Sunday, September 30, 2012

The French Economy

According to The World Factbook France gets about 75 million foreign tourists per year making it the most visited country in the world.  In 2011 France's GDP was worth 2772.03 billion in U.S. dollars according to the World Bank that is about 4.47% of the world economy.  Currently the country's interest rate is the same as that of the euro zone 0.75% , the country's inflation rate was reported at 2.1% in August.  Although closing lower at 1.2856 the euro has appreciated in value from July 2012 when it was trading at about 1.20.

Bordering between Spain and Italy, France appears to be going through some tough economic times  of its own.  The unemployment rate has increased from 7.4% in 2008 to 10.2% in the second quarter of 2012.  France's lower than expected growth and high unemployment have increased borrowing costs and have cut government revenues.  As a result the government budget deficit has risen steadily from 2008.  During the last month French stocks have declined 58 points the CAC 40 closed at 3354.82, the top performer for the day was Publicis Groupe SA.

With a mild recession in France the country will cut the budget deficit ceiling by 3% by 2013.  France's new president Francois Hollande is proposing to fix the country's economic problems while evading painful cuts, many believe the goal will not be met given the fact the country has very little growth if any.  The government is looking to raise 30 billion euros through spending cuts and new taxes to meet the goal of lowering the budget deficit by 1.5%.



Sunday, September 16, 2012

Investing For The Future

As recently announced by the Federal Reserve Quantitative Easing 3 has just been unleashed but unlike the first two this one has no announced end date.  Some have already called it "QE3 Infinity" under QE3 the Fed will buy $40 billion every month in mortgage backed securities until the economy improves.   This brings us to unknown territory one can only measure it with the symbol QE3אo (aleph-null) when predicting how to invest and guard ones money in this unique environment.  At one point or another inflation has to be a concern to investors, the pumping of cash has to deteriorate the power of the U.S. dollar, with stocks indexes hitting 4 year highs the market has to be looked at with caution.  Moving forward CD's and Treasuries are out of the question leaving few options for the serious investor.  One option is buying dividend yielding stocks but in a market that is near 4yr highs purchasing now is a mistake therefore waiting to enter is a better strategy.  The other option is real estate which seems ready for the taking for those investors that can afford to enter.

For investors with less cash 401k's and dollar cost averaging may be the way to go to evade heart breaks in the market, right now is not the time to put the farm in the stock market.  QE3 is also a catalyst for commodities but unless an investor already owns gold buying the physical stuff right now is not too good a strategy, selling it or holding on to it a bit longer would be the better alternative.  If inflation does pick up like in the early 1980's then precious metals or even base metals would be a better option than U.S. currency.  The FOMC Meeting Announcement also stated interest rates will remain low 0-0.25% at least through mid 2015. 

Inflation rates are currently at 1.7% the 10yr T-Note is trading at 1.87% yield barely enough to keep up with inflation which will likely pick up in the time to come.  An investor with $100,000 in 2007 when the Great Recession started would have had to grow her money to $111,000 in 2012 just to protect her purchasing power according to the Bureau of Labor Statistics CPI inflation calculator.  That means within those years an investor should have roughly earned 11% interest just to protect her money from inflation, to make it grow she would have had to earn 12% interest or higher.  It is worth mentioning throughout that period 2009 saw inflation in the negative territory or deflation.  Baby boomers must have anticipated this and that is why after the 2008 crash/nightmare they moved into low yielding CD's.  Although boomers protected their money in 2009 they missed out on the opportunity of a lifetime to buy stocks at the bottom of the crash as a risk taker I started loading up in early 2009. 

Before the recession hit, interest rates by the Federal Open Market Committee were 5.25% in early 2007 and ended the year at 4.25%.  In 2008 at the height of the recession interest rates dropped to 0.25% which have stayed that way ever since.  Beating inflation in a low interest rate environment is hard and with inflation likely to pick up it will be even harder.  Stocks are one of the few choices out there the blue chips seem to be an investors best bet.  In the short term inflation seems harmless especially at rates such as 1.7% but if an investor in 1995 would have left his $100,000 in the bank bearing no interest he would have lost half of the value of his money today.  Over the years getting returns above inflation is the only way to create and preserve wealth.  QE3 is a bullish move and stocks are the way to go yet investing wisely and through timed intervals is the only way to minimize risk. 

Table of Inflation Rates by Month and Year (1999-2012)


Sunday, September 2, 2012

Investing Overseas

Heading into the worst month for stocks let us see if investing overseas had been a better alternative 2 and a half years ago when the market was still recovering. 

March 2010                                    August 2012              Gain/Loss

Nikkei 225  - $10,645.79                   $8839.91               (-$1805.88)
CAC 40      - $4013.97                       $3413.07               (-$600.90)
DAX           - $6048.30                      $6970.79                (+$922.49)
Singapore (^STI) - $2894.55              $3025.46               (+$130.91)
Bovespa      -  $70,045                       $57061.45              (-$12983.55)
All Ordinaries - $4889.80                  $4339.02                (-$550.78)
FTSE 100    - $5500.30                      $5,711.48               (+$211.18)
Composite - $11,866.90                     $11,949.26             (+$82.36)
FTSE/MIB - $23,545.02                     $15,100.48            (-$8444.54)
BSE 30      - $17558.73                      $17,429.56             (-$129.17)
Mexico IPC - $32,758.53                    $39,421.65            (+$6663.12)
Swiss Market - $6631.40                    $6,388.01               (-$243.39)
FTSE/JSE Africa - $27,895.10           $35,389.45             (+$7494.35)
Hang Seng   - $21,823.28                    $19,482.57             (-$2340.71)
S&P 500   - $1132.99                          $1,406.58               (+$273.59)

As the price table above shows investors would have been better off investing their money in the U.S. instead of trying to get profits overseas.  Taking into consideration the transaction costs of buying international stocks most major indexes would have delivered small if any gains at all.  In the last 2 years an investor most likely would have lost money or broken even overseas.  Only Germany and 2 other countries would have brought gains taking into consideration the added risk of investing internationally.  Perhaps a global mutual fund is a better alternative to international indexes if an investor feels confident and is knowledgeable hand picking individual international stocks can bring better returns as there are undervalued stocks in markets such as Russia. 

For stocks September is the cruelest month therefore enter or exit positions with caution.  September could bring QE3 yet the market may already have priced that in.  This Thursday investors will be keeping an eye on the European Central Bank meeting and for the details on their purchase of Spanish and Italian debt.  For this year the MSCI Emerging Markets Index has only gained about 3 percent.  Entering a position in the Dow right now would be risky, as noted in my previous Benzinga article "Is Now A Good Time To Buy Stocks?" the Dow has faced major resistance in the 13k range and surely enough as I warned it came back down from 13300 to 12,978.91 and closed Friday at 13090.  At this range an investor may be better off in the sideline waiting for technical signals.  The S&P and Dow Jones have shown strong gains this year and taking a look abroad can be a good strategy for the rest of 2012.