Weekly Market Commentary: October 5, 2015

Provided by geralt/Pixabay
Provided by geralt/Pixabay

Well, third quarter was a humdinger.

It began with the first International Monetary Fund (IMF) default by a developed country (Greece) and finished with Hurricane Joaquin possibly headed toward the east coast. In between, China’s stock market tumbled, the Federal Reserve tried to interpret conflicting signals, and trade growth slowed globally.

After such a stressful quarter, we may see an uptick in the quantity of alcoholic beverages consumed per person around the world. That number had declined (along with economic growth in China) between 2012 and 2014, according to The Economist.

No Grexit – for now

Despite defaulting on its IMF loan, rejecting a multi-billion-euro bailout plan, and closing its banks for more than two weeks, Greece was not forced out of the Eurozone. Instead, Europe cooked up a deal that left the IMF unhappy and analysts shaking their heads.

The Economist reported the new deal for Greece was an exercise in wishful thinking. The problem is the deal relies on “the same old recipe of austerity and implausible assumptions. The IMF is supposed to be financing part of the bailout. Even it thinks the deal makes no sense.” It’s a recipe we’re familiar with in the United States: When in doubt, defer the problem to the future.

A downturn in China

Despite reports from the Chinese government that it hit its economic growth target (7 percent) on the nose during the first two quarters of the year, The Economist was skeptical about the veracity of those claims. During the first quarter:

“Growth in industrial production was the weakest since the depths of the financial crisis; the property market, a pillar of the economy, crumbled. China reported real growth (i.e., after accounting for inflation) of 7 percent year-on-year in the first quarter, but nominal growth of just 5.8 percent.”

That statistical sleight of hand implies China experienced deflation early in the year. It did not.

On a related note, from mid-June through the end of the third quarter, the Shenzhen Stock Exchange Composite Index fell from 3,140 to about 1,716, according to BloombergBusiness. That’s about a 45 percent decline in value.

Red light, green light at the Federal Reserve

Green light: employment numbers. Red light: consumer prices, inflation expectations, wages, and global growth. Late in the quarter, the Federal Reserve decided not to begin tightening monetary policy. According to Reuters, voting members of the Federal Open Market Committee (FOMC) decided uncertainty in global markets had the potential to negatively affect domestic economic strength.

They may have been right. The Wall Street Journal reported, although unemployment remained at 5.1 percent, just 142,000 jobs were added in September. That was significantly below economists’ expectations that 200,000 jobs would be created. The Journal suggested the labor market has downshifted after 18 months of solid jobs creation.

Global trade in the doldrums

The global economy isn’t as robust as many expected it to be. According to the Business Standard, the World Trade Organization (WTO) lowered its forecast for global trade growth during 2015 from 3.3 percent to 2.8 percent. Falling demand for imports in developing nations and low commodity prices are translating into less global trade. Expectations are trade growth will be 3.9 percent in 2016, which could help support global economic growth.

Data as of 10/2/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 1.0% -5.2% 0.3% 10.5% 11.4% 4.8%
Dow Jones Global ex-U.S. 0.7 -8.6 -10.3 0.8 0.0 0.9
10-year Treasury Note (Yield Only) 2.0 NA 2.4 1.6 2.5 4.4
Gold (per ounce) -0.5 -4.9 -5.9 -13.7 -2.8 9.4
Bloomberg Commodity Index -0.7 -15.8 -25.7 -16.1 -8.7 -6.9
DJ Equity All REIT Total Return Index 1.5 -3.3 9.2 9.4 11.6 6.8

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.

Why Your Family Needs a Household Austerity Budget

© Thinkstock/Getty Images
© Thinkstock/Getty Images

Let’s talk about austerity. No, not the austerity proposed in Greece (although I’m probably the only one not writing about Greece). Rather, I’m talking about personal austerity. I frequently recommend that families develop an austerity budget. Let’s describe what this is and how it might help you.

