Tuesday, September 20, 2011

Credit Suisse: Don't buy now... Huge volatility ahead

Credit Suisse is recommending that investors sit tight as volatility is likely to persist. They say the uncertainty in the markets is likely to continue as the Europeans fail to put together a clear solution to the Euro debt crisis. They provide an interesting perspective on Global volatility which shows that the current environment is potentially more volatile than the 2008 crisis (see image below). They’re not recommending additional equity positions at this juncture:

“As long as there are no convincingly clear positive catalysts stemming from macroeconomic data points and statements/actions from European politicians, we think that this market regime is likely to continue. And there will be continued volatility in a fairly fragile environment, where any news items regarding the European and US economic/sovereign situation is likely to lead to significant swings in equity prices.

We recommend investors with a neutral position in equities not to take any action and wait, while investors which are
overweight, and which have a longer investment horizon, should maintain their overweight position.”

Stocks vs. Bonds



Now that the S&P 500 yields more than Treasurys, what does that portend for equity returns in the coming year? Sam Stovall, S&P Capital IQ, explains.

Is The Stock Market Really Worth Your Money?

The Wall Street Journal's Marketwatch website recently reported that in the past three years, from September 9, 2008 to September 9, 2011, the S&P has gone nowhere - 0.00% when dividends are factored in. This fact, along with the negative global news surrounding the investment markets, may make you wonder why you're invested in stocks if over three years you've made nothing on that investment. You may even remember reading an article or hearing your financial adviser tell you that U.S. Treasury bonds or bills have such a low return that they aren't worth a second look. Looking back, even if they averaged a yield of 2%, that's still better than 0.00% on the S&P 500.

If that 0% gain wasn't depressing enough, if you had invested in an index fund either as an exchange traded fund or mutual fund, you would actually be down slightly because you still have to pay the fees that came with those funds. The answer is not in what the statistics are telling you, but what they aren't telling you.

Before you give up entirely on the market, remember that your entire retirement, IRA, or individual investment account hopefully isn't 100% invested in stock-based products. The fact that this one index is flat doesn't speak for your entire portfolio. In fact, many financial advisers recommend only committing 5% to 10% of your portfolio to index funds.

Look at the Details
Normally we are too focused on the details and miss the big picture, but in this case, it is the opposite. The S&P 500 is a weighted average of 500 stocks with some of those having a rough three years while others have done quite well. If you held Apple (Nasdaq:AAPL - News) for three years you would be quite happy with the 149% gain you've seen. If you aren't skilled at choosing stocks, staying with a broader index fund will return impressive gains over time when the dividend is factored in.

The Dividend
The dividend plays a big part in the gains of any portfolio, and if you're not taking advantage of stocks that pay dividends, you're missing out on virtually free money. Dividends are like interest in your savings account. You don't have to do anything to earn it and although some companies will cut their dividends, it is still a steady, secure source of income. Many higher wealth individuals live on the dividends that come from their stock purchases.

How About 10 Years?
In the past 10 years, the S&P 500 has lost an inflation adjusted 13.54% of its value. Once the inflation adjusted annual dividend is added in, it is up 8.4% in those 10 years. While this isn't an impressive 10 year return, these numbers would be much different just two months ago before the S&P 500 suffered a loss of 14%.

How about some individual names? If you would have seen the potential in Green Mountain Coffee Roasters (Nasdaq:GMCR - News) 10 years ago you would have a 5,067% gain today. Apple has a 10 year return of 4,320% and Amazon.com (Nasdaq:AMZN - News) has seen 2,448% added to its stock price.

Of course, the chances that you added these names to your portfolio and then held them through the good and bad times are not very likely, but these figures clearly demonstrate that when a portfolio is supplemented with a few good stocks, the gains can be quite impressive. Even if you held these names for half or a quarter of the time, you would be proof that investing in the stock market isn't a losing venture.

Index Funds Versus Actively Managed Funds
If you're not skilled at choosing stocks and you don't want to take the chance that your financial adviser or the people managing your mutual funds are either, invest in index funds as an exchange traded fund or mutual fund. One study showed that over a 10-year period, out of 262 mutual funds studied, only 46 beat the S&P 500.

The Bottom Line
Sure, there are other investment vehicles that have performed better than the average returns of the S&P 500, but that doesn't mean that your money should steer clear of the stock market. When dividends and good stock picking by a skilled investor supplement other investment products, the stock market remains an impressive source of revenue over time.

Greek Default Could Tip US Into Recession

Despite being more than 5,000 miles from Washington D.C., a default in Athens could trip up the global banking system just enough to tip the U.S. into a recession, investors and economists said.

“Due to financial trading relationships and off-balance sheet exposure to European banks, the U.S. banking system will not go unscathed,” said Michelle Meyer, a Bank of America Merrill Lynch economist, in a note to clients Friday. “If the crisis in Europe escalates, it could be the shock that pushes the U.S. economy into recession ."

While this is not the base case predicted by Bank of America , the firm does still prepare its clients for this possibility by laying out how the Greece crisis could quickly become a “Lehman event.” After all, a 50 percent haircut on Greek sovereign debt would mean a very manageable $60 billion, or just two percent, of total bank foreign claims for U.S. banks, according to the report. But that’s just director exposure.

There are five major ways the U.S. is connected: trading counterparty risk and derivative ownership with heavily-exposed European banks, overall market confidence, central bank funding, money-market funds and trade flows.

“Investors become less willing to buy sovereign debt, boosting borrowing costs, which adds to the debt burden and increases chance of an ultimate default,” wrote Meyer. “If banks either take losses or lose funding, bank credit could dry up, weakening the real economy."

The euro fell Monday amid a teleconference between the European Union, the IMF and Greece’s finance minister. They want to make sure Greece has the ability to meet the austerity measures laid out in the rescue package approved by European Union leaders in July. No statement was planned following the call, adding to the jitteriness of investors.

The S&P 500 Index fell in lockstep with the euro Monday, led by shares from the industries that would be most effected by a Europe-led global slowdown: raw materials, energy and industrials. However, U.S. banks were far and away the biggest losers on concern profits would be hurt even further by a global contagion that contains loan demand, curbs trading profits, and grinds merger advisory to a halt.

To Bank of America’s point about central bank funding, many investors and economists have voiced their displeasure at the European Central Bank’s failure to set up a TARP-like mechanism to recapitalize the European banks and stop the bleeding.

“Since no contingency funds have been set aside by the public authorities to recapitalize banks in a crisis, the imminent default of Greece and/or other nations poses a risk to the viability of the banking system,” wrote Carl Weinberg, chief economist for High Frequency Economics in a note to clients Monday. “Lending money to a bankrupt bank cannot make it less insolvent.”

The Maastricht Treaty, which formed the European Union, bars one country from financing the spending of another, so policy makers will have to get creative in their formation of this structure. High Frequency’s Weinberg suggests the countries set up a series of mini-TARPS. They’ll get plenty of time to come up with this plan this week, with the meeting of Group of 20 (G20) nations finance leaders Thursday in Washington.

Many investors believe that recapitalizing the troubled banks in Italy, Ireland, and Greece should take priority over checking up on Greece’s austerity progress. The U.S. arguably was able to recover from the Lehman Brothers collapse more quickly because it focused on these actions first and then turned its sights to deficit reduction after a recovery was already underway.

“It is not only a Greek default, it is the continent-wide austerity measures that pose the biggest threat,” said Brian Kelly of Shelter Harbor Capital. “An earthquake in Japan disrupted the supply chain in the auto sector and the U.S. economy slowed dramatically. The economic earthquake of budget cuts will not be halted by the Atlantic Ocean.”

The Corporate Bank Run Has Started: Siemens Pulls €500 Million From A French Bank, Redeposits Direct With ECB

In a shocking representation of just how bad things are in Europe, the FT reports that major European industrial concern Siemens, pulled €500 million form a large French bank, which is not BNP and leaves just [SocGen|Credit Agricole] and deposited the money straight to the ECB. The implications of this are quite stunning, as it means that even European companies now refuse to work directly with their own banks, and somehow the ECB has become a direct lender/cash holder of only resort to private non-financial institutions! As Bloomberg reports further on the FT story, in total, Siemens has deposited between 4 billion euros and 6 billion euros, mostly through one-week deposits, with the ECB, FT says, cites the person. It isn’t clear from which bank Siemens withdrew its deposits, per the FT... but it is hardly difficult to figure out. BNP Paribas isn’t the bank involved, FT reports, cites unidentified person familiar with the bank. This story should be having far more impact on the EURUSD than any rumors about Greece lying it will fire all of its public workers only to make sure Eurobanks can survive one more day.

