Money Morning's Chief Investment Strategist Keith Fitz-Gerald joined FoxBusiness Friday to explain why last week’s market activity included two days where more than 200-point rallies fizzled intraday. Click the video to hear what Fitz-Gerald details as the good and bad signals stemming from this market behavior. Loading the player …
September 2011 - Money Morning - Only the News You Can Profit From
To hear the "bond bubbleistas" tell it, the bond market is poised to collapse the second interest rates start to rise.
But if you're thinking about dumping all of your bonds, you should think again.
Yes, rates will rise – but not as fast as many analysts are forecasting. What's more, even if rates do increase, the price risk is not as bad as you might think.
That's why the more appropriate strategy is to simply reorient your bond portfolio, rather than pull out all together.
Don't get me wrong. I'm not trying to make light of the global financial crisis or our current situation, but people have been calling for an "end" to bond markets, in one form or another, for quite a long time.
PIMCO cofounder and fund manager Bill Gross has actually done so twice, most recently dumping all government bonds in early 2011. He's since admitted he was wrong and piled back in. Granted, his business is bonds so he had to, but the point is moot.
PIMCO investors paid through the nose in lost performance, though. The PIMCO Total Return Fund was up just 3.2% as of August, trailing more than 70% of its peers and lagging the 5.6% return of its benchmark index, according to Bloomberg.
Meredith Whitney famously called for the $3 trillion muni-market Armageddon in November 2010. Her clock is about up and she's mentioning nothing about her prediction in recent appearances despite turning the bond markets upside down for months.
Even economist Nouriel Roubini has eaten crow when it comes to bonds. He called for the complete meltdown of everything we knew to be true in 2004, 2005, 2006, and 2007. And while he's since become a media darling, his predictive record is less than stunning. Journalist Charles Gasparino, who investigated Roubini's track record, noted that he couldn't find a "single investor who regularly uses his research."
My point is not that any of these incredibly smart people were wrong – everybody is wrong from time to time – just that investors risk a lot by not "risking" anything.
Let me explain.
No Substitute for Stability
Fueled by banking blunders and the European banking crisis, U.S. Treasuries have not only risen this year, they've rocketed so high that in August the benchmark 10-year yield dropped below 2% for the first time since 1950 and traded at around 1.96% yesterday (Thursday).
That means investors who hung in there despite the risks and the hype have enjoyed a nice return from bond appreciation even as they continued to reap the benefits of the yield those bonds kicked off. Those who bailed out did so prematurely and got left behind.
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The United States should look at emerging markets for clues on how to sustain economic growth, according to U.S. Federal Reserve Chairman Ben S. Bernanke.
While the advanced economies of the world have stagnated since 2008, countries like China, Brazil and parts of Southeast Asia have enjoyed growth rates in the 7% to 9% range. Although several have slowed this year, they're still faring better than the economies of the United States and Europe.
"Advanced economies like theUnited Stateswould do well to re-learn some of the lessons from the experiences of the emerging market economies,"Bernanke said in a speech delivered yesterday (Thursday) at a Cleveland, OH forum.
Specifically, Bernanke attributed growth in emerging markets to "disciplined fiscal policies, the benefits of open trade, [and] the need to encourage private capital formation while undertaking necessary public investments."
The so-called advanced economies certainly could benefit from more fiscal discipline. Decades of profligate government spending have created debt problems that are crippling those economies.
In the United States, which has the world's largest debt at $14.7 trillion, the issue triggered a political crisis over the debt ceiling this past summer that roiled stock markets. Although the United States is unlikely to default, the growing debt – 98% of the nation's gross domestic product (GDP) — hangs over the economy, hindering growth.
In Europe, the situation is far worse. Greece has been teetering on the edge of default for more than a year. It's been sustained only by the flow of bailout money from stronger European Union countries like Germany.
Greece isn't alone, either. Countries like Italy, Ireland, Portugal and Spain also have dangerously high sovereign debts. The crisis has hobbled the economy of the entire European Union (EU), with no end in sight.
One of the main reasons many emerging economies have thrived is that they have avoided the rampant deficit spending that created the crippling debt in the advanced countries.
And because they haven't been struggling, most emerging market economies have much greater flexibility in their monetary policy – they have leeway to lower interest rates – to cope with the current global slowdown.
Bernanke noted that emerging markets account for more than half of total economic activity today, up from less than one-third in 1980.
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Believe it or not, there was a time when investors saw the euro as the savior currency of the world.
People talked about how the euro would replace the dollar as the world's reserve currency – and there was plenty of proof to support that opinion.
At the time, t he European Central Bank (ECB) had the right monetary solutions in place to fight inflation, while the U.S. Federal Reserve was struggling to keep inflation under control . That was another point for the euro, and a strike for the dollar.
