Read More : Higher Inflation Rate Expected; Long-Term Investors in Danger?

Certainly, long-term investing does have risks, including a hidden hazard of the possibility that a rising inflation rate will erode wealth just as easily as the levy imposed by Cyprus on bank deposits.

A study done by The Economist showed that people in the U.S. who placed their capital in six-month certificates of deposit (CDs) from 2009 until 2012 earned 3.2% (before tax). Many believe that a CD is among the safest of short-term investments. However, the inflation rate was 6.6% during this time period, resulting in a loss of wealth for the investor of 3.2%. (Source: “The financial-repression levy,” The Economist, March 23, 2013.)

While bank depositors in Cyprus are in an uproar over the one-time levy, American investors have also been hit with a loss of wealth of approximately 3.2% during a three-year period due to inflation, as noted above. Now, imagine the full impact on long-term investing over many years and decades as the inflation rate erodes wealth.

Understanding the real impact of the rate of inflation should alter one’s portfolio allocation when it comes to long-term investing. Simply placing capital in U.S. Treasury notes will not have the rate of return that investors need for retirement.

Many people only look at the nominal return, and not the real return on an investment. Remember, regardless of what the expected return is, for long-term investing, one must exceed the inflation rate to increase portfolio wealth.

There are some who fear that in America cash deposits might be hit by a one-time levy similar to what occurred in Cyprus. These fears are unfounded, and such an event will not occur. However, there are subtle ways of imposing such a levy; for example, through a higher inflation rate. The increased inflation will simply lower the value of future dollars to pay off current debts of the government.

This means that for someone to be successful in long-term investing, one must diversify his or her portfolio away from the standard “safe investments,” such as Treasury bonds. With a higher inflation rate expected, this could result in several outcomes.

One possible outcome is a lower currency. However, with many countries running aggressive monetary policy programs, the net result might be negligible; although this might be true, having a diversified portfolio of investments in various currencies, especially ones that could benefit from higher commodity prices, such as the Canadian dollar, seems like a prudent step. Additionally, some commodities, such as gold, could also act as a hedge against increased inflation and a lower U.S. dollar.

The push to create a higher inflation rate will also mean, by definition, higher asset prices, including stocks, homes, and commodities. However, if the inflation gets too high, then this could hurt these assets, as the central bank would then need to raise interest rates.

There is a fine balance between a high and low inflation rate. Regardless of one’s beliefs regarding the future rate, having a diversified portfolio is crucial. No one can predict the future, and as such, one should have a mix of assets to try and reduce overall portfolio volatility.

When it comes to long-term investing, I believe the worst thing investors can do at this point is not to take into account the potential for a higher inflation rate, and to instead go ahead and buy long-term government bonds. With the tiny interest rate being paid, I believe the future rate of inflation will be higher, resulting in a loss for those investors.

Comment (0)

In 2008, Federal Reserve Chairman Ben Bernanke made his first step on the Quantitative Easing (QE) ladder in an effort to create more economic activity and higher home prices.

QE1 was initiated in November 2008 and ran until March 2010. During that time, the Federal Reserve snapped up $2.1 trillion worth of mortgage-backed securities and Treasury bills.⁷

After QE1 ended, many experts expected the economy to sputter to life and for mortgage rates to rise. Contrary to expectations, mortgage rates tumbled.

For more information you can visit http://useconomicoutlook2013.com/qe1-qe2-qe3-us-economy-2013.php

Comment (0)

Read More : http://www.investmentcontrarians.com/recession/what-the-latest-job-creation-data-indicate-for-this-market-sector/1984/

The latest data on job creation by the Bureau of Labor Statistics (BLS) are interesting for several reasons. While there are some glimmers of hope, there is still much more work that needs to be done.

For April, job creation improved by 165,000, with the 12-month average now at 169,000 per month. The long-term unemployed level continues to be high, although it is decreasing. Currently, there are 4.4 million long-term unemployed, a decrease of 258,000 during the month of April. This lowered the percentage of long-term unemployed to 37.4% of the overall unemployed, down 2.2% for the month. Another important metric is the participation rate, which remained at 63.3% and is at historically low levels.

Clearly, economic growth needs to accelerate for job creation to continue moving upward. The participation rate remains quite low, and the large number of long-term unemployed is stubbornly high.

The market reacted positively, not only from the headline number, but also the extremely large positive revisions to the previous months of job creation data. While economic growth appears to be slowing, jobs data were much stronger than previously reported, with February and March job creation data revised upward by 64,000 and 50,000, respectively, from the initially reported data.

Do these data indicate any sectors worth investing in?

