Paper Chase: Emerging Markets, Earnings, and Robots
The market is currently falling because of emerging market fears, news of weak growth in China, and a weaker than expected earnings report. I am not panicking because I see a market that remains in a slow but steady recovery.
Not All Bad
The housing market is still strong as existing home sales rose by 1% in December, and hit their highest yearly sales rate since 2006 of $4.87 million. Toyota beat General Motors and Volkswagen as the world’s leading auto seller. Toyota’s sales were up 2% in 2013 to 10 million vehicles.
It’s important to remember that a bad week does not signify a long term trend. The economy is not strong, but it is reasonably good. As I was saying in a back and forth with a trusted and respected friend of mine on the street, I will start to panic over emerging markets when, in order to cover losses, profitable positions in liquid markets like the United States must be sold off. If that were to happen, there would be contagion risk. He raised a good point about not being reactionary versus proactive, but also said the chances of an international collapse would be slim.
In 2013, $50 billion went into emerging market debt while only $3 billion came out. This means there is still a lot of emerging markets exposure whose fates have yet to be determined. This is part of the reason I can’t get too excited either way. We just don’t know enough about those positions yet.
Why Emerging Markets?
Investors in emerging markets are looking for better yield outside the country. Higher yield does equal higher risk, but emerging market debt funds, U.S. dollar funds, or local dollar funds attract investors in with these higher yields. The spreads between emerging market bonds and treasuries have widened but are not back to their average.
We are still in the midst of earnings season, and with approximately a quarter of companies reporting, 64% have surpassed expectations. 11% have met estimates, and 25% missed estimates. It’s important to remember that earnings season is important for those buying securities. There is really little to gain macroeconomically concerning asset allocation of stocks vs. bonds by looking at earnings.
Analysts did bring their estimates down ahead of time. Top line revenue growth continues to be elusive. It continues to be difficult for large cap, mulitnational companies to grow revenues. In other words, large cap, high quality, multinational, dividend paying companies which are normally good investments are having problems due to an appreciating dollar and weak growth in emerging markets. Conversely, small and medium companies are having a much easier time growing revenues.
The New Fed
It looks like the fed is still on track to taper its asset purchases. While the nonfarm payroll report was disappointing, slow but continued momentum continues. The task of the fed is both monetary policy and regulation, but it hasn’t focused on regulations in 20 years. We could see Janet Yellen acting as more of a regulator.
Bull or Bear?
Neutrality on the market is at a 12 year high. This would indicate that we are at the mid part of the investing cycle where investors are accepting of equities. In the early phase of the cycle, investors are scared of equities and in the late phase of the cycle, investors love equities. Flows into the equity market are going into global and emerging markets. Outflows in the equity market are from US equity funds.
2.6% growth is a fair estimate for growth this year assuming less fiscal drag, continued improvement in consumption, and businesses increase spending. Net trade is reducing that deficit which feeds directly into GDP and is a big tax break for consumers.
I suggest staying the course in this market. Look at developed markets, and don’t get too bearish too soon. I am still overweight in equities. I am not diving into emerging market debt yet.
There is one incident of identity fraud every three seconds. There has been an estimated $21 billion stolen as a result of identity fraud. 12.6 million adults in the U.S. are affected by identity fraud. More than 50% of victims were actively detecting fraud. We can infer that this is a major problem and has yet to be adequately solved. This is an investment opportunity.
Get A(nother) Job
A lackluster labor market and job insecurity have caused people to pursue side gigs that often become full time jobs. Killing The Breeze is actually an example of that. The top five side gigs based on high pay and low startup costs are website designer, marketing consultant, financial services provider, legal services provider and social media consultant. Invest in yourself as well as the market.
As manufacturing rebounds and profits grow, robots are working side by side with humans. It’s the latest round of robots are smarter, less expensive and allow manufacturers to expand and hire more people. Manufacturers have been adding robots and automation for decades. This has indeed boosted efficiency, but the advent of robots corresponds with the drop in manufacturing jobs. Robots are smaller, easier to program and working closer with blue collar America than ever.
Disclaimer: Killing The Breeze is not a registered investment advisor or advisory service. It does not tell or suggest which securities or currencies should be bought or sold. The employees or affiliates of Killing The Breeze may hold positions in the stocks, currencies or industries discussed here. There is a very high degree of risk involved in the market. Killing The Breeze assumes no responsibility or liability for any trading or investment results. All content posted is for educational purposes only and independent advice should be sought from a professional to confirm validity and accuracy of any claim made.
The information should only be a starting point for doing additional independent research in order to allow you to form your own opinion regarding trading decisions. You should ask the firm with which you deal about the terms and conditions of the specific securities which you are trading and associated obligations. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment.