remains a possibility.
7 Does this latest bout of market volatility change the Fed’s timetable for interest rate hikes?
Perhaps. We had previously expected the Fed to begin raising rates in December 2015, with September a possibility. We now think September may be off the table and early 2016 may be a possibility. More importantly, the trajectory of future hikes is likely to be gradual. Regardless of when the first hike arrives, we continue to see the Fed as a very manageable risk for stocks this year.
8 What are some attractive buying opportunities resulting from the latest declines?
With most everything “on sale,” we increasingly like what we have liked best all year—U.S. large cap growth stocks. At the sector level, that means technology, industrials, consumer discretionary, and biotech, which we would expect to outperform should stocks move higher over the balance of 2015. We also continue to like high-yield bonds on the fixed income side, where we see value amid energy sector default fears.
9. Should I sell my emerging market equities positions due to Chinese weakness?
For suitable investors, we suggest holding on to modest emerging market equities positions due to the long-term value in the asset class. Although it may take some time for that value to be realized, we expect additional bold stimulus from China, eventual (hopefully fairly soon) stabilization in commodity prices, and the export boost from weaker currencies to help spur the next move higher in emerging markets, particularly in Asia.
10. Is 1998 a good comparison to 2015?
In some respects, yes. That year, not unlike today, an Asian currency crisis drove sharp losses overseas and contributed to the S&P 500 being down year to date at the end of August. The index rallied sharply during the last four months of that year to end 1998 with a stellar 27% gain. We are certainly not suggesting we’ll get a rally like that (a series of Fed rate cuts in late 1998 is one major difference between then and now, in addition to burgeoning internet mania). But we do believe U.S. stocks have the potential to stage a rally and end the year with respectable gains, despite China’s currency devaluation and its increased economic significance.
11. What technical indicators are you watching to indicate stocks have bottomed?
The 14-day Relative Strength Index (RSI-14), a technical momentum indicator that compares the magnitude of recent gains with recent losses in an attempt to determine overbought and oversold conditions, has reached severe oversold levels [Figure 3], increasing the likelihood of a short-term bottom (below 30 is considered oversold). In order to confirm a shortterm bottoming process, we are looking for a series of higher highs and higher lows on both the price and the RSI(14), strengthening breadth (broad participation), and high-volume positive sessions. To identify a reversal of the latest downtrend, we are watching for the S&P 500 to sustain a close back above its 50- and 200-day moving averages and a daily RSI(14) reading above 50.
12. Is negative investor sentiment signaling a buying opportunity?
The American Association of Individual Investors (AAII) bull/bear survey currently shows a very low percentage of bulls, with a four-week average of 28.5% [Figure 4]. At more than one standard deviation below the long-term average reading of 40%, this smaller percentage of bulls, corresponding to a high level of pessimism, has historically indicated a potential contrarian buying opportunity. For comparison, even during the financial crisis in 2008–2009, the percentage of bulls bottomed at about 20%.
This week we answer the top 12 investor questions in response to the S&P 500’s 12% correction.
We expect the U.S. economic expansion and bull market may continue through year-end, despite the latest stock market correction and China uncertainty.
We reiterate our forecast for stocks to produce midto high-single-digit returns in 2015.
Written by Burt White and Jeffrey Buchbinder of LPL Financial
For the full report, please click on the source link below.
It’s too early to determine if recent market turmoil has made a September rate hike more or less compelling, Federal Reserve Vice Chairman Stanley Fischer told CNBC on Friday.
Investors are watching the Fed closely for signs of an impending tightening. As international and U.S. markets swung wildly this week, some questioned whether the conditions were anywhere near appropriate.
“I think it’s early to tell: The change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds, so I wouldn’t want to go ahead and decide right now what the case is—more compelling, less compelling, et cetera,” he said.
He added that “there was a pretty strong case” for a September hike, although that had not yet become a conclusion.
“We’ve got a little over two weeks before we make the decision,” he said. “And we’ve got time to wait and see the incoming data, and see what is going on now in the economy.”
One big sign comes next Friday, when the August jobs report is released.
Fischer conceded that the recent market volatility will affect the Fed’s decision making.
“If you don’t understand the market volatility—and I’m sure we don’t fully understand it now, there are many many analyses of what’s going on—yes it does affect the timing of a decision you might want to make,” he said.
Short-end bond yields turned slightly higher on Fischer’s comments.
Former Dallas Fed President Richard Fisher said the vice chairman “did the right thing by being perfectly neutral.”
On the international front, Stanley Fischer said the movements in the Chinese yuan will have “some small impact,” but he cautioned that “we still got to wait and watch and see how this turns out.”
He also said the direct effect of a Chinese slowdown on the U.S. economy will be “relatively small.” He added, however, that the concern is whether the full weight of China’s impact on its region could then affect the U.S.