Yes; as the healthcare industry continues with a steady pace of job creation, with 19,000 newly employed in April, this brings the 12-month average for job creation in the healthcare industry to 24,000 per month. As an investor, with economic growth still relatively anemic nationwide, it appears the healthcare industry will continue on its upward trajectory.

The new healthcare law is creating a positive push into the healthcare industry, which should remain quite strong, regardless of economic growth. However, healthcare stocks are benefiting in more ways than simply through “Obamacare.” Demographics internationally are pointing to an aging population worldwide. This means more demand for healthcare products and services.

While economic growth globally remains sluggish, job creation will most likely continue in the healthcare field, as demand appears to be increasing over the next several decades.

A stock chart of the S&P 500 Health Care Index is featured below:

Chart courtesy of www.StockCharts.com

This chart of the S&P 500 Health Care Index clearly shows that even in a situation of relatively slow economic growth, there are areas in which an investor can still generate strong returns. By looking at the steady increase in the number of jobs created over the past year in the healthcare industry, it’s clear that these firms are continuing to build their levels of employees due to increased expectations of future growth.

Although the current level of healthcare stocks is quite high, I would certainly look at accumulating on significant pullbacks. While economic growth may or may not accelerate, the job creation data for the healthcare industry show that the firms within this field believe that the future offers significant potential.

As the world population grows older, there will be increased sickness and demand for medications. While this is often a sensitive subject, the facts remain that there will be a huge number of people moving into the older age bracket, and that highly populated age bracket will benefit healthcare stocks and their shareholders. At this time, though, I would prefer to wait for a pullback and a more attractive price point.

Comment (0)

Read More : http://www.investmentcontrarians.com/stock-market/forget-what-the-bulls-are-saying-red-flags-are-surfacing/1988/

The S&P 500 made another record high above 1,600 last Friday, but making that move to above the magical level came slowly and cautiously, which makes me feel somewhat uneasy.

The breakout—above the multiyear top near 1,565—is positive, as shown on the chart below, but the move was associated with light volume, which suggests a bearish divergence, based on my technical analysis.

Taking a look at the blue ovals on the stock market chart below, you will notice the possible pullback that has occurred after every six-month rally from November to April over the past three years from 2010 to 2012.

Whether we will see another retrenchment in the stock market this year is unknown, but based on the rate of the gains so far, I feel there is an above-average likelihood of this happening.

Featured below is a stock chart of the S&P 500 Index:

Chart courtesy of www.StockCharts.com

While the stock market continues to show upside potential, I think you should continue to ride the wave upward; however, you also need to be aware of the risk and the reality that the stock market could plummet on bad news, considering how high the gains have been so early in 2013.

Moreover, the Dow Jones Transportation Average is also offering up a red flag on the upward move in the Dow Jones Industrial Average.

The chart below shows that the industrials (as indicated by the green line in the top portion of the chart below) are moving higher, while the transports are showing a slight downward bias (as indicated in the bottom portion of the chart). Also, note the declining volume, which is a red flag of market disinterest.

Chart courtesy of www.StockCharts.com

The reality is that the decline in the transport sector means we could be seeing a drop-off in the transportation stocks. These are the companies that move the goods across the country and around the world. When these begin to decline, you have to question why the industrials are moving higher, since a decline in transports suggests businesses may be shipping less.

This is a key concept behind Dow theory, and it is critical in determining which way the market turns. The decline in the transports should make you nervous about the stock market, especially in terms of what lies on the horizon.

My advice at this juncture is to continue to ride the stock market upward, while also taking some profits off the table, especially on some of your major winners.

Comment (0)

Click here to visit : When It Comes to Jobs Numbers, the Market Is Trading on Anything but the Truth

Pop the champagne; it’s time to rejoice and toast this month’s jobs numbers, isn’t it? The S&P 500 edged up to another record high above 1,600, while the Dow is seriously eyeing 15,000.

I did think those targets for the two indices were achievable, but not this early in the year.

You can thank the Federal Reserve and the astounding job creation for the high jobs numbers—of course, I’m being sarcastic to a degree.

According to the United States Department of Labor, job creation tallied 165,000 jobs in April, better than the Briefing.com estimate of 135,000. The March reading was also revised upward to 138,000 new jobs from the previous muted reading of 88,000. The 165,000 new jobs is decent, but let’s be realistic: that number is no reason for the S&P 500 to be trading at a record high. The truth of the matter is that we need to see a higher job creation number.

The unemployment rate fell to a four-year low of 7.5%, much better than the Briefing.com estimate of 7.7%. Again, great, but I think the drop has more to do with job seekers leaving the search.