In a budgeting sense, “austerity” refers to sharply curtailing spending in a time of financial crisis. Your family’s austerity budget is a plan you can put into effect in the event you lose your job or encounter some other financial hardship. Creating an austerity budget involves calculating the minimum amount of money you would need monthly or weekly to live indefinitely. I like to use this definition because it is the most practical minimum budget, as we will see in a moment. Here is what it should include:

  • Rent or mortgage
  • Basic utilities
  • Food
  • Insurance
  • Car payments
  • Debt payments (credit cards or student loans)
  • Any miscellaneous ongoing expenses that can’t be eliminated

Just as important is what it should not include:

  • Savings or investment expenses
  • Vacations or travel
  • Entertainment
  • Dining out

Since your austerity budget is meant to last indefinitely, you need to be realistic about what you will spend. For instance, it does no good to lop out all restaurant expenses if you know you won’t have the willpower to break your daily Starbucks habit. Be realistic — maybe even try living on your austerity budget for a month or two. If you find that life is unbearable without, say, your daughter’s dance lessons, then go ahead and include them in your budget. You might be able to live on a bit less than this budget for a short time, but not indefinitely.

Your austerity budget and an emergency savings account are your sword and shield against financial adversity. When crisis hits, you should know what your austerity budget is and what steps you need to take to get there quickly — such as cutting off cable TV or suspending your kids’ day care. This will maximize the amount of time you can live off your emergency savings.

For some, this might be a relatively straightforward exercise. If you’re single, you might find that your austerity budget is fairly easy to get to. Others with different obligations, such as supporting a family, may find that getting down to their austerity budget requires more action. You may also find that there are issues you should address now, so if there ever is an emergency, the people depending on you won’t be surprised by their circumstances.

I find that there is an added benefit to understanding your austerity budget. As you save and invest over your lifetime, you may find that you have socked away enough money that you could safely withdraw from your accounts an amount equal to your austerity budget. Using simple parameters like the 4% rule, you may find that you already have enough money to live a simple life indefinitely just based on your investments. Many people find peace of mind in knowing this. An austerity budget could be the true start of financial independence.

Written by NerdWallet of Money

(Source: Time)

Investment Directions: So What Should I Do With My Money?

Provided by 401kcalculator
Provided by 401kcalculator

United States

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.

CONSIDER

iShares Core S&P 500 ETF (IVV), iShares Core S&P Total U.S. Stock Market ETF (ITOT), Basic Value Fund (MABAX)

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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.

CONSIDER

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)

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Emerging Markets

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.

CONSIDER

iShares MSCI Emerging Markets Asia ETF (EEMA), iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV), Emerging Market Allocation Fund (BEEIX)

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Global Sectors

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.

CONSIDER

iShares Global Financials ETF (IXG), iShares Global Tech ETF (IXN), iShares U.S. Technology ETF (IYW), Global Long/Short Equity Fund (BDMIX)

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Fixed Income

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.

CONSIDER

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.

CONSIDER

iBonds® ETFs

Seek Income

Cast a wider net for income while carefully balancing the trade-offs between yield and risk.

CONSIDER

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.

CONSIDER

Total Return Fund (MAHQX), iShares Core U.S. Aggregate Bond ETF (AGG), iShares Core Total USD Bond Market ETF (IUSB)

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For the full report, please click on the source link below.

Written by Russ Koesterich of BlackRock

(Source: BlackRock)

Investment Directions: A Symphony of Uncertainties

Provided by Carlo Alberto Cazzuffi/Wikimedia
Provided by Carlo Alberto Cazzuffi/Wikimedia

The word symphony is derived from the Greek word symphonia, and before the word settled on its current melodic meaning in the 17th century, it was used to convey compatibility between opinions or actions. Today, tensions stemming from high debt loads and too little growth—not just in Greece but also China and Puerto Rico—are reaching a crescendo and seem to be some ways off from a resolution.

First Movement: The Greek Impasse

Clashes culminated in early July with the Tsipras administration’s unexpected calling of a referendum and Greek voters’ rejection of European creditor demands. Although a short-term deal was brokered to pull Greece back from the brink of financial collapse, Europe stood its ground on austerity. It is hard to tell how things will play out, but this much is clear: A prolonged period of uncertainty will probably accompany negotiations, as long as a Greek exit from the eurozone is in play.

Second Movement: The Chinese Volley

Greece is not the only country beset by uncertainty. Momentum in the high-flying China A-shares market has been broken, though a summer deluge of support measures from the People’s Bank of China (PBOC) ultimately had some stabilizing effects. After the latest selloffs, however, China H-shares, which are traded in Hong Kong, appear to offer some relative value.