Fischer said his level of confidence is “pretty high” that U.S. inflation will return to the Fed’s target, as factors like oil’s low price are transitory.
Still, he added that he has not seen “much evidence” of increasing risks to staying at near-zero rates for longer, but he also said he didn’t want to wait too long.
“When the case is overwhelming, if you wait that long, you’ll be waiting too long,” he said. “There’s always uncertainty.”
Fischer emphasized that the Fed’s tightening will be slow and not drastic.
“We do not intend doing a rapid rate of increase,” he said.
Earlier this week, New York Fed President William Dudley made headlines when he played down the chances of a September rate increase.
“From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,” Dudley said Wednesday.
Some have pointed to that comment as part of the reasons U.S. stocks have rallied during the second half of the week.
On Friday, Richard Fisher, the former Fed official, said it appears a September rate hike is “still on the table.”
“If the data aren’t compelling, it looks like they’ll be moving either to October, possibly, or to December,” Fisher said. “I think he and others have signaled very clearly that they will be moving this year and I believe that market has begun to discount that.”
U.S. stock markets finished last week higher than they started it, but the five-day ride was awfully bumpy.
Concerns about China’s slowing growth, shifting currency valuations, and falling stock markets, coupled with uncertainty about the Federal Reserve’s next monetary policy move, contributed to malaise in world markets early last week.
After falling by about 6 percent the previous week, U.S. stocks spiraled even lower early last week. They flirted with correction status (a correction is a 10 percent drop from previous highs) before moving higher.
By midweek, markets were on the rebound, bolstered in part by the comments of New York Fed President William Dudley who indicated a September rate hike might not be all that compelling. Strong U.S. economic data also soothed some investors. Barron’s reported:
“The economic data, however, have been good enough to suggest that the market is too pessimistic. There was that strong second-quarter gross-domestic-product reading, which even included signs of stronger capital spending, while good housing data suggest that third-quarter GDP could be better than many observers expect.”
Market whiplash left investors feeling pretty shaky, as did late-week comments from Fed Vice Chairman Stanley Fischer who indicated it was too soon to know what the Fed would decide about interest rates in its September meeting. He indicated the decision would depend on economic data that is still being collected.
While the market’s end of week bounce was welcome, The Wall Street Journal reported traders and investors appear to be ready for additional volatility.
Whether markets are volatile or calm this week, it’s important to remember that it’s impossible for any of us to control what happens in Washington, on Wall Street, or on Main Street. We can, however, control how we prepare for and respond to market volatility. As you know, we believe thoughtful goal identification, risk tolerance education, and a disciplined approach can help investors reach their long-term financial goals.
We understand that market volatility is uncomfortable, but it is not unusual or unexpected. If you have any questions or would like to discuss recent events, please contact your financial advisor.
Data as of 8/28/15
Standard & Poor’s 500 (Domestic Stocks)
Dow Jones Global ex-U.S.
10-year Treasury Note (Yield Only)
Gold (per ounce)
Bloomberg Commodity Index
DJ Equity All REIT Total Return Index
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
We are underweight U.S. stocks. After its June policy meeting, the Fed signaled that it was getting close to raising short-term interest rates on improving economic conditions and promised to move gradually. Yet turmoil surrounding Greece and China has brought more uncertainty to the global economic outlook, which could give the Fed some pause. To begin with, there is reason to proceed with caution. The latest U.S. readings on jobs and the housing market point to an economic reacceleration in the second half, but soft spots remain. Measures such as retail sales and durable goods continue to show weakness. And, the Chicago Fed National Activity Index (CFNAI), a good leading indicator for the country’s overall economic health, has inched higher but is still running below trend (see the chart below).
Given that valuations of U.S. stocks are relatively pricey, we tend to search abroad for better value and opportunities. But we think U.S. stocks have further upside potential, keeping in mind that mergers and acquisitions just hit a new high in the second quarter. It is still early in the second-quarter earnings season, but with estimates having already been lowered, the U.S. economy recovering and the dollar having stabilized, companies should have an easier time beating estimates this time around.
Turning Insight Into Action
Many measures of U.S. economic activity have improved since the slowdown early in the year. While weakness lingers in some areas, the U.S. economy looks set to regain speed. Selectivity is important in the U.S. market, where value will vary by sector and individual company.