Yes, the job creation numbers are a myth as far as the real strength of the labor market.

The Labor Department estimates there are 11.7 million people unemployed, but in reality, it is probably twice that because many workers have quit looking for work out of frustration.

In fact, a closer examination of the job creation numbers from the Labor Department tells us another story—not what is in the headlines and not what the government wants you to know.

All we see is the unemployment rate declining to 7.5% and everyone, including the market, losing their sanity and driving the S&P 500 up to a new record.

But let me tell you: the job creation, while improving, is still not healthy.

The amount of part-timers came in at 7.9 million in April. Trust me: many of these employees would work more hours if they had the opportunity.

And then there’s that group the Labor Department calls the “marginally attached”—those who are unemployed but have been actively looking for full-time work. There were 2.3 million of these branded workers who were not counted in the unemployment data, because they were not looking for a job in the four weeks prior to the survey.

While I really don’t want to sound cynical, you have to question the real strength of the job creation and realize that the stock market is trading on the headline and not the reality.

Comment (0)

Read More :  Physical Gold Bullion Charged Large Premiums as Demand Increases

An investment strategy can take many forms. For long-term investors, one investment strategy is to wait for significant pullbacks and enter positions when the price declines.

The recent sell-off in gold bullion has created a substantial increase in demand for the precious metal around the world. It appears that many long-term investors globally are using the investment strategy of buying on dips when it comes to gold.

Following the biggest sell-off in the price of gold bullion in 30 years, international investors are taking the pullback as an opportunity in their investment strategy to accumulate the metal. A sign of demand is the premium that gold buyers are willing to pay.

In many parts of the world, such as Dubai, physical gold bullion prices paid by wholesalers are trading at a premium of $6.00–$9.00 an ounce over the spot rate in London, versus a premium of only $0.50 prior to the sell-off, according to precious metals service provider MKS (Switzerland) SA. (Source: Sim, G., “Gold Rush From Dubai to Turkey Saps Supply as Premiums Jump,” Bloomberg, April 30, 2013, last accessed May 3, 2013.)

The gold bullion trade in Dubai was worth approximately $56.0 billion in 2011, up from only $6.0 billion in 2003. The premium for physical gold is even larger in Turkey. Gold traded as much as $25.00 per ounce higher on the Istanbul Gold Exchange versus London’s price for gold.

The increase in demand for physical gold bullion is a sign that many long-term holders have the investment strategy of buying when the price dips. Considering that the recent sell-off in gold was so significant, long-term bulls might consider the fact that buyers are accumulating large quantities of physical gold as a sign of a price support.

Take a look at the stock chart for gold spot prices below:

Chart courtesy of www.StockCharts.com

Following the sell-off, gold bullion entered oversold territory as indicated by the relative strength index (RSI). However, one cannot base an investment strategy solely on the RSI, since a market could be oversold or overbought for a prolonged period of time. In late February, gold also showed signs of being oversold, which, as we all know now, were followed with further selling pressure.

At this point, it is a battle between two types of investment strategy: large investors who are selling gold and the retail public who are buying gold. Is there enough demand to overcome the massive level of supply being sold into the market? Obviously, the future is unpredictable, but if the physical buying of gold bullion is any indication of potential future price moves, one could say that the recent sell-off to $1,350 an ounce for gold might be a floor, at least over the short term.

Comment (0)

Click here to visit : Yet Another Housing Crisis on the Horizon?

Home prices are heating up, as the flow of new homes and permits continue to steadily increase and the attraction of historically low mortgage rates motivates buyers.

The buyers that are driving up the housing market are not only the buyers of principal homes, but also the investors who are attracted to the relatively lower home prices and cheap financing.

What is interesting is that we are seeing major buying from not only the smaller investor who may dabble in an investment property, but also the large institutions and hedge funds that are getting into the swing of things, gobbling up hundreds and thousands of properties at lower prices.

The S&P/Case-Shiller index, comprising the 20 largest U.S. metropolitan cites, increased a better-than-expected 9.3% in February, representing the 13th straight up month for prices.

While the housing market is far better than it was a few years ago, when the sub-prime mortgage crisis crushed the housing market and left a trail of destruction, my view is that there may be a bubble building as much of the current surge in prices is due to the cheap money.

Just consider the S&P/Case-Shiller index and notice the major jump in home prices in the housing market. For example, home buyers in the Phoenix housing market saw home prices surge 23% year-over-year, while those living in San Francisco reported an 18.9% surge in home prices.

My problem is that much of the buying in the housing market is being triggered by low-financing costs that can inevitably get homeowners in trouble once interest rates begin to ratchet higher—and they will go higher. For instance, carrying a $100,000 mortgage will become more expensive for many homeowners who were initially able to enter into the market only because of the low rates.

Even Robert Shiller, co-creator of the S&P/Case-Shiller index, is not that enthusiastic. He feels that the current housing climate is occurring in an “abnormal economy” that has been created by the money printing by the Federal Reserve. Shiller actually believes that home prices will do very little over the next decade. (Source: Napach, B., “Robert Shiller: Home Prices Will Remain Relatively Stagnant For Next 10 Years,” Yahoo! Finance, April 30, 2013.)

Years ago, after the last housing bubble, I said that if you have the money, go out and buy an investment property—you would be buying homes when they were cheap and, best of all, the money was cheap.

So as long as the Federal Reserve continues to pursue its bond-buying program and place downward pressure on financing rates, the housing market will continue to improve.

The worry is for when rates move higher: we may be headed for another housing market bubble down the road. If so, you may want to lighten up on the homebuilder stocks.

Funny how some people never learn.

Comment (1)

Click here to visit : Did the Federal Reserve Just Signal More Monetary Policy?

The latest meeting by the Federal Reserve was quite significant regarding its monetary policy program, and many economists will now need to revise their analyses.

The key sentence in the Fed’s statement was, “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” (Source: Board of Governors of the Federal Reserve System web site, May 1, 2013, last accessed May 2, 2013.)

Why is this so significant? For the past few months, many economists and analysts have been expecting that the Federal Reserve would begin to discuss when it would be appropriate to begin reducing its aggressive monetary policy program, specifically the monthly $85.0 billion bond-buying level.

Many were thinking that at this meeting the Federal Reserve would indicate that at some point in the future it would begin reducing its aggressive monetary policy stance. While the Fed did indicate that it might be prepared to reduce bond buying and lower monetary policy measures, this is the first mention in its press releases that an increase is possible.

In my opinion, this indicates that the Federal Reserve now believes that additional monetary policy might be necessary, whereas we all had been hoping that the U.S. economy would begin to improve. Clearly, the recent data has shown otherwise.

Job creation remains very weak, and various sectors, such as manufacturing, do not indicate that they will increase their level of production anytime soon. Internationally, we are also seeing continued weakness in many countries, which can only put downward pressure on our own economy.

With approximately 11.7 million people still out of work, the sentiment in the Fed’s press release that an increase is possible is a signal to me that the current easy money program is losing its effectiveness. The Federal Reserve committee still has two targets to hit: an unemployment rate below 6.5% and an inflation outlook that is below 2.5%.

The unemployment rate is nowhere near 6.5%, with the real unemployment rate being significantly higher. The Federal Reserve does understand that real unemployment is unbearably high, and its use of quantitative easing is the only tool it has at its disposal. Once again, the Fed did mention fiscal drag as being an impediment to growth. The politicians in Washington continue to cause havoc with the American economy, as people are uncertain about the future and fed up with both political sides.

This secondary target for the Federal Reserve is an inflation outlook below 2.5%. While the Fed might be currently meeting its target, as we’ve seen both consumer and producer core inflation far below 2.5%, such an aggressive monetary policy program will at some point raise concerns over the long-term costs. If inflation were to begin increasing, this could result in many asset classes moving upward in price, including commodities like gold.

The key question: can the Federal Reserve rein in monetary policy at a fast enough pace to prevent inflation? History has shown that the Fed has been quite slow at pulling back on quantitative easing, and this delay has created bubbles in the economy, which will create more havoc down the road. There are always costs that must be paid for such a monetary policy program.

But before we see quantitative easing come to an end, the current economic situation in America might very well warrant additional and more aggressive monetary policy by the Fed. The quotation that began this article clearly shows that the Federal Reserve is considering additional measures, which makes me worry about the true fundamental strength of the U.S. economy.

Comment (0)

Click here to visit : How True Is the “Sell in May and Go Away” Adage?

Let’s look at the question from two angles: a historical context and the S&P 500’s currently position.

There are some historical facts that raise a few concerns in my mind regarding an investment strategy in the market during the month of May and early summer—not only in terms of actually selling off, but also in terms of increasing volatility.

A look at the best and worst performances for the month of May since 1928 by Bespoke Investment Group, LLC shows that for the S&P 500, two of the top-10 worst Mays (May 2010 with a 8.2% contraction, and 2012 contracting by 6.27%) and one of the top-10 best Mays (May 2009 with 5.31% growth) occurred during the recent bull market that started in 2009. (Source: “S&P 500’s Best and Worst Months of May Since 1928,” Bespoke Investment Group, LLC web site, April 30, 2013, last accessed May 1, 2013.)

