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November 14, 2013

November 14, 2013

Will the U.S. Economy Strengthen?As readers know, it is our view that we are at the stage of the economic cycle where capital spending and industrial expansion rise.  This rise leads to more employment and faster economic growth.  In spite of the panicky behavior exhibited by the financial media about the government shutdown in October, the U.S. economy is strengthening.  Last Friday’s October non-farm payroll report came in stronger than the pundits had projected.  The current growth of employment is being seen in construction and manufacturing, two areas which pay well and which many economists have been worried were too weak.

Do we remain bullish?  Upgrade today to find out.

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Will Stocks Continue To Rally Into 2014? 

As readers know, it is our view that we are at the stage of the economic cycle where capital spending and industrial expansion rise.  This rise leads to more employment and faster economic growth.  In spite of the panicky behavior exhibited by the financial media about the government shutdown in October, the U.S. economy is strengthening.  Last Friday’s October non-farm payroll report came in stronger than the pundits had projected.  The current growth of employment is being seen in construction and manufacturing, two areas which pay well and which many economists have been worried were too weak. 

What are the four factors we are examining to determine a continued rally?


Is Europe Doing Better?

Last week, the European Central Bank (ECB) cut rates.  However, the European stock markets did not immediately rally.  In our opinion, this is because many observers believe that the interest rate cut alone was not enough to reverse the rising deflationary trends in many European economies.  Many believe that Europe is in danger of sinking into a state much like the one Japan suffered through for over twenty years due to government’s unwillingness to take stronger action.  What do we mean by stronger action?  In Japan, the government was slow to force banks to raise more capital and write off bad loans, so it took decades to slowly work the bad loans off of the books.  Meanwhile, zombie companies were allowed to stagger along and borrow more money which they had no hope of repaying — instead of declaring bankruptcy.


Looking for Income?  Where Should You Emphasize?

During the 30 years from 1982 to 2012, U.S. interest rates were in a general state of decline.  Decades of disinflation followed the high inflation of the 1970s and a few years of very accommodative central bank policies helped drive 10-year U.S. Treasuries from over 12 percent in the early 1980s to less than 1.75 percent by the summer of 2012.

U.S. 10-year Treasury yields trended lower for about 30 years

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Source: Bloomberg

Most Bond Investors Did Pretty Well Over This Period. 

When bond yields got very low in recent years, investors who needed more income decided to pour hundreds of billions into “bond proxy” investments that offer higher income yields than traditional bonds.  Real Estate Investment Trusts (REITs), utilities, Master Limited Partnerships (MLPs), bond funds, preferred shares, and emerging market debt were among the popular choices.  From 2009 to early 2013, these asset classes performed very well, as more and more capital flowed into the sectors.

The low short-term interest rates helped these types of investments in another way.  These entities typically borrow money at low rates, and then they invest in longer duration assets that have a higher return than their cost of borrowing.  This is how they are able to make higher income payments to shareholders.  Often, the higher the leverage, the higher the dividend, especially in the case of many mortgage related REITs.

May 2013 — Upsetting the Apple Cart

After U.S. treasury rates went below 2 percent in 2012 and stayed there into 2013, investors reached for yield.  The bond proxy investments remained attractive on a relative yield basis, and more income-seeking money plowed into the sector.  Then, in May of this year, Ben Bernanke hinted that the Fed would consider curtailing its $85 billion per month bond-buying program if the economy kept improving.  Short-term interest rates were not affected much at all, but longer-term interest rates jumped unexpectedly.

 

Where are there income opportunities?


Is It a Good Time to Invest in Indonesia?

Over the past summer, the intersection of two forces proved troublesome for many economies in emerging Asia.  On the one hand, uncertainty surrounding the tapering of QE in the United States led to fears that the abundant liquidity flooding world markets would begin to slow.  That led to an exodus of developed-market investors, decreasing demand for the currencies of some Asian nations and driving up inflation, the costs of imports, and current account deficits.  That was perhaps a short-term phenomenon, contingent on the vagaries of U.S. politics.  But these emerging Asian economies are in the midst of another process, a secular (or long-term) process — the end of a commodity supercycle driven by Chinese demand and several decades of extremely rapid Chinese growth.


Guild Basic Needs IndexTM

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Track our analysis in these letters and at www.gbni.info.


Market Summary

We discuss The U.S. economy and highlight the industries that we think will do well.  Are Japan and Europe a good investment opportunity?

 


In Last Week’s Global Market Commentary We Discussed:

  • As the Trauma of 2008 Fades in the Rearview Mirror, How Much Longer Before Businesses Act in a More Growth-Oriented Manner?
  • Will Stocks Continue To Rally into 2014?
  • Merchant Refiners Face Uncertainty From a Regulatory Roller Coaster
  • Specter of Deflation May Spur Action By the European Central Bank
  • Are Banks a Good Investment?
  • Global Inflation: A Mixed Picture

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