Consider blending opportunities for core market exposure with high- conviction active solutions that focus on finding value in the market.
iShares Core S&P 500 ETF (IVV), iShares Core S&P Total U.S. Stock Market ETF (ITOT), Basic Value Fund (MABAX)
International Developed Markets
We hold an overweight to eurozone equities. Uncertainty surrounding Greece and its membership in the euro area will keep risk premiums and volatility elevated; however, we think fallout from the Greek drama will remain contained and short- lived (see Hot Topic on page 7). In fact, with economic data coming roughly in line with forecasts and profit expectations firming, any further volatility in eurozone equities could present an opportunity. This is especially true since the European Central Bank (ECB) is expanding its balance sheet and is poised to provide further monetary accommodation if needed. Any continued euro weakness associated with these events will likely give an additional kick to earnings as profits are repatriated. That said, investors should consider hedging their currency exposure to eurozone equities to avoid returns being eroded by euro weakness.
We are overweight Japanese stocks. Somewhat sheltered from this year’s financial market roller coaster ride, Japanese equities have not only been an island of relative calm and tranquility (see the chart below) but also an area of strong outperformance. Japan’s economy, while certainly not a locomotive, has managed to pull out of a shallow and brief recession and is beginning to show signs of benefiting from a weaker yen. Moreover, Japanese companies have come a long way in improving profitability, and they are also lifting dividends and share buybacks to boost return on equity. Despite outpacing the rest of the developed world so far this year, Japan remains inexpensive based on price-to-book and forward price-to-earnings ratios.
We have a neutral view on developed Asia ex-Japan equities. A setback in Chinese stocks, slower commodities demand growth and negative earnings revisions have weighed on the region’s equity markets this year. However, after the summer selloffs, we think Asia ex-Japan equities warrant a closer look. Take Hong Kong, the Hang Seng Index has very recently regained some lost ground, but not before it fell to the cheapest levels versus the MSCI World Index since September 2003. Also of note are the above-average dividend yields, with Australia yielding north of 4.5%.
Turning Insight Into Action
Earnings growth and valuations of European and Japanese companies are more compelling than for U.S. companies. But renewed strength in the greenback could erode returns in international markets for U.S. dollar- based investors, boosting the allure of currency hedged exposure.
Consider using an active manager with strong stock selection expertise or be selective with index-based exposures.
Global Long/Short Equity Fund (BDMIX), Global Dividend Fund (BIBDX), Global Allocation Fund (MALOX), iShares MSCI Japan ETF (EWJ), iShares Currency Hedged MSCI Japan ETF (HEWJ), iShares MSCI Eurozone ETF (EZU), iShares Currency Hedged MSCI Eurozone ETF (HEZU), iShares International Select Dividend ETF (IDV)
We hold a benchmark weight to emerging markets. Since topping out at the end of April, emerging markets have entered another correction phase, and the selloff has been quite indiscriminate. While markets have stabilized somewhat very recently, emerging Asia has clearly dominated price action since the end of June. In addition to China’s equity market woes, Latin America has underperformed again so far this year and Eastern Europe sharply declined since mid-May. However, we still prefer emerging Asia. Countries in emerging Asia have greater scope for monetary accommodation and market reforms, will likely experience better growth (though not great), should benefit most from lower oil prices and have increasingly competitive currencies.
We have a neutral weight in China with a preference for H-shares. Chinese stocks tumbled the most in nearly six years in early July after a series of measures (and some quick backtracking) paradoxically aimed at stabilizing financial market conditions backfired. While the slide has paused for now, we expect more volatility, particularly in the onshore exchanges. After downgrading China to neutral in June, we will hold off from chasing newly attractive valuations until the situation stabilizes. That said, it may be possible to find bargains in the Hong Kong-listed H-shares market, which is both cheaper and less volatile than the A-shares market. Select banks, property developers and new energy companies could present value.
It is worth noting, however, this stock turmoil has not affected the Chinese economy. The PBOC has plenty of spare power to support economic growth and financial markets, unlike some developed market central banks, and will likely continue to implement countermeasures. And when it comes down to it, we have not seen a material impact from the equity selloff on the global economy and markets to date.
We elect to downgrade Poland from an overweight to neutral. Poland’s economy is in relatively good shape and profitability is quite strong among Polish companies. However, the financials sector, which represents more than 40% of Poland’s market capitalization, faces the risk of a banking tax and other regulation if a more populist party (the Law and Justice party) comes to power this autumn, as is currently projected. Moreover, Poland no longer stands out as particularly cheap relative to other Eastern European countries, such as Turkey and Russia.
Turning Insight Into Action
It may be time to consider getting back to a benchmark exposure in emerging markets, but investors should remain selective.
Consider accessing specific countries or regions, or use an active manager with expertise to identify potential opportunities.
iShares MSCI Emerging Markets Asia ETF (EEMA), iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV), Emerging Market Allocation Fund (BEEIX)
We are overweight information technology and financials. As the economy firms, loan demand should rise, which could support financials stocks. Mergers and acquisitions as well as securities underwriting business will likely remain solid, which can also prove helpful. And, technology stocks should benefit from more and more companies deciding to replace antiquated technology infrastructure.