So not surprisingly, central banks started replacing some of their U.S. dollar reserves with euros, and the euro became a second "reserve currency" for central banks.
The euro also soared past the dollar in just a few years. In fact, the euro shot up from 82 cents at its inception to $1.60 in less than 10 years.
Yes, it seemed that the planets were aligned for the euro to step up to the plate and become the world's reserve currency.
But that's because the euro had never experienced a real "rough patch," or serious monetary crisis.
Fast forward to 2008.
The Euro Gets its First Test
Once the credit crisis was in full bloom in mid-2008, loans dried up and unemployment went to 10% in the United States and Eurozone.
That's when the euro had its first real test.
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The short-term market rally we've seen over the past week represents fresh opportunities to profit, but be forewarned – it won't last.
The Dow Jones Industrial Average on Monday rallied 272 points, or 2.5%, and followed with another 148-point, or 1.34%, gain on Tuesday. That's after last week's 738-point, or 6.4%, tumble. The Standard & Poor's 500 Index is up 3.4% this week after last week's 6.5% fall.
Money Morning Chief Investment Strategist Keith Fitz-Gerald knows why the short-term rally is happening – and how investors can best to take advantage of it.
"I can make a case for a short-term rally that may build through the end of the week or even longer, now that the markets have gotten their ya-ya's out via the vicious selling of recent days," Fitz-Gerald said.
According to Fitz-Gerald, there are three things that could fuel a brief stock market rally:
- We're coming up on the end of the quarter. Given the massive over-performance of bonds over the past 12 to 24 months, the bulk of the institutions are likely to rebalance their portfolios by buying equities — probably dividends and energy.
- The end of the year is in sight, too. That speaks to a practice called "window dressing," which are changes to a portfolio that institutional managers make to spruce up their quarterly client statements, while bolstering their bonuses if possible.
- The markets are very oversold, technically speaking, and that lights a fire under Wall Street's feet with regard to the timing. The markets historically want to reward underperformers. That's why the fear of missing further gains could pull more money into the game short-term.
So what can an investor do with this short-term market rally? Fitz-Gerald has several suggestions:
Poland has formally embarked on a new energy course – one whose impact will be felt throughout Europe and beyond.
Visiting the first advanced drilling site in eastern Poland, Prime Minister Donald Tusk last week committed the country to extracting shale gas beginning in 2014. This will fundamentally transform the nation's energy prospects.
Now, Tusk and his government are in the run-up to a parliamentary general election (the voting takes place on Oct. 9), and the country's energy situation has been a visible campaign issue.
Back in Krakow, the prime minister's press conference was broadcast live at our shale gas conference. (Funny – it actually interrupted a panel I was on devoted to how the shale gas revolution will affect localities and regions.)
Turns out, the Polish shale picture is more significant than even I was anticipating.
The Impact Will Be Felt Around the World
For one thing, the projections of how much unconventional gas Poland possesses keep increasing.
The government is now convinced the country will become self-sufficient in energy and begin exporting gas to the rest of Europe.
Yet the implications hardly stop there.
Several of the ministers at our meetings are talking openly about using a new liquefied natural gas (LNG) terminal under construction on the Baltic to move product into the broader global market.
Moreover, the rapid development of shale gas will require the creation of an entirely new technical sector to service the fields, process the gas, and apply the newfound largess. This means a significant upgrading of the national gas network, and the laying of major new stretches of pipelines and pumping stations, along with a concerted move to employ the gas as feeder stock for the petrochemical industry.
It is, therefore, hardly surprising that among the audience in Krakow were representatives from such field service powerhouses as Halliburton Co. (NYSE: HAL) and Schlumberger Ltd. (NYSE: SLB), European offices of international drilling companies, consulting agencies, research centers, and law firms.
And there will be plenty of work for all of them.
Rising Opportunities (and a Message for Moscow)
Despite the refrain I heard repeatedly over the past several days – that Polish companies should provide the bulk of the services – this energy revolution will require outside assistance for years to come.
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With oil prices far from record highs, but expected to rise in coming months, it's time to examine oil-related investments – especially those with high yields.
The West Texas Intermediate (WTI) benchmark was approaching $90 a barrel two weeks ago, but has since slipped more than 7% due to concerns over the European debt crisis.
Recent oil price fluctuations also stem from crude oil supply issues. Libya's revolution trimmed production of light sweet crude normally destined for the European refining complexes. This has helped keep a floor under oil prices, while the global economies start to price in a slowdown in growth.
But prices won't stay down for long.
Paired with supply constrictions, growing global demand will again push prices over $100 a barrel next year. The International Energy Agency reports that worldwide oil demand will rise by 1.2% (to 89.3 million barrels a day) this year and 1.6% (to 90.7 million barrels a day) in 2012.
That's why I like this energy investment that pays a juicy dividend.