Third Movement: The Volatility Effect

Financial markets at times responded nervously to the Greek and Chinese events, but we think most of the impact will be short-lived. The focus on Greece and China has obscured the facts that the Greek economy is very small, and China A-shares are mostly held by domestic investors. We believe that longer-term damage to the global economy or markets is unlikely.

Fourth Movement: The Search for Value

The widespread aversion to risk renewed some appetite for safe haven bonds, as did changing expectations of when the Federal Reserve (Fed) will act on interest rates. Despite that, we still believe stocks will fare better than bonds and are inclined to look internationally and to cyclical sectors for the most compelling equity opportunities.

For the full report, please click on the source link below.

Written by Russ Koesterich of BlackRock

(Source: BlackRock)

Dow Closes Down More Than 200 Points on Surprise Yuan Devaluation

Provided by CNBC
Provided by CNBC

Stocks closed lower by about 1 percent on Tuesday after an unexpected move overnight by the People’s Bank of China to depreciate the yuan by nearly 2 percent.

“The major concern is, the prospect of a China hard landing is more ominous as far as its impact on global growth,” said Eric Wiegand, senior portfolio manager at U.S. Bank’s Private Client Reserve.

The Dow Jones industrial average ended 212 points lower, wiping out most of Monday’s gains. Apple briefly plunged more than 5 percent and Caterpillar fell more than 2.5 percent to lead declines. The index’s 50-day moving average fell below its 200-day moving average, a bearish condition many analysts term a “death cross.”

On Monday, the blue-chip index snapped its first seven-day losing streak in four years with a 241-point rise.

Biotech stocks and Apple outweighed Google’s 4 percent jump to pressure the Nasdaq Composite off 1.2 percent.

Sharp declines in oil pressured the energy sector to give back much of Monday’s gains, dropping nearly 2 percent as one of the greatest decliners in the S&P 500.

Renewed concerns about a deeper slowdown in the world’s second-largest economy increased negative sentiment.

It’s the “interpretation that the U.S. dollar is going to further strengthen against the Chinese yuan and be a further headwind against U.S. multinationals,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

“I’m a little surprised (China) did this because they had plenty of room to cut interest rates,” Luschini said.

The drop in the daily peg to 6.2298 renminbi against the U.S. dollar, down from 6.1162 on Monday, was the largest one-day move in more than two decades and took the currency back to levels from three years ago. The central bank described the decision as a “one-off depreciation.”

“I think the market’s perception is if China is doing that they’re really worried about their economy,” said Jason Leinwand, managing director at Riverside Risk Advisors. “Any currencies that have direct ties with China will be weakened.”

The U.S. dollar index traded mildly higher, while the euro held above $1.10 on a bailout deal between Greece and its creditors. The yen was weaker against the dollar, near 125 yen.

European stocks closed sharply lower, with the German DAX off more than 2.5 percent, on the yuan move. Asian stocks ended mostly lower, with the Shanghai Composite flat.

“This news is negative for exporters (such as automakers) and luxury goods makers as well as other companies that derive foreign exchange revenue from China and other parts of Asia,” said Ilya Feygin, senior strategist at WallachBeth Capital.

He noted that the currency instability benefits Treasurys and gold.

Treasury yields fell as traders piled into dollar-denominated assets, with the 10-year yield briefly hitting its lowest level since June 1 before trading near 2.14 percent and the 2-year yield at 0.67 percent.

The Treasury Department auctioned $24 billion of 3-year notes at a high yield of 1.013 percent at 1:00 p.m. ET.

Gold rallied on Monday to its highest level since the end of June. Gold futures traded near $1,110 an ounce in afternoon trade.

Investors also watched Google, which unexpectedly announced after the close Monday that it will become part of a new publicly traded entity called Alphabet. Shares will still trade under the tickers GOOGL and GOOG. Class A shares jumped more than 3.5 percent in the afternoon.

Oil extended a recent decline. Brent crude was down more than 2.5 percent to below $49 a barrel, while U.S. crude briefly fell below $43 a barrel for the first time since March.

On Monday, dollar weakness and a refinery outage helped crude rally nearly 2.5 percent from a near five-month low earlier in the session

Crude oil futures hit a five-month intraday low of $42.69 and settled down $1.88, or 4.18 percent, at $43.08 a barrel, a six-year low. Gold futures ended up $3.60 at $1,107.70 an ounce.

On the data front, preliminary second quarter productivity was up at an annual rate of 1.3 percent, while unit labor costs were up 0.5 percent.

Wholesale sales rose 0.1 percent in June, the weakest since March of this year, while inventories topped expectations with a gain of 0.9 percent. May’s figure was revised lower to 0.6 percent from 0.8 percent.

“I think once investors get past the yuan devaluation we can focus on the (U.S.) economic picture, which remains good,” Luschini said.

Most analysts expect the Federal Reserve will find enough support from economic data to raise rates as early as September.

“The overnight devaluation of the Chinese yuan will likely be seen by Fed officials as a minor headwind to growth, but is not significant enough to change our base view of September liftoff,” J.P. Morgan said in a note. “The yuan has a 21.3 percent weight in the Fed’s broad dollar index, and so simply taking the 0.4 percent dollar change implied by the PBoC action at face value would imply perhaps a few hundredths off growth over the next one to two years (using a rough rule of thumb that 10% in the broad dollar subtracts about 1% off the level of GDP over time).”

Before the opening bell, Towers Watson posted quarterly results that beat expectations on both the top and bottom line.

In other earnings news, Shake Shack posted results after the close Monday that beat on both the top and bottom line. The restaurant chain also raised its full-year guidance.

Kraft Heinz reported a decline in sales at both its Kraft and Heinz divisions. Combined results for the recently merged firm were not reported.

Computer Sciences, Symantec, Cree and Cyber Ark Software will report after the bell.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded above 14.

About seven stocks declined for every three advancers on the New York Stock Exchange, with an exchange volume of 505 million and a composite volume of nearly 2.5 billion in afternoon trade.

Written by Evelyn Cheng of CNBC

(Source: CNBC)

Gold is Tanking, and the Slump is Here to Stay

Bloomberg News/Landov
Bloomberg News/Landov

Gold prices have slipped again this year, with the precious metal down more than 40% from its 2011 peak.

We’ve been here before. Gold prices were around $1,140 an ounce in early November, before staging an impressive run back up to about $1,300 by late January, almost a 15% gain.

Difficult as it is in this age of Internet trolls, I try to be agnostic about gold and think purely about its investment potential in the here and now. I couldn’t care less about conspiracy theories — what I want to know is whether I can make money on this trade, given that gold is so volatile.

So what’s in the cards for gold now? Are current prices a bargain as they were last fall, or will the recent declines continue?

I believe it’s the latter. But that doesn’t mean a savvy trader can’t make a profit with a targeted short-term play on gold or gold miners.

Gold’s January head fake

Gold’s jump at the beginning of the year was largely a head fake. Investors were rattled by weak retail sales and consumer spending to start the year, and conflicts in Russia and in Iraq helped fan the flames of uncertainty for many gold bugs.

But subsequent economic reports have proven that fears over consumer trends were overblown, with a series of encouraging jobs reports and a nice retail sales bounce in May. At the same time, geopolitics was moved to the back burner as investors lost interest in troubles abroad.

Throw in the fact that the U.S. dollar staged an impressive run, and the scales were tipped decidedly against gold in spring. Quantitative easing in Japan and obvious problems for the euro amid a Greek debt crisis favored the greenback, and a stronger dollar naturally means weaker prices for commodities such as gold that are priced in U.S. dollars.

It’s also important to note that the broad trend for gold has been downward since 2011 because of some rather massive market dynamics, namely the end of a so-called “supercycle” for commodities. From the 1990s through the financial crisis, prices of commodities from gold to copper to oil were surging on strong emerging-market demand and supply bottlenecks, and then the bottom fell out.

It’s hard to imagine these challenges abating anytime soon. The U.S. dollar remains rock-solid vs. the yen, euro and other currencies, and with the Fed talking about raising rates before the end of the year, that trend is assuredly going to continue. At the same time, emerging-market demand has been soft. Consider gold in India is actually discounted significantly vs. global pricing as jewelry demand remains weak even in this nation where gold remains an important cultural touchstone.

Long story short: January’s high was a head fake, and the long-term trend remains decidedly against gold.

Trade gold or miners, but don’t hold them

Still, much of this narrative working against gold is old news. So even though I think the deck is stacked against gold, it’s worth at least entertaining the notion that the precious metal has been beaten down too far and that shrewd swing traders may be able to swoop in and make a profit.

That’s actually the view of Bank of America Merrill Lynch, which recently called gold “undervalued” by a small measure.

Also, many central banks continue to be buyers of gold. The World Gold Council reported that in 2014, government demand for the precious metal rose at the second-highest pace in 50 years, with a 17% increase in demand. Russia was at the top of that list, and should remain there as it looks to diversify its foreign reserves and help its ailing ruble.

And, of course, it’s important to remember that demand for gold, as with any commodity, can often be propped up by falling prices. Consider that after China’s appetite for gold plunged 25% in 2014, it snapped back nicely in the first quarter of this year in large part because of how cheap the precious metal had become in the eyes of buyers.

Speaking of China, the huge losses incurred by recent market declines in the nation could rekindle interest in gold as an investment alternative.

All this may add up to short-term potential for gold, even if long-term price targets don’t hold a lot of upside.

Another interesting play for traders could be mining stocks. Mining companies have fallen much more than gold from their high-water marks earlier this year. Take AngloGold Ashanti Ltd. , which is down about 40% from February while gold is only off by a little more than 10% in the same period. AngloGold stock now trades for about 0.65 time next year’s sales and at a forward price-to-earnings of about 8.

Those are risky plays, mind you, and investors should expect volatility. I certainly don’t think a direct investment in gold bullion or gold miners will give you reliable returns over the next few years, and there’s a decent chance that the broader pressure against gold and gold miners will continue.

But if you want to grab the tiger by the tail, I can understand the logic behind a swing trade in gold or gold miners.

Just know what you’re getting into, because the long-term view for gold remains bleak.

Written by Jeff Reeves of MarketWatch

(Source: MarketWatch)

7 Things You Need to Know About the Crisis in Greece

Copyright Trine Juel/Flickr
Copyright Trine Juel/Flickr

With Greece nearly certain to default on a 1.6-billion-euro bond payment due June 30, the long-feared prospect of Hellenic financial chaos is just about here.

The nation’s banks closed this weekend, and the government imposed controls of the movement of capital in and out of the country. A Greek referendum is set for Sunday, in which voters will decide whether to accept more austerity or face the prospect of being booted from Europe’s currency union.

1. How bad is the problem? 

Greece owes foreign creditors about 280 billion euros, including $242.8 billion to public or quasi-public entities, such as the International Monetary Fund, the European Commission and European Central Bank. It doesn’t have the cash to make the interest payment due this week, and the failure to make a deal to restructure and refinance the obligation raises the prospect of an imminent default. The two sides are talking about an 18-billion-euro package to refinance some of that debt.

Greece’s private creditors took a write-down of about 75 percent on debt owed to them in 2012, but the public entities have resisted a similar move.

2. Why have talks broken down? 

The so-called Troika of the IMF, ECB and EC are looking for a combination of spending cuts (the most politically sensitive of which are to pensions that function as the Greek equivalent of Social Security) and tax increases. Greece’s top tax rate of 42 percent already applies to annual incomes as low as 42,000 euros. In addition, the nation has a value-added tax of as high as 23 percent, and Social Security taxes are also much higher than in the U.S. The country is already having huge problems collecting taxes it is owed. Greek Prime Minister Alexis Tsipras, pointing to the nation’s 25.6 percent unemployment rate, argues that Greece can’t handle more austerity.

3. What did the government do this weekend?

Greece’s anti-austerity Syriza party called for an election, hoping voters would back its push to get creditors to back down. It also imposed so-called capital controls to halt the flight of money out of the country and closed banks for a week.

While most domestic transactions are little affected, there is a daily cash-withdrawal limit of 60 euros, and international transactions are subject to approval. Greek banks had been reporting a sharp decrease in deposit balances since at least April, cutting into the banks’ ability to meet their own international obligations. Europe has also been helping Greek banks with a program called Emergency Liquidity Assistance, but Goldman Sachs economist Huw Pill said Sunday that the assistance could end early this week as the rest of Europe tries to cap its total exposure to Greece.

“Although the Greek government has repeatedly stressed that this is not a referendum on Greece’s euro membership, we believe that in practice it is,” IHS Global Insight economist Diego Iscaro wrote Monday. “In the event of a ‘no’ win, Greece’s euro zone membership will be seriously jeopardized. The creditors are unlikely to change their position markedly, and it would be impossible for the Greek government to accept the current proposal after being defeated by popular vote.”

4. How will the mess affect the markets in Europe and the U.S.?

European markets traded sharply lower on Monday, and the Dow Jones Industrial Average opened nearly 1 percent lower in New York. But the effect may be short-lived: S&P Capital IQ published a 70-year historical analysis of past market shocks that found events like this produce an average decline of 2.4 percent on the next trading day, which has been recovered in an average of 14 trading days.

“Greece represents less than 2 percent of the EU’s GDP,” S&P strategist Sam Stovall wrote. “By itself, its default or exit won’t upend the EU. … Yet if this drachma drama triggers a market decline in excess of 10 percent, not seen since October 2011, it may be a blessing in disguise. As history has shown, prior market shocks have usually proven to be better opportunities to buy than bail, primarily because the events did not dramatically alter the course of global economic growth.”

5. What happens if Greece leaves the euro or is forced to leave the euro?

Estimates of how little Greek drachmas may be worth are all over the place, from 340 to the U.S. dollar to as little as 1,000 drachmas to the dollar. Even before Greece is (or isn’t) forced to leave the currency union, there is talk of the government meeting its obligations in so-called “parallel currency,” whose value is highly uncertain.

6. Has the IMF’s austerity program worked so far?

No. Austerity has been the rule in Greece since the first debt-restructuring program was approved in 2010. But Greece’s unemployment rate has nearly tripled since, and annual gross domestic product has dropped 100 billion euros, or almost 30 percent. Greece’s slashed spending and tax hikes brought the nation’s “primary deficit,” or deficit before debt-service payments, into surplus territory in 2010. But the program was the equivalent of slamming on the economy’s brakes: Output dropped so rapidly that the primary deficit is now again 2 percent of Greek gross domestic product even with tough controls on spending. That’s not much different than the U.S., but the U.S deficit as a percentage of output is declining because the U.S. economy Is growing.

7. What does this mean for Greek tourism?

Uncertainty overshadows Greek tourism. And the stakes of not interrupting tourism are high indeed: Tourism accounts for 18 percent of the nation’s economy and employs a quarter of its workers, according to the Association of Greek Tourism Enterprises. Greece attracts as many as 17 million annual visitors, twice the nation’s population, and is virtually the only industry still growing in a nation where an estimated 59 businesses are closing each day.

But already, tourists are reporting difficulty getting cash, because automated teller machines are running out, and the threat of capital controls had some merchants unwilling to accept credit cards. Over time, leaving the euro and devaluing the drachma would lead to a period where Greek vacations should be very cheap for Western tourists.

How long that would last, and the impact it would have on hotels and other merchants, is hard to forecast. But resort owners are resisting creditor proposals to end or curtail their tax breaks for resorts on more remote islands and to raise the value-added tax on lodging.

Written by Tim Mullaney of CNBC

(Source: CNBC)

World Markets Suddenly Facing a Summer of Trouble and Strife

© Provided by CNBC
© Provided by CNBC

It’s approaching that time of year when market activity typically slows, as traders and central bankers alike depart for long holidays.

But this summer is shaping up to be anything but quiet for markets, with Greece at a cross roads, stocks in China nose diving and rising uncertainty about the timing of a U.S. interest rate rise.

“Summers are always difficult in the markets, but every summer turns out to be interesting and there’s so much going on this summer,” Bill Blain, a strategist at Mint Partners in London, told CNBC on Friday.

While the crisis in Greece, which holds a referendum this Sunday on whether or not to accept creditor-proposed bailout terms, is likely to be the trigger for near-term volatility, markets have much bigger fish to fry in the weeks to ahead.

Take for instance the slide in Chinese stock markets, which is fuelling concerns about the outlook for the world’s second biggest economy.

The benchmark Shanghai Composite index, which had risen as much as 113 percent between November and a peak in June, has collapsed, sliding almost 30 percent.

“It’s not Greece but China we should be concerned about,” said Blain. “The correction that we’re seeing in stocks is fascinating and the fact that the authorities are clearly nervous should make markets nervous,” he said, referring to measures taken this week by Beijing to shore up the battered equity market.

Fed up with Fed?

Analysts said uncertainty about the timing of a rise in U.S. interest rates was another key reason to keep traders on edge over the summer months, with Thursday’s softer-than-expected June jobs data prompting a re-think on the rate outlook.

“I think the biggest risk is not so much Greece; not so much China (stocks), which is in a dramatic move but is pretty localised, I think it is the Fed and the U.S. economy,” Giles Keating, the global head of research for private banking and wealth management at Credit Suisse, told CNBC’s “Squawk Box Europe” on Friday.

The timing of the Fed’s first rate hike since 2006 and the pace of subsequent monetary tightening is viewed as one of the biggest risks to global markets – from emerging markets, which are seen among the most vulnerable to a rise in risk aversion, to bond markets, which have already seen heavy selling.

Slim Feriani, CEO of MENA Capital, said that while Greece was a concern, Fed policy was a bigger worry for markets.

“The bigger cloud hanging over markets in general in the next 6-12 months is the Fed and what they do and when,” he said from a fund forum in Monaco earlier this week.

Blain at Mint Partners said there was no reason for the Fed to hike rates soon, as there was no pressure on the economy yet. He suggested that “perhaps a lot of the stock market upside has been overdone.”

The tech-heavy Nasdaq  (.IXIC) hit a record high in June, while the broader S&P 500  (.SPX) closed at about 2,077 points on Thursday – about 2.5 percent off a record high hit in May.

Uncertainty surrounding Greece meanwhile is unlikely to go away, with Sunday’s shock referendum suggesting the country will remain a source of market volatility in the weeks ahead, analysts said.

Greece this week became the first advanced economy to default on a loan from the International Monetary Fund and its worsening financial crisis has fuelled fears that it will become the first country to leave the euro zone.

If Greek voters back the creditors’ bailout plan—which the anti-austerity government has recommended they reject—Greek Prime Minister Alexis Tsipras has made it clear he will quit.

“There is a view that we’re going to get this referendum result on Monday morning and that will explain everything,” Blain said.

“All the referendum will do is start the next phase of negotiations and the crisis continues. If we get a ‘yes’ vote, we could be dealing with a new government as it looks inevitable the government could fall — so there lots of things for markets to worry about.”

Written by Dhara Ranasinghe of CNBC

(Source: CNBC)

How the US is Helping to Sink Puerto Rico

© REUTERS/Ana Martinez
© REUTERS/Ana Martinez

As creditors in Europe look with trepidation at the increasing probability that Greece will default on its debts, investors in the United States are watching a similar situation play out in Puerto Rico, where decades of borrowing and a stagnating economy have, according to the commonwealth’s governor, made default on general obligation bonds all but inevitable.

The government announced over the weekend that banks would be closed on Monday and capital controls would be put in place to prevent investors from taking money out of the island’s economy.

In an alarming report that leaked over the weekend, a team of economists headed by Anne O. Krueger, former chief economist for the World Bank and more recently first deputy managing director of the International Monetary Fund, issued dire warnings.

“Puerto Rico faces hard times,” the authors found. “Structural problems, economic shocks and weak public finances have yielded a decade of stagnation, outmigration and debt. Financial markets once looked past these realities but have since cut off the commonwealth from normal market access. A crisis looms.”

The Krueger report found that the government’s fiscal deficit is “much larger than assumed” and said the only way forward involves massive restructuring of both the government’s debts and those of major public enterprises.

Any move to restructure the commonwealth’s obligation will likely meet stiff resistance from the bond markets. Puerto Rico’s debt is widely held by U.S. hedge funds, mutual funds and other investment vehicles. It has been particularly popular because a special provision of U.S. law for years made it exempt from federal, state and local taxes.

That allowed Puerto Rico to fund large amounts of deficit spending for well over a decade, resulting in a debt load that has placed an enormous fiscal burden on an economy that has begun shrinking. As recently as 2013, Puerto Rico’s Government Development Bank could borrow at between 5 and 6 percent interest. Today, that rate has rocketed to more than 15 percent, essentially shutting the island out of the bond markets.

The combination has left Puerto Rico unable to pay its debts, Gov. Alejandro Garcia Padilla admitted in an interview with The New York Times. “The debt is not payable,” he said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”

The Krueger report notes that Puerto Rico’s close association with the United States is both a benefit and a curse when it comes to the island’s economy.

For example, employers are subject to federal minimum wage laws, despite the fact that the federal minimum of $7.50 per hour is much higher relative to per capita income on the island than it is on the mainland. A mainland U.S. worker earning the minimum wage is making about 28 percent of per capita income in the country as a whole. A worker earning the same in Puerto Rico earns 77 percent of the island’s per capita income. This means that even entry-level workers are much more expensive to hire in Puerto Rico.

Additionally, the report found, social safety net benefits are, given the cost of living on the island and the relative earnings of minimum wage, more generous than on the mainland.

“Workers are disinclined to take up jobs because the welfare system provides generous benefits that often exceed what minimum wage employment yields; one estimate shows that a household of three eligible for food stamps, AFDC [Aid to Families with Dependent Children], Medicaid and utilities subsidies could receive $1,743 per month — as compared with a minimum wage earner’s take-home earnings of $1,159.”

One result is that only 40 percent of the adult population is gainfully employed, versus more than 60 percent in the mainland.

The report paints a picture of an island trapped in a vicious cycle. Poor economic growth, the result of past fiscal mismanagement, has led to an increasing need for deficit spending, which further depresses growth, perpetuating what Garcia Padilla has called a “death spiral.”

With a population greater than that of 22 states, Puerto Rico has economic significance for the U.S., and its extensive use of the bond markets in the past decade means that a widespread default could be a major shock to the markets. (The island’s per capita debt load would also, as the Krueger report points out, involve an unprecedented request for relief from creditors.)

The report posits a “voluntary exchange of old bonds for new ones with a later/lower debt service profile.” That essentially means bondholders would have to take a haircut.

“Negotiations with creditors will doubtlessly be challenging,” the report said. “There is no U.S. precedent for anything of this scale and scope, and there is the added complication of extensive pledging of specific revenue streams to specific debts. But difficult or not, the projections are clear that the issue can no longer be avoided.”

Written by Rob Garver of The Fiscal Times

(Source: The Fiscal Times)

Europe Raises Heat on Greece to Make Further Concessions

© Daniel Roland/AFP/Getty Images
© Daniel Roland/AFP/Getty Images

European policy makers raised pressure on Greece to return to the negotiating table and make further concessions to unlock aid, as each side laid out its demands to rally support for its respective position.

Stocks and the euro fell on Monday as the extent of the policy divide that remains to be resolved was laid bare after weekend talks billed by European officials as a last attempt to end the standoff broke up early.

Europe needs a “strong and comprehensive agreement, and we need this very soon,” European Central Bank President Mario Draghi told lawmakers at the European Parliament in Brussels on Monday. “While all participants need to go the extra mile, the ball lies squarely in the camp of the Greek government.”

With signs that negotiating fatigue was stoking intransigence on all sides, some euro-area officials publicly raised the prospect of Greece’s exit from the currency region as the Greek government suggested it had reached the limits of its ability to make concessions. Finance Ministry officials from the 19-nation euro zone are due to hold a Greece call on Tuesday ahead of a meeting of ministers later this week.

“We’re reaching a potential period of turbulence if no accord is found,” French President Francois Hollande told reporters in Paris on Monday. “This is a message for Greece, because Greece mustn’t wait, it must renew talks with the institutions,” he said, referring to the International Monetary Fund, the ECB and the European Commission.

Awaiting Invitation

Greek Prime Minister Alexis Tsipras’s government said that it was awaiting an invitation from its creditors and is ready to respond anytime to continue the negotiations, according to an e- mail from the premier’s office.

The EU commission and IMF separately outlined their respective goals in the talks that broke up after just 45 minutes on Sunday. The focus now shifts to a June 18 meeting of euro-area finance ministers in Luxembourg. Officials have focused on that as a make-or-break session for Greece’s ability to avert default and stay in the currency union.

Tsipras, in a statement on Monday, portrayed Greece as the torchbearer of democracy, standing firm against creditors’ demand for pension cuts.

“One can only suspect political motives behind the fact that the institutions insist on further pension cuts, despite five years of pillaging,” Tsipras said. “We will wait patiently til the institutions adhere to realism.”

That prompted a rebuke from the European Commission.

“It is a gross misrepresentation of facts to say the institutions are calling or have called for cuts in individual pensions,” spokeswoman Annika Breidthardt told reporters in Brussels.

Written by Angeline Benoit and Nikos Chrysoloras of Bloomberg

(Source: MSN)