We hold a neutral weight to the health care sector. While health care has outperformed by a wide margin this year and is a consensus overweight among money managers, valuations appear reasonable against solid earnings growth and profitability, even for biotechnology stocks. In an environment of decent economic growth, favorable credit conditions and continued good earnings growth, we would anticipate biotech especially, but also life sciences, to outperform. Meanwhile, there are good reasons to consider pharmaceuticals stocks, which tend to have very high dividend payout ratios. This could prove particularly advantageous in a risk-off scenario (defined by a renewed drop in bond yields).
We are underweight U.S. utilities and consumer staples. These sectors outperformed during the past month as heightened global risk aversion prompted a decline in interest rates and a preference for defensive sectors. But while defensives may be somewhat less expensive after this year’s repricing, any stabilization from here could entail further downside.
We have a neutral exposure to the energy sector as oil prices have declined anew in recent weeks. We prefer integrated oil and gas companies given their more muted sensitivity to oil prices in the past. What is more, their refinery businesses benefit from lower oil prices.
We are neutral in industrials. The correction in transportation stocks has investors worried that the decline may be a harbinger of bad news for the broader market. We think the decline in transports has more to do with the subsector’s overvaluation after two years of strong outperformance. Plus, declining global trade volumes, weaker-than-forecast economic activity and reduced demand for coal shipments all play a role in the subsector’s recent outsized move lower.
Turning Insight Into Action
Consider cyclical sectors over defensive and dividend-oriented sectors. Consumer staples and U.S. utilities look particularly unattractive and are vulnerable to rising rates.
Look into possible opportunities in the technology and financials sectors and consider a long/short approach to potentially benefit from any continued market volatility.
iShares Global Financials ETF (IXG), iShares Global Tech ETF (IXN), iShares U.S. Technology ETF (IYW), Global Long/Short Equity Fund (BDMIX)
We are underweight Treasuries. Yields of long-term debt in the United States, Germany, United Kingdom and Japan hit their highest levels this year in June, but the upward movement was interrupted, at least temporarily, by jitters about Greece and China near month-end. Rate volatility is likely to remain elevated as markets wrestle with the timing of the Fed’s liftoff. We believe yields could climb higher over the course of the year, although much of the adjustment may have already taken place.
We hold a neutral position in Treasury Inflation-Protected Securities (TIPS). The backup in yields has returned some value to the asset class. We don’t think inflation will accelerate meaningfully anytime soon, but headline inflation and expectations have inched higher while the risk of disinflation has decreased.
We are overweight high yield. Outflows from the asset class continue and spreads are under pressure. Although volatility could persist, yields are attractive in both absolute and relative terms, and fundamentals remain encouraging.
We have an overweight in municipals. The municipal market had another negative month in June, though it performed better than the more volatile Treasuries. Puerto Rico’s debt woes grabbed headlines but had little price impact thus far on the overall muni market (see the chart below). Fundamentals of the majority of the muni market remain intact, as we anticipate minimal contagion risk. That said, if restructuring negotiations between the commonwealth and its bondholders turn contentious and drag on, this could stoke volatility for the broader market.
We are underweight in non-U.S. developed markets and neutral in emerging- market debt. Increased volatility in interest rates and risk assets, as well as the possibility of the dollar resuming its climb, could prove difficult for hard currency- denominated emerging-market debt.
We hold a benchmark weight in mortgage-backed securities (MBS). While MBS held up relatively well in the interest rate backup, mortgage spreads relative to Treasuries remain low and valuations do not suggest an attractive entry level yet.
Turning Insight Into Action
With interest rates likely to rise in the United States in 2015, fixed income investors will likely face challenges yet again this year.
Manage Interest Rate Duration
Consider a flexible strategy with the ability to actively manage duration.
Strategic Income Opportunities Fund (BSIIX), Strategic Municipal Opportunities Fund (MAMTX), Global Long/Short Credit Fund (BGCIX)
Manage Interest Rate Risk
Seek to reduce interest rate risk through time by using a diversified bond ladder and matching term maturity to specific investing needs.
Cast a wider net for income while carefully balancing the trade-offs between yield and risk.
Multi-Asset Income Fund (BIICX), High Yield Bond Fund (BHYIX), iShares iBoxx $ High Yield Corporate Bond ETF (HYG), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
Build a Diversified Core
Consider using core bonds for potential diversification benefits and protection from unforeseen shocks to equity markets.
Total Return Fund (MAHQX), iShares Core U.S. Aggregate Bond ETF (AGG), iShares Core Total USD Bond Market ETF (IUSB)
For the full report, please click on the source link below.