It's the largest conventional U.S. oil and gas trust, has assets in the largest North American oil field, and, best of all, it yields 9.9%.
That's pretty amazing when you consider that the U.S. government will pay you less than 2% per year to hold one of its 10-year bonds.
And as oil prices climb, that dividend will only get sweeter.
I'm talking about BP Prudhoe Bay Royalty Trust (NYSE: BPT), a high-yielding energy stock that's a "Buy" in this uncertain market environment.
Gloom has enveloped most of the investment landscape these days, but there is still one region that offers strong growth and serious returns.
I'm talking about Southeast Asia.
There was a time when investors scoffed at the likes of Singapore, Thailand, Malaysia and Indonesia. But no one's laughing now. The naysayers currently are all too busy pulling their money out of the regions they always assumed were safe – the United States, Europe, and even the trendy BRICs (Brazil, Russia, India, and China).
Indeed, there are precious few flourishing economies in the world today, and none look as promising as the ones you'll find in Southeast Asia. We're talking about countries that have pro-market governments, thriving manufacturing sectors, ample natural resources, and – with the exception of Singapore – wage levels that can still grow a great deal before pricing themselves beyond their Western competitors.
That's quite a lot by today's standards.
Just take a quick look around the rest of the world and you'll see what I mean.
Searching for a Savior
U.S. growth has fallen off a cliff and no amount of "stimulus" seems likely to get it back on track. Economic growth in Europe is stalled as well, and the continent is further jeopardized by the potential collapse of Greece and the European Union (EU). Even Australia and Canada, both with strong mineral and energy sectors, seem to be slowing as demand wanes in the wealthy West.
Emerging markets seem like a better bet for our money at first glance, but they, too, have problems when examined more closely.
Brazil and China are battling inflation. Brazil has a government that seems unable to stop spending, while China has a thoroughly corrupt government and a banking system with an enormous hidden bad debt problem. Russia is a snake pit, from which a foreign investor is unlikely to escape alive. And India, while growing rapidly, has a serious inflation problem and a government as corrupt as it is economically inept.
Fortunately, one incandescent bright spot shines through the darkness: Southeast Asia. So let's take a look at some of the investment opportunities being illuminated.
If you knew of a company that had high manufacturing costs, was in a highly competitive market, and was hemorrhaging money, would you invest in it?
Well, U.S. President Barack Obama and the federal government did – using taxpayer money.
And now that company, Solyndra LLC, is bankrupt, and the $535 million loan it secured from the government stands little chance of being repaid.
Republicans have seized upon the Solyndra collapse as a political embarrassment for the Obama administration, which pressured the U.S. Department of Energy to approve the loan application in August 2009.
President Barack Obama's May 2010 visit to the Fremont, CA, facility established Solyndra as a focal point for his green jobs initiative.
But as a money-losing company with a business model that virtually assured eventual collapse, Solyndra was a bad bet. The company filed for Chapter 11 bankruptcy protection on Sept. 6.
"Solyndra was never profitable, and it was obviously poorly managed and unviable in the global market," Rep. Cliff Stearns, R-FL, chairman of a congressional panel investigating the Solyndra bankruptcy, told The New York Times.
It's amazing Solyndra needed a federal loan guarantee at all; it attracted $1 billion in private capital in addition to half billion it received through the federal loan guarantee program in September 2009.
Yet, by the end of August, most of it was gone.
Although the Obama administration has blamed the Solyndra collapse on poor luck and stiff competition from Chinese solar companies, many warning signs were apparent even before the loan guarantee was approved.
The evidence includes:
Investing legend Warren Buffett announced Monday that Berkshire Hathaway (NYSE: BRK.A, BRK.B) might execute a share buyback for the first time ever – a bullish signal that it's time to buy stocks at record bargain prices.
Buffett said Berkshire is authorized to repurchase stock for the first time as long as its price is less than 1.1 times book value, and it retains cash holdings of no less than $20 billion.
Berkshire's Class A shares rose 8% Monday on the news, and Class B shares climbed 8.6%.
Buffett didn't just start a rally in his own company's stock, either. The whole market moved on news of Buffett's bullish sentiment.
The Dow Jones Industrial Average on Monday rallied 272 points, or 2.5%, and followed with another 148-point, or 1.34%, gain yesterday (Tuesday). That's after last week's drastic 738-point, or 6.4%, tumble in the Dow. The Standard & Poor's 500 Index is up 3.4% this week after last week's 6.5% fall.
"When Buffett does anything, it's not so much the economic impact but the psychological impact of what he does, and this was hugely important from a psychological perspective," Larry Glazer, managing partner at Mayflower Advisors LLC, told The Wall Street Journal.
Now investors are looking for their own Buffett-style bargains, believing that the famed investor's moves mean it's time to buy.