Monthly Archives: February 2016

The Markets

It wasn’t as entertaining as the Fantastic Four, The Magnificent Seven, or Ocean’s 11 but, last week, we had an opportunity to watch the Group of 20 (G20).

The G20 stars finance ministers and central bankers from 19 countries and the European Union as well as representatives from the International Monetary Fund (IMF) and World Bank. The group meets periodically to discuss the global economy.

At their most recent meeting, the G20 made a commitment to continue to pursue global growth through monetary policy. They also emphasized governments around the world need to do more. The IMF’s report stated:

“In advanced economies, securing higher and sustainable growth requires a mix of mutually-reinforcing demand and supply policies. On the demand side, accommodative monetary policy remains essential where inflation is still well below central banks’ targets. However, a comprehensive approach is needed to reduce over-reliance on monetary policy. In particular, near-term fiscal policy should be more supportive…”

In other words, the world has been depending on monetary policies, which are determined by central banks, to encourage growth. Now it’s time for fiscal policies, which are measures implemented by governments (e.g., tax cuts, government spending), to strengthen economies.

BloombergBusiness reported the event might have disappointed investors who were hoping for a finale featuring a coordinated stimulus plan for the global economy. If so, it didn’t reflect in the performance of U.S. stock markets. ABC News reported an oil price rally helped push stock prices higher last week and so did some positive economic data. Fourth quarter’s U.S. gross domestic product, the value of all goods and services produced in the United States, was revised upward from 0.7 percent to 1.0 percent.

All major U.S. indices finished in positive territory for the second consecutive week.

IF YOU LIKE FAST FOOD AND A GOOD DEAL, YOU CAN FIND A REALLY CHEAP BIG MAC IN RUSSIA. The Economist created The Big Mac Index 30 years ago as a rough-and-ready gauge of world currencies. The index is based on the idea when currencies are aligned correctly, the same product (in this case, a Big Mac®) should have the same price in different countries when that price is denominated in a single currency. This is called purchasing power parity (PPP).

For the purposes of this commentary, we looked at the price of a Big Mac in U.S. dollars. Early in 2016, a Big Mac cost a hungry American about $4.93. In Russia, it cost about a $1.53, in the Euro area $4.00, and in Switzerland, about $6.44. These prices indicate the Russian ruble is undervalued by about 69 percent, the Euro is undervalued by about 19 percent, and the Swiss franc is overvalued by almost 31 percent. Switzerland is an outlier, according to The Economist:

“Americans hunting for cut-price burgers abroad are spoilt for choice: the index shows most currencies to be cheap relative to the greenback. This is partly owing to the Federal Reserve’s decision to raise interest rates when the central banks of the euro zone and Japan are loosening monetary policy… Another force weakening many currencies, including the ruble, has been the ongoing slump in commodity prices since mid-2014. Shrinking demand from China and a glut of supply have sapped the value of exports from Australia, Brazil, and Canada, among other places, causing their currencies to wilt, too.”

In theory, when a country’s currency depreciates relative to that of its trading partners, the country’s exports should become more attractive because they are less expensive and should boost economic growth. However, depreciation hasn’t produced the results many expected.

One explanation, offered by both the World Bank and the IMF, is globalization. If a country’s exports are part of a global supply chain, then the cost of materials imported to create the exports may offset gains from currency depreciation. According to The Economist, “The IMF thinks this accounts for much of the sluggishness of Japan’s exports; the World Bank argues that it explains about 40 percent of the diminished impact of devaluations globally.”

Weekly Focus – Think About It

“If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. Let him step to the music which he hears, however measured or far away.”
                                                                                                  –Henry David Thoreau, American author.

* These views are those of Peak Advisor Alliance, and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.  These risks are often heightened for investments in emerging markets.
* The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Stock investing involves risk including loss of principal.

Sources:
http://www.g20.utoronto.ca/g20whatisit.html
http://www.bloomberg.com/news/articles/2016-02-27/g-20-wish-list-wants-governments-to-do-more-central-banks-less
http://www.imf.org/external/np/g20/pdf/2016/022616.pdf (See the Executive Summary)
http://www.investopedia.com/terms/f/fiscalpolicy.asp
http://abcnews.go.com/Business/wireStory/us-global-stocks-rise-us-economic-data-china-37220437?nfo=/desktop_newsfeed_ab_refer_homepage
http://www.economist.com/content/big-mac-index (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/02-29-16-TheEconomist-The_Big_Mac_Index-Footnote_6.pdf)
http://www.economist.com/news/finance-and-economics/21685489-big-currency-devaluations-are-not-boosting-exports-much-they-used-after (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/02-29-16_TheEconomist-After_the_Dips-Footnote_7.pdf)
http://www.brainyquote.com/quotes/quotes/h/henrydavid141463.html

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February 22, 2016

The Markets

And the economic data says…

The United States economy is doing pretty well. So well that a March rate hike by the Federal Reserve is not entirely out of the question. Barron’s described the situation like this:

“Squawking pessimism can’t drown out what is a very respectable start to 2016. Economic data so far this year, apart from predictions of deflation and negative interest rates, could justify what was scheduled to be, but what soon seemed impossible, a rate hike at the March FOMC. Yes, global factors are a risk and are hurting the factory sector but service prices are definitely on the climb and vehicle prices and vehicle production, reflecting strength in domestic demand, are back up. Ignore the cacophony of doubt and look at the economic data for yourself!”

U.S. economic data was generally positive last week, but that wasn’t the primary driver behind the rally in U.S. stock markets, according to Reuters. Nope, that had more to do with oil prices. Despite serious political differences, Iran and Saudi Arabia appeared to reach an accord on oil production last week, when Iran endorsed a plan by Saudi Arabia to stabilize global oil prices, according to The Guardian. The agreement pushed oil prices higher mid-week.

However, late in the week, news that oil stockpiles in the U.S. were at record levels reignited worries about oversupply and oil prices fell at week’s end. U.S. stock markets followed, giving back some of the week’s gains on Friday, but all of the major indices finished more than 2 percent higher for the week.

Economic data may dominate the news next week. We’ll get more information on housing, durable goods orders, jobless claims for February, and a revised estimate for fourth quarter’s gross domestic product growth. Barron’s suggested a strong employment report in tandem with rising prices could influence the Fed’s interest rate decision.

WONDERING WHAT THE NEXT DECADE MAY BRING? America is renowned for innovation – originating ideas that change the ways in which people live and work. From the cotton gin to the assembly line, the transcontinental railroad to the automobile, the telephone to the Internet, ideas and inventions have spurred America’s economic growth during the past two centuries. Here are a few inventions that are on the horizon:

  • The Superman memory crystal: Imagine, a tiny piece of glass etched by a laser that has the capacity to save an enormous amount of data for more than 13 billion years, according to LiveScience.com. One tiny disc currently holds the Magna Carta, Universal Declaration of Human Rights, and King James Bible.
  • A transparent antipeep piezoelectric nanogenerator (TAPN): It may have a tongue twister of a name right now, but the TAPN could become as familiar as your phone charger in the future. All you’ll have to do is place a transparent film on the touchscreen of a smartphone or another device, and then every tap on the screen will generate electricity. Which begs the question: Could texting teenagers power the world?
  • A braille printer: A 12-year-old used Legos to build an inexpensive printer for people who are blind or suffering from macular degeneration or other conditions that affect eyesight. It used a thumbtack to punch braille dots into paper. Newer prototypes don’t rely on thumbtacks, and are expected to translate words from a computer screen into braille very quickly.
  • A fry pan that teaches cooking: Cooking will not become a lost art if a couple of hungry and cooking-challenged college students are successful. They’ve developed a smart frying pan. The pan transmits temperature data to the cook using a smartphone app that also lets the cook know when it’s time for the next step in a recipe.

The human brain is an engine for innovation, and innovation is a driver of economic growth. Let’s hope the outlook is good for brainstorms in the United States and across the globe.

Weekly Focus – Think About It

“Software innovation, like almost every other kind of innovation, requires the ability to collaborate and share ideas with other people, and to sit down and talk with customers and get their feedback and understand their needs.”
                                                                                                                                                  –Bill Gates, Founder of Microsoft

* These views are those of Peak Advisor Alliance, and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Stock investing involves risk including loss of principal.

Sources:
http://www.barrons.com/mdc/public/page/9_3063-economicCalendar.html (Click on U.S. & Intl Recaps and select “The year of the chicken”)
http://www.reuters.com/article/us-global-markets-idUSKCN0VS03O
http://www.theguardian.com/business/2016/feb/20/oil-price-plunging-saudi-arabia-iran-alliance-enemies
http://www.barrons.com/mdc/public/page/9_3063-economicCalendar.html (Click on U.S. & Intl Recaps and select “A better week for equities”)
http://www.barrons.com/mdc/public/page/9_3063-economicCalendar.html (2016 Economic Calendar for the week of February 22, 2016)
http://www.brookings.edu/blogs/future-development/posts/2015/10/12-europe-america-innovation-khan
http://www.history.com/topics/inventions
http://www.livescience.com/53783-superman-memory-crystal-data-storage.html
http://onlinelibrary.wiley.com/doi/10.1002/smll.201502453/full
http://www.livescience.com/53565-touch-screen-coating-generates-electricity.html
http://www.popsci.com/braille-printer-born-lego
http://www.popsci.com/frying-pan-teaches-you-cook
http://www.brainyquote.com/quotes/quotes/b/billgates626265.html?src=t_innovation

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February 16, 2016

The Markets

Are markets suffering from excessive worry? 

Last week, markets headed south because investors were concerned about the possibility of negative interest rates in the United States – even though the U.S. Federal Reserve has been tightening monetary policy (i.e., they’ve been raising interest rates).

The worries appear to have taken root after the House Financial Services Committee asked Fed Chair Janet Yellen whether the Federal Reserve was opposed to reducing its target rate below zero should economic conditions warrant it (e.g., if the U.S. economy deteriorated in a significant way). Barron’s reported on the confab between the House and the Fed:

“Another, equally remote scenario also gave markets the willies last week: that the Federal Reserve could potentially push its key interest-rate targets below zero, as its central-bank counterparts in Europe and Japan already have. Not that anybody imagined it was on the agenda of the U.S. central bank, which, after all, had just embarked on raising short-term interest rates in December and marching to a different drummer than virtually all other central banks, which are in rate-cutting mode.”

Worried investors may want to consider insights offered by the Financial Times, which published an article in January titled, “Why global economic disaster is an unlikely event.” It discussed global risks, including inflation shocks, financial crises, and geopolitical upheaval and conflict while pointing out:

“The innovation-driven economy that emerged in the late 18th and 19th centuries and spread across the globe in the 20th and 21st just grows. That is the most important fact about it. It does not grow across the world at all evenly – far from it. It does not share its benefits among people at all equally – again, far from it. But it grows. It grew last year. Much the most plausible assumption is that it will grow again this year. The world economy will not grow forever. But it will only stop when…resource constraints offset innovation. We are certainly not there yet.”

Markets bounced at the end of the week when the Organization of Petroleum Exporting Countries (OPEC) indicated its members were ready to cut production. The news pushed oil prices about 12 percent higher and alleviated one worry – for now.

CAPITAL HAS BEEN LEAVING CHINA…When Federal Reserve Chair Janet Yellen testified before the House Financial Services Committee last week, she made no bones about the fact the Fed is keeping an eye on economic developments in China and evaluating the ways in which changing circumstances in the country, including currency devaluation, could affect global growth and the U.S. economy.

Yellen is not the only one worried about currency devaluation in China. The New York Times reported Chinese companies and wealthy citizens have been pulling money out of the country because they’re worried the purchasing power of their savings will decline significantly if the government further devalues the renminbi. Some have been using renminbi to invest in real estate abroad, buy overseas businesses, or pay off dollar-denominated debt.

Others have been avoiding China’s capital controls, which are measures designed to regulate flows from capital markets, by engaging in ‘smurfing.’ The New York Times described the practice of smurfing this way, “…Individuals are asking friends or family members to carry or transfer out $50,000 apiece, the annual legal limit in China. A group of 100 people can move $5 million overseas.”

According to the Institute of International Finance, cited by CNBC:

“The 2015 outflows largely reflected efforts by Chinese corporates to reduce dollar exposure after years of heavy dollar borrowing as expectations of persistent renminbi appreciation were replaced by rising concerns about a weakening currency.”

During the final six months of 2015, capital flowed out of China at a rate of about one trillion U.S. dollars annualized, according to The Economist.

Weekly Focus – Think About It

“Do not dwell in the past, do not dream of the future, concentrate the mind on the present moment.”
                                                                                                                                –Buddha, Religious leader

* These views are those of Peak Advisor Alliance, and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Stock investing involves risk including loss of principal.

Sources:
http://www.cnbc.com/2016/02/10/yellen-conditions-less-supportive-of-growth-reiterates-rate-path-is-data-dependent.html (Main video)
http://www.barrons.com/articles/negative-interest-rates-turn-the-world-upside-down-1455343696?mod=BOL_hp_we_columns
http://www.ft.com/cms/s/0/db57a57e-b38b-11e5-b147-e5e5bba42e51.html#axzz40Fbb7hY3
http://www.wsj.com/articles/oil-rebounds-from-12-year-low-1455251366
http://www.federalreserve.gov/newsevents/testimony/yellen20160210a.htm
http://www.nytimes.com/2016/02/14/business/dealbook/chinese-start-to-lose-confidence-in-their-currency.html?_r=0
http://www.cnbc.com/2016/01/20/emerging-markets-china-should-brace-for-more-outflows-iif.html
http://www.economist.com/news/leaders/21688396-strains-currency-suggest-something-very-wrong-chinas-politics-yuan-and
http://www.brainyquote.com/quotes/quotes/b/buddha101052.html?src=t_life

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