Clearly, volatility in the S&P 500 has increased substantially for the month of May for the past few years over the course of the current bull market, and your investment strategy certainly needs to take that volatility’s timing into account. Additionally, since the bull market’s beginning in 2009, the S&P 500 during the month of May has averaged a decline of 2.64%.

Looking even further back, many investors have continued to alter their investment strategy for the S&P 500 during the month of May—and the spring season in general—since history does indicate that caution is warranted during this timeframe. Mark Hulbert of MarketWatch stated on CNBC that statistical work has shown the “sell in May and go away” trading strategy has worked since the 17th century. (Source: Navarro, B.J., “‘Sell in May,’ History Says: Pro,” CNBC.com, April 30, 2013, last accessed May 1, 2013.)

Hulbert states that statistical work on 108 different stock markets, going back as far as England in 1694, shows some evidence that indicates that selling in May through October has some merit. However, not all stocks within the S&P 500 are affected. The investment strategy for certain sectors was more positive historically than others.

Of course, one can’t make a decision on an investment strategy simply based on past performance. We all know that past performance is not always a predictor of the future. However, there are persisting worrisome signs that the S&P 500 is due for a pullback in the current timeframe.

Featured below is a chart for the S&P 500 and the Dow Jones-UBS Commodity Index:

Chart courtesy of www.StockCharts.com

This chart, showing the S&P 500 and the Dow Jones-UBS Commodity Index, indicates that while there were obvious deviations over the past 10 years between the S&P 500 and the commodity index, the divergence has now really become quite large. In addition, the relative strength index (RSI) for the S&P 500 has now moved into overbought territory.

However, there are additional variables to consider when making any shift in an investment strategy. At this time, we’re seeing aggressive central bank stimulus around the world. This might drive the commodity prices higher, closing the gap while leaving the S&P 500 relatively untouched.

Considering the relative calm and low volatility levels in the S&P 500 over the past couple of months, it makes sense to take precautions in your investment strategy and prepare for higher volatility levels. Low volatility levels can only last for so long before a spike occurs.

Given the economic situation in America—and around the world—if I were currently holding stocks in the S&P 500 that are up significantly, I would certainly look to take profits. The increase in the S&P 500 since November of 2012 cannot continue at the current pace. My personal investment strategy would be to begin raising cash or possibly buying puts to hedge my portfolio.

Comment (0)

Small business is the backbone of America’s economy. While large multinational companies tend to get all of the attention, it’s the small companies that are critical to the country’s economy.

From your local “mom and pop” shop to the independent watering hole around the corner to the small manufacturing company making widgets, small companies are critical to the economy.

These are the companies that tend to fare better than other companies when coming out of a recession or a slowdown, due to their ability to make quick decisions in response to rapidly changing business variables.

While large companies could take months to adapt to a changing business environment, small companies could take only days or weeks to adjust, which is why their activity should be monitored.

An interesting measure on how well small companies may be doing can be linked to the amount of loans taken out. The thinking is: the higher the loans, the more the business is growing.

The Small Business Lending Index (SBLI), developed by Thomson Reuters and PayNet, is a good benchmark on small business lending. The SBLI is based on the volume of new commercial loan and lease originations from the major lenders in the U.S. given to small companies.

In March, the index fell to 98.5 from 105.4 in February.

The SBLI chart shows the pattern of the loans from 2005. You will notice the dip in loans when the recession surfaced, followed by the steady rise in loans to small companies up until the present time. Also note the recent big dip in loans to small companies.

This recent decline may prove to be nothing important, but it could also indicate an impending slowdown in loan demand by small companies on the horizon—potentially foreshadowing an upcoming slowing in the business climate and U.S. economy as small companies clamp down on spending used for company expansion, such as jobs growth and adding capacity via machinery.

While we may be somewhat premature in suspecting the possible slowing, it is important to monitor the lending situation.

In the economy as a whole, factory activity may be stalling, as indicated by the key Institute for Supply Management (ISM) index, which fell to 50.7 in April, down from 51.3 in March. While the reading still indicates expansion in manufacturing, the low reading indicates stalling and is the lowest reading since December 2012, when 50.2 was reported, according to the ISM.

So, while the Federal Reserve’s easy money policy has helped to drive the economy, the red flag indicated by the slowing in loans made to small companies is worrisome. As such, you may want to be careful when buying stocks during this time because the economy could be set for some stalling.

Click here to visit : Small Business Loans Drop: Does This Foreshadow a Slowing?

Comment (0)