More from the FT:

The company’s move came almost a year after Europe’s largest engineering conglomerate prepared itself for a future financial crisis by launching its own bank, an unusual move for an industrial group outside the car sector, where companies run big car financing and leasing businesses.

In an interview last December, Roland Châlons-Browne, chief executive of Siemens’ financial services unit, said its banking business would enable the group to tap the central bank for liquidity and deposit cash at the ECB.

“In the case of another financial crisis, we will be able to broaden our flexibility and take out risk with our own bank,” Mr Châlons-Browne said at the time.

Siemens does not only use the ECB as a haven; it also gets paid a slightly higher interest rate than it would get from a commercial bank.

The ECB paid an average interest rate last week of 1.01 per cent for its regular offers of one-week deposits, under which it withdraws from the financial system an amount of liquidity equivalent to the amount it has spent on eurozone government bonds.

Update: reader Arnold informs us that Siemens was lucky enough to be the functional equivalent of a Goldman Sachs ATM (you know, Goldman as an FDIC insured "depository" organization) when back in 2010 it got a bank license:

At the end of 2010, Siemens was granted authorization by the German Financial Supervisory Authority (BaFin) to operate banking business in Germany.

Through its loan business, Siemens Bank expands the product range of Siemens’ Financial Services unit, especially in sales financing. In addition, the deposit business of the bank increases flexibility in the area of corporate financing and provides the opportunity for the further optimization of risk management.

Siemens Bank is based in Munich and will be located in Germany only for the time being. Cross-border activities are planned in future. European countries will be the initial focus of such activities. Select emerging markets are additional focal points.

Siemens Bank is a subsidiary of Siemens AG and acts as an independent company. Nonetheless, it profits from its inclusion in the network of Siemens Group’s financial services companies. The bank employs about 100 people, mainly experts from the areas of risk management and risk controlling as well as specialists from loan origination & structuring.

Economic Collapse -- Why It Won't Be Stopped

Inside the Trillion-Dollar Underground Economy Keeping Many Americans (Barely) Afloat in Desperate Times

The United States continues to suffer from mass unemployment. People have had to adjust their lifestyles to the new reality—fewer jobs, lower wages, mortgages to pay that are now more than their homes are worth. Millions have dropped out of the job hunt and are trying to find other ways to sustain their families.

That's where the underground economy comes in. Also called the shadow or informal economy, it's not just illegal activity like selling drugs or doing sex work. It's all sorts of work that doesn't get regulated by the government or reported to the IRS, and it's a far bigger part of the economy than most of us are aware—in 2009, economics professor Friedrich Schneider estimated that it was nearly 8 percent of the US GDP, somewhere around $1 trillion. (That makes the shadow GDP bigger than the entire GDP of Turkey or Austria.) Schneider doesn’t include illegal activities in his count-- he studies legal production of goods and services that are outside of tax and labor laws. And that shadow economy is growing as regular jobs continue to be hard to come by—Schneider estimated 5 percent in '09 alone.

The Young Women's Empowerment Project [PDF] describes the “street economy” as “... any way that girls make cash money without paying taxes or having to show identification. Sometimes this means the sex trade. But other times it means braiding hair, babysitting, selling CDs/DVDs, drugs or other skills like sewing and laundry.”

D.A. Barber explained:

“This underground economy goes beyond the homeless collecting aluminum cans or clogging day labor halls. It includes the working poor getting cash for all forms of recycling: giving plasma, selling homemade tamales outside shopping plazas, holding yard sales, doing under-the-table work for friends and family, selling stuff at pawnshops, CD, book and used clothing stores, and even getting tips from restaurants and bars--to name a few.”

That means nearly all of us have participated in some way in the underground economy.

Yet little is known or discussed about this area of our lives, even though it touches many of us as we try to make ends meet.

Economist Edgar Feige estimated in 2009 that unreported economic activity was costing the US government $600 billion in tax revenues, and the growth in that number—from the Internal Revenue Service's 2001 estimate of $345 billion—indicates the growth of the informal economy. Reporting on Feige's work, Dennis Chaptman noted, “As the recession deepens and regular employment opportunities decline, unreported activities tend to grow, thereby swelling the tax gap and worsening the government's budget deficit.”

Workers in the underground economy can also be vulnerable to exploitation; the Monthly Review pointed out that workers, especially undocumented immigrants, are pushed into off-the-books work out of desperation and have no authority to appeal to when their conditions are horrific or their pay substandard; wages are pushed downward and expectations lowered.

Labor economist Mark Price agreed. He told me, “People enter such arrangements because of their difficulty finding formal employment. Think of undocumented immigrants that work as housecleaners or in the construction industry.”

He continued, “Employers or consumers who use workers in this way are doing so to boost profits or lower prices. Of course documented workers also can end up choosing to work in the underground economy but that choice, like the choice for the undocumented, has the same basic driver--the inability to find formal paid employment that meets a worker's needs.”

Alfonso Morales, a professor at the University of Wisconsin at Madison, told the Christian Science Monitor that off-the-books work “is probably neutral to good.” He pointed out that it is impossible to separate the informal economy from the formal. “People who make their money in unregulated businesses probably spend it in regulated ones.”

Price compared the growth of the underground economy to payday lending; “a typically undesirable practice that develops and thrives because it fills a need created by the failure of public policy to address societal needs.”

The informal economy, though, does not only consist of low-wage workers. Saskia Sassen, Robert S. Lynd Professor of Sociology at Columbia University, pointed out in her book Cities in a World Economy that there is also an informal economy of creative professionals. In an article titled “Cities Today: A New Frontier for Major Development” she wrote:

“In brief, the new informal economy in global cities is part of advanced capitalism. One way of putting it is that the new types of informalization of work are the low-cost equivalent of formal deregulation in finance, telecommunications, and most other economic sectors in the name of flexibility and innovation. The difference is that while formal deregulation was costly, and tax revenue as well as private capital went into paying for it, informalization is low-cost and largely on the backs of the workers and firms themselves.”

She points out that by keeping creative professional work informal, these workers avoid the corporatization of creative work, and maintain the freedom to be innovative and self-sufficient.

While these creative workers prize independence, Lisa Dodson stressed the way communities come together to help one another through tough times, often through off-the-books economic activity, in her book The Moral Underground: How Ordinary Americans Subvert an Unfair Economy.

In one passage, she tells the story of arriving in a small-town farmer's market in Maine, only to overhear a discussion between locals on “neighbors and the market erosion of common fairness.” She wrote:

“Just then a middle-aged woman, who had been talking to friends, suddenly turned around to face other shoppers and asked, 'What’s happening to us? Why doesn’t the government do something?' A local farmer, sorting vegetables nearby, responded immediately, 'The government is the same as the oil companies. There’s no difference. We can’t wait for them to do anything.' A young mom holding a baby as she stood in line said, 'So what do we do?' There was no single response, but they were looking at each other to find it.”

Without solutions coming from Washington or local governments, it continues to be up to working people to find a way to negotiate the rough economy. Price argued, “People shouldn't have to give up fundamental human rights like access to income in retirement or safety on the job because they need work. But in a society like ours, which tolerates high levels of unemployment, the underground economy is often the next best alternative to starving.”

While some have been able to flourish working underground, it's important to remember that most workers are not off the books to dodge paying taxes or because they prefer it that way. As we see more and more people dropping out of the formal labor market in despair, the informal economy will remain a destination of last resort—and will keep growing.

Missing Out On Social Security

The Social Security program in the United States is one of the world's largest government programs. The program pays out hundreds of billions of dollars each year in retirement income, disability income, and death and survivorship benefits. According to the Social Security Administration, nearly 55 million Americans will receive $727 billion in Social Security benefits in 2011. The recent economic crisis has devastated retirement savings and resulted in a greater dependence on Social Security retirement benefits.

Twenty two percent of married couples and 43% of unmarried people now rely on Social Security for at least 90% of their income during retirement. With so many individuals and couples depending on Social Security to pay the bills during retirement, it is important to number crunch and to understand how age affects benefits when determining the best time to start receiving benefits.

