Stock Trading Blog
For more than a decade, China has been the engine driving global economic growth. A leader in the emerging market economies with double digit GDP growth, a newly capitalist political regime and a rising middle class gave investors a guaranteed way to maximize profits. The exponential growth caused demand for commodities like steel and aluminum to rise and helped lift markets worldwide.
But China’s days as a fast growing emerging market economy are numbered. GDP is decelerating and settling into a normal pace for a developed economy and the global economy has yet to recover from the demand vacuum China left behind.
The Next Generation
Investors might already be familiar with the BRIC economies: Brazil, Russia, India and China. These have been the staple for high growth emerging markets for more than a decade, but their reign may be at an end.
Brazil and Russia have been gripped by recessions and China’s story is essentially at an end, leaving only India as the one BRIC economy that could rise up as a replacement. With a fast growing population and radical political reforms, India is well positioned to take over China’s place in the global economy. India’s GDP growth has risen more than 76 percent since 2008 and is now expected to be at 7.1 percent for the first quarter of 2017. In comparison, China’s GDP growth rate is less than 7 percent.
But the real growth may come from the new MINT economies: Mexico, Indonesia, Nigeria, and Turkey. These countries all share several similar qualities – a young workforce, a changing political paradigm focused on pro-business policies and no dependence on a singular industry.
These economies look much like the BRIC’s did several decades ago and could be where the next big emerging market boom comes from. While all four countries still face significant challenges, there are a number of positive developments that investors should take notice of. Still, Mexico looks like it’s in the best position to break out as an emerging market favorite.
Mexico has successfully diversified its exports, no longer being oil-centric and focusing instead on its growing manufacturing sector. As the closest manufacturing powerhouse to the United States, Mexico could undercut established manufacturing bases like Taiwan and China with a lower cost of labor and lower cost of transportation.
The longer the global economy goes without a country to take over China’s place, the closer we get to an equilibrium, in which case it won’t matter. Once the global economy balances with the lack of a high demand emerging economy, any new growth should have a hugely positive effect. Still, there are plenty of new economies developing that could take center stage.
The most likely scenario is that more than one economy emerges with high growth prospects. Diversifying your emerging market investments might be the best way to take advantage of the next big global growth boom.
Most people think of space exploration as the domain of scientific discovery and nothing more. Only a handful of tech visionaries have already begun investing in what could be the next greatest economic expansion in human history.
While it might seem like the stuff of science fiction, investors can already invest in space operations with defense contractors, aerospace companies and telecommunications companies. While most of the companies on the forefront of space technology are still private, investors should pay close attention to what is being developed and how they’re growing.
There’s no bigger name in private spaceflight right now than Elon Musk’s SpaceX. The company builds and launches rockets with its Falcon 9, Falcon Heavy and Dragon spacecraft. Recent breakthroughs have made the rockets reusable, lowering the cost of a launch to around $42 million – a significant decrease from just a decade ago when launches typically averaged over $100 million. Musk’s latest goal to travel to Mars to establish a colony may sound too bold, almost unreasonable, but considering how fast the industry is developing, that goal looks more and more achievable every year.
The other major competitor in the private space industry is Blue Origins. Founded by Jeff Bezos, the man behind Amazon.com, this company also designs and launches its own private spacecraft. Unlike SpaceX, Blue Origins is focused more on human spaceflight with plans to take customers into space and even in orbit around the moon. Looking ahead, Bezo’s wants the company to provide supplies and flights to and from established space stations and lunar colonies. Along with SpaceX, Blue Origin also has a contract with NASA to provide supplies to the International Space Station.
Planetary Resources and Deep Space Industries
Two up-and-coming industrial mining companies are also looking into space exploration: Planetary Resources and Deep Space Industries are specifically focused on mining asteroids. Before you dismiss that idea as mere fantasy, consider that a recently discovered asteroid (16 Psyche) located between Mars and Jupiter is estimated to contain a mineral worth of $10,000 quadrillion. That one asteroid alone is worth enough to crash the world economy. Many high value elements like gold, platinum, rare earth metals, and more can be mined from these objects remotely using drones. NASA is already planning a mission to 16 Psyche set to launch in 2023.
While space exploration might be the next big investment opportunity, significant risk remains. Like the advent of the computer, many pioneering companies will likely undergo a number of mergers and acquisitions, making it difficult for investors to navigate. Interested investors can get exposure to space technology through companies like Boeing and ATK Orbital, until the future of space industries begins to form more concretely.
One of the best ways investors can gauge the strength of the economy is through mergers and acquisitions (or M&A) activity. It tells investors that businesses are growing and that the economy is healthy enough to support large financial commitments.
Historically, increased M&A activity has been associated with the availability of credit, deregulation or other changes in government policy, and innovation stemming from the private sector. Because these business deals are often multi-billion arrangements, mergers and acquisitions tend to make the most sense when stock values are high so companies can finance part or all of the buyout through stock purchases. With the markets near all-time highs and a pro-business administration newly elected to office, it would make sense that M&A activity would be up.
M&A Activity in the Last 12 Months
For 2016, takeover activity registered as the third highest on record – with only 2015 and 2007 being higher. Some of the biggest mergers recently were the mega-deals in the chemicals industry. Dow Chemical and DuPont agreed to a $59 billion merger, China National Chemical Corp acquired Syngenta for $42 billion, and Bayer bought Monsanto for $66 billion.
Tech mergers have been strong as well, especially in the telecommunications industry, while the energy industry has been forced to make deals in order to stave off bankruptcy and combat low oil prices. On a global scale, the United States attracted $387.1 billion in M&A funds for 2016 ahead of the election – the highest on record according to Mergermarket, an M&A monitoring firm.
Other major deals last year were the AT&T/Time Warner deal and the GE/Baker Hughes oil and gas merger.
Mergers to Watch for
As Donald Trump begins to implement his policies, deregulation could return to Wall Street, helping boost M&A activity further for 2017. So far this year, M&A activity looks stronger than ever with January registering a 12.7 percent increase in deals from December.
For 2017 though, there are a few interesting merger possibilities that investors might want to watch out for. One is the video streaming service, Netflix. With its low debt load and high growth prospects, it could attract buyers like Disney or Apple.
Another deal could happen in the retail space with Barnes and Noble getting bought up by online giant, Amazon. While the brick-and-mortar business model hasn’t been working for most retailers, Amazon has recently announced plans to expand into physical locations and Barnes and Noble could meet those demands fairly easily.
Finally, Acadia Pharmaceuticals, a biotech with drug developments for Alzheimer’s and Parkinson’s could be attractive to buyers like Pfizer or Gilead Sciences.
One sector that hasn’t seen much deal-making lately is healthcare. As Trump starts to deregulate markets and address issues like the Affordable Care Act though, there could be a shake up in the industry that investors might be able to take advantage of. Interested investors should watch the industry closely to see how the fallout from political changes will shape the healthcare industry.
The bull has been marching for eight years now with no signs of weakness. In fact, the economic data keeps growing stronger, supporting the case for continued strength in the global rally. The Fed’s recent statements seem to indicate possible rate tightening to combat future inflation, as well – another sign that the markets are healthy.
Taking a look at volatility in the markets reveals that investors aren’t too worried about a correction of any kind with the VIX reading under 12 for the past month. But it’s often when nothing seems obviously wrong that the markets make a sudden turn downward. The only way to really know if the markets are growing is to check the data.
Important Market Indicators
While many investors rely on the mercurial Fed for direction, there’s another way of determining the strength of the markets. There are a number of indicators that investors can use to analyze how healthy the markets are.
One obvious indicator is the strength of the markets themselves – in other words, how equities are performing. When equities are high, it’s a good sign that there’s something positive pushing values up. The higher stocks go, the greater confidence investors tend to have.
Of course high stock prices can mean that equities are being overvalued. Investors should take a look at the average P/E ratio of an index like the S&P 500 to figure out where average values are at. Right now the average P/E of the S&P 500 is 26.60 – far higher than the historical average of 15.64. That could mean that stocks are overvalued, but it doesn’t guarantee that a correction is imminent either.
The yield on the 10-year treasury is another tool investors can use to analyze markets. A low yield could mean that credit is easy, but that could be to encourage businesses to invest. Conversely, a rising yield can actually be a good thing, as it means that the economy is growing. In the past 6 months, the yield rose from 1.50 percent to 2.37 percent – a 58 percent increase.
Inflation is one of the most often looked at indicators for determining economic strength. Rising inflation, like yields, can indicate economic growth. Over the past 6 months, inflation has risen from a sluggish 0.8 percent to 2.5 percent – a whopping 212 percent gain. It’s a strong sign that the economic rally has a fundamental basis.
Finally, the PMI (Purchasing Mangers Index) can be helpful to investors by detailing how the manufacturing sector is performing. Generally a reading of 50 or less indicates an economic contraction. At 56 percent, the PMI seems to be telling investors that the U.S. economy is strong and growing.
Other than economic data, momentum can be a powerful influence on market direction. If positive momentum is strong and investor expectations are high, then markets can still move upward, even after the underlying fundamentals turn negative. Basing a market rally solely on performance can be misleading and leave your portfolio exposed to unnecessary risks.
The stock market is a dynamic entity that’s in constant motion. Investors analyze stock movements across various sectors in an attempt to spot trends and predict future patterns. One of the most often used methods for analyzing stock patterns is the business cycle.
As the economy ebbs and wanes, certain sectors of the stock market outperform or under-perform. The business cycle tracks these movements and creates a generally recognized pattern that investors can use to identify winning sectors. By identifying where the economy is at in the cycle, investors can narrow down their search to those sectors that are expected to perform well.
Tracking the Business Cycle
There are four main stages of the business cycle: early expansion, mid-expansion, late expansion and recession. Let’s take a closer look to see what events occur during each stage and which industries outperform.
In this stage of the economy, a recovery from a recession is well under way with inflation turning positive and manufacturing production rising. Monetary policy changes to ease credit conditions, allowing for growth in profit margins, while low business inventