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Tag Archives: Federal Reserve

Thoughts on Investing in 2013

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Here are a few quick thoughts off the top of my head regarding what lies ahead in 2013.

  • The overall market was carried away by bullishness in 2012.  Other than a light sell-off in May and June and an even lighter decline in November, the market didn’t experience much weakness throughout the year.  We experienced nothing close to what was seen in 2011.
    • When do we get a sell-off in 2013?  I see a replay of the sanguine market conditions of 2012 as being highly unlikely.  Somewhere volatility will strike, though how long and how server is anyone’s guess.
    • Conversely, are we in a period where the market is on a sort of ‘melt-up’ auto pilot?  Such was the case back in the earl-middle part of the last decade?  I don’t think this is true since so many unknowns politically and economically.  Yet, in 2012 they didn’t see to make all that big of a stir.
  • Does the Federal Reserve increase its role in the market?  In the latter part of 2012, this was the case.  Does this pattern continue into 2013?
    • If the pattern does continue, at what point does intervention turn from a sign of bullishness in the market to a sign of bearishness?
  • How big of an impact with the changes in tax rules impact dividend-centric stocks?
    • If a sell-off occurs, how big of an over correction occurs?
      • If this does come to pass, a buying opportunity exists in an already beaten down area of the market.

Bill Gross – Damages

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If you have not come across the latest monthly installment by Bill Gross, you certainly will want to give it a read (linked below).  Bill does a great job this month providing a stark dose of macro economic reality.  It’s better to know what you’re up against than pretend what you’re up against isn’t there.  Since the discussion is focused on a ‘big picture’ centric view of the U.S. economy, it is relevant to investor or non-investor.

Three key takeaways from Bill’s October column…

  • The U.S. has federal debt/GDP less than 100%, Aaa/AA+ credit ratings, and the benefit of being the world’s reserve currency.
  • Studies by the CBO, IMF and BIS (when averaged) suggest that we need to cut spending or raise taxes by 11% of GDP and rather quickly over the next five to 10 years.
  • Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow, and the dollar would inevitably decline.

Read October’s Installment

The June Rally: Built on Weak Foundations

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Below is an article recently published by Elliott Gue.  As to be expected, Elliott provides a tremendous amount of insight in a way that is very accessible to all readers.  The discussion revolves around the current weakness we’re seeing in the market and what the Fed may do in the latter part of the summer.  Since the general direction in the market has a whole lot to do with how your investments perform, I highly recommend you give the article a read.

The June Rally: Built on Weak Foundations

Thinking About “Occupy Wall Street” Protests

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We believe that the straw that broke the camel’s back and ignited the Occupy Wall Street rallies were: 1) the recent considerations by the Federal Reserve to re-initiate its inflationist, quantitative easing policies; and 2) the global, government-coordinated efforts to bail out European and even U.S. banks in the wake of the PIIGS sovereign debt crisis. The message American labor hears is: the U.S. economy is getting worse, our leaders will continue to inflate the dollar in a misguided effort to bail out the economy, which will only accelerate rising living costs, and banks could receive hundreds of billions of dollars in additional government support as opposed to the consumer. Of course, these protests will take place at the regional Fed banks and the Treasury…READ MORE.

Rising Interest Rates, the Dollar and Gold

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For nearly a year and half now many foreign countries (mainly developing countries, but Australia is in the mix) have been increasing interest rates and increasing reserve requirements.  This summer the Federal Reserve’s Quantitative Easing II will be ending.  A national election is upcoming in 2012.  As usual, a number of events are happening and are upcoming that can impact the performance of your portfolio.

I’m not much for big predictions, but I think it’s a good idea to at least think about shifts in trends and how such shift could impact your investing game plan.  Bear with me as I shoot off a few random thoughts…

What happens when the Fed finally starts to increase interest rates?  It’s bound to happen some day soon, right?  Free money (or nearly) can’t exist in perpetuity.  At least I don’t think so.  When rates begin to increase, what will that do for the dollar?  I suppose if every other country in the world is doing the same (increasing rates), then it’s a wash, but that sounds like some type of text book situation.

If we hold that the recovery continues, will we come out stronger that Europe?  If so, does this mean that the dollar begins to regain some of its strength?

What if Washington gets the deficit under control and drives the current account deficit down?  That would be a positive catalyst for the dollar.  I think we could agree that the public sentiment wants deficit spending reduced, but will current and/or future politicians have the will to do so?

In the case that the dollar gets stronger, what does that mean for commodities?  What does it mean for precious metals?  Gold is driven up right now based on anxiety and fear.  Increased faith in ‘the system’ would presumably cause investors to migrate away from gold.  Other commodities might be hit as well.  Oil is priced in dollars and therefore a stronger dollar would lead to lower oil prices, all else being equal.

Questions like those above are good for any investor to consider.  Right now it’s hard to think about a strong dollar bull run, but if it does occur is your portfolio ready?  If not, what type of plan can you devise to act accordingly?  No one wants get caught unprepared.

Did an ETF Trigger the Current Gold Boom?

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So what caused this steep price rise? The key hasn’t been any inherent increase in gold’s value to society. Instead, gold rose because a South African mine owner — with help from consulting firm Bain & Co. — invented a way to sell it to the masses without the hassle of physically delivering the shiny metal, explains a Bloomberg BusinessWeek article published Sunday…Read More

My Take:  This article hits home with me.  I’ve been of the opinion for a couple of years now that gold is overbought and due for a correction.  As an investor, when I hear ads on the radio, television and other forms of media pushing people to buy gold, something doesn’t smell right.

Cohan, through his observations of the Business Week article, is claiming that the significant growth in the price of gold has been triggered by the ability of people to easily purchase gold (via Exchange Traded Funds – ETF) and a good marketing campaign.

While I’ve been aware of the marketing campaign for some years now (Honestly, who hasn’t?), I never took into consideration the ‘innovation’ that is gold-based ETFs.  I’m certain the concept is not exactly new, taking hold of a tangible good through deed only, but the access and accessibility are certainly areas that have grown rapidly within recent history.

If you don’t remember anything about the article, remember the following: “According to Wharton professor Jeremy Siegel, gold has total annual real returns of just 0.6% since 1802 — stocks, at 6.6% are much better investment performers, as are bonds at 3.6% and bills at 2.8%.”

Part 2 – Increasing interest rates & how to best position your portfolio

Posted on by Posted in Dividends, Interest Rates, Investing, Risk, Strategy, Valuation 1 Comment

Increasing interest rates & how to best position your portfolio.

If the Fed increased short-term borrowing rates, what borrowing rates will be hit hardest?  You guessed it, short-term rates.  Therefore, stay away from companies that are heavily burdened by short-term debt.

Companies that rely heavily on short-term debt will be the most adversely impacted by a rate increase.  This will impact their profitability and impede their ability to maintain operations and pursue future growth opportunities.

Companies that have balances sheets with little short-term debt are a better pick.  Look for companies that have financed much of their debt with long-term debt obligations or use their retained earnings to finance company growth.  With the use of retained earnings they are free of being subject to increasing interest payments on their finances.

Larger companies probably fair better, since they typically are not so highly leveraged with debt compared to newer and smaller companies.

If all other countries keep their interest rates the same and the U.S. increases rates, then in theory the demand for dollars should rise.  If the interest rate offered at U.S. banks for  saving accounts, CDs, T-Bills…increases compared to all other countries, then investors will demand more dollar denominated investments compared to other country currencies.  This will put positive pressure on the dollar’s valuation.

Look for companies that have 50% or more of their revenues in dollars.  If the dollar gains value, so does all of the revenue they bring in and thus the company is more valuable (until the dollar’s valuation heads south…).

The next part of this episode will highlight a few companies I believe would be good examples of companies to hold in your portfolio, if the Fed increases rates.  We’ll use them as an example to help you with your research.