When Is the Normal Retirement Age?
An individual's normal retirement age depends on when he or she was born, as the chart below illustrates:

For individuals born in …

The normal retirement age is …

1937 or earlier

65

1938

65 and 2 months

1939

65 and 4 months

1940

65 and 6 months

1941

65 and 8 months

1942

65 and 10 months

1943 – 1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 10 months

1960 or later

67

Three Alternatives
People have three alternatives when deciding the best time to start receiving Social Security benefits. They can take them early, wait until the normal retirement age or wait even longer. The longer an individual waits to start receiving benefits, the larger the monthly check will be.

Take Benefits Early
The earliest a person can start receiving Social Security retirement benefits is 62. More than 66% of eligible workers take Social Security retirement benefits early even though many would be better off financially by delaying benefits. People who choose to take benefits early (before the normal retirement age) will be penalized: the benefit is reduced by five-ninths of 1% for every month before the normal retirement age is reached, up to 36 months.

When benefits are started more than 36 months prior to normal retirement age, the benefit is further reduced by five-twelfths of 1% each month. If your full retirement age is 67, as it is for any individual born in or after 1960, the approximate reduction for starting benefits early would be:

Age

Reduction

62

30%

63

25%

64

20%

65

13.3%

66

6.66%

Wait Until the Normal Retirement Age
Individuals who wait until normal retirement age will receive full Social Security retirement benefits. The amount of the monthly benefit is calculated by averaging the earnings from the 35 highest income-generating years. In addition to receiving full benefits, individuals who wait until normal retirement age to collect benefits may continue working and receiving wages without impacting Social Security retirement benefits. Social Security benefits may be reduced for those who elect to take benefits before normal retirement age and who remain active in the workforce.

Wait Until After the Normal Retirement Age
Delaying benefits until after normal retirement age will earn a credit and result in a larger monthly check. With delayed retirement credits, an individual will receive the largest benefit by retiring at age 70. The annual delayed retirement credit percentage varies from 3-8% depending on the person's year of birth. For those born in or after 1943, waiting one extra year would increase the yearly benefit by 8% or two-thirds of 1% monthly.

Considerations
People who elect to begin receiving Social Security benefits prior to the normal retirement age will have reduced benefits, but will receive benefits for a longer time. If you wait until normal retirement age or beyond, the checks will be larger, but you will receive fewer checks. The Social Security Administration's website has several calculators and a retirement estimator ( www.ssa.gov/estimator ) to help people determine the best time to start receiving benefits. An individuals should also consider his or her:

  • Health and life expectancy
  • Current cash needs
  • Anticipated future financial needs
  • Current employment status
  • Other income streams
  • Spouse's Social Security

The Social Security Administration reminds us that regardless of when one elects to start taking advantage of Social Security benefits, everyone should sign up for Medicare three months before reaching age 65 to avoid delayed coverage or increased rates.

The Bottom Line
Deciding when to start taking Social Security is a difficult personal decision that must be based on factors like current cash needs, employment status and how long one expects to live. Because there are so many what-ifs, careful number crunching examining the different scenarios must be performed to determine the most practical and advantageous age at which to take benefits. The Social Security Administration's website has a host of helpful information, tools and calculators. Qualified financial and retirement planners can also assist individuals and couples in making these important decisions to maximize Social Security benefits.

Pre Week Market Analysis and Price Forecasts

Chief Strategist Chris Vermeulen of TheGoldAndOilGuy.com ETF trading alert service has been on fire lately with not only recent price action in the SP500 and Dollar but also with his trades. He recently traded the last rally in gold for a quick 10% gain, then shorted the SP500 pocketing another 7.3% profit and to top it off his subscribers are long the UUP dollar ETF with 1.4% gain in the SCO oil etf pocketing 7.4% profit this morning in less than two trading sessions.
Chris has put together a short video explaining what took place on Friday and what to expect going forward along with a possible trade setup this week!

Here are the points he covers:
  1. The US dollar index has moved nicely in our favour in overnight/pre-market trading and will gap up this morning.
  2. Crude oil has also moved nicely in our favour to the down side and resting on the support trend line.
  3. Both gold and silver are trading with a short term bearish pattern but I am not willing to short them at this time.
  4. The strong move up in the dollar has put pressure on equities which are trading down 1.5% in pre-market.
  5. We could be shorting the index later today or this week depending how things unfold moving forward today.
WATCH HIS DETAILED VIDEO HERE: http://www.thetechnicaltraders.com/ETF-trading-videos/index.html

Hedging on the Cheap

There are ways to safeguard a stock portfolio while keeping options-related trading costs down.

As stock indexes sag under dour European economic news, investors are turning to the options market to hedge their portfolios.

A simple strategy can be used so investors will not feel like they are buying fire insurance in an inferno.

By buying one bearish put, and selling another, investors can lower hedging costs, and still protect their portfolio from big declines.

With the SPDR S&P 500 Trust (SPY - News), a popular exchange-traded fund, trading at about 114, investors can buy the October 114 put, and sell the October 108 put. The position cost $1.91 compared to $5.07 for just buying the SPY October 114 put.

We do need to point out that in return for hedging at a lower cost, investors limit the effectiveness of the hedge. The spread strategy — selling one option and buying another with a different strike price — offsets losses to 108. Buying a solo SPY put offers unlimited downside protection.

Still, the spread's maximum return is 200% if SPY drops from 114 to 108.

Investors who expect sharper declines can buy a stand alone option contract, like the SPY October 114 put and pay the extra money. If you think the stock market's decline will not be catastrophic, use the spread strategy. Such conversations about hedging and pricing are occurring all over Wall Street.

Institutional investors — hedge funds, pension funds, mutual funds, and others — are asking trading strategists how to cost-effectively protect their portfolios. They are being told that customized hedges can be created for little cost in the "over-the-counter" market that banks operate for their best customers. Barrier options, which his a popular institutional hedge, pay off if the Standard & Poor's 500 Index falls to a certain level determined by the client.

"While barrier options don't provide crash protection, they do offer a low cost way to position for downside within a range and can lower implementation costs by 80% to 90% versus vanilla puts or put spreads depending on the volatility environment," Krag Gregory, Goldman Sachs' volatility strategist, advised clients early Monday.

Gregory is also telling clients to consider buying October 40 calls on the Chicago Board Options Exchange's Volatility Index (VIX.) With VIX at about 39, the VIX calls pay off with VIX at 40.

Since the VIX, the stock market's so called fear gauge, tends to climb when stock markets fall, this is another way to hedge a stock portfolio.

Trading VIX options can be tricky. Many investors intuitively think VIX options are based on the widely quoted VIX fear gauge, but they are based on VIX futures. Anytime you buy VIX options, you are expressing a view that VIX futures will rise or fall in support of your investment thesis, and that the fear gauge will be higher than the VIX strike price at expiration.

To be sure, market conditions are dour. If the Standard & Poor's 500 index breaks 1,140 — it was recently at 1153 — some technical analysts think the index could drop to 1,000. This is why hedging is a hot topic, and why it is worth thinking about the return of capital versus the return on capital.

US home builder outlook worsens in September

The U.S. homebuilders' outlook worsened in September, as foreclosures and anxious buyers hurt construction and sales activity.

The National Association of Home Builders said Monday that its index of builder sentiment in September fell to 14 from 15. The index has been below 20 for all but one month during the past two years.

Any reading below 50 indicates negative sentiment about the housing market. It hasn't reached 50 since April 2006, the peak of the housing boom.

Last year, the number of people who bought new homes fell to its lowest level dating back nearly a half-century. Sales this year haven't fared much better.

Builders are struggling to compete with foreclosures, which have made the price of re-sale homes more competitive. Many buyers are having difficulty obtaining loans or meeting higher down payment requirements. Low appraisals are scuttling some deals after contracts have been signed and some would-buyers who want to purchase a new home can't sell their old one.

David Crowe, the group's chief economist, said a weakening U.S. economy and high unemployment has made the short-term prospects for the homebuilding industry "fairly bleak." The low indexes reflect "builders' awareness that many consumers are simply unwilling or unable to move forward with a home purchase in today's uncertain economic climate."

While new homes make up a small portion of sales, they have an outsize impact on the economy. The builders' trade group says each new home built creates an average of three jobs for a year and generates about $90,000 in taxes.

Separate gauges of current single-family home sales and foot traffic of prospective buyers each fell two points, to 17 and 11, respectively.

An index of builders' outlook in the Midwest rose one point to 11. In the Northeast and South, the index fell two points to 15 and in the West it fell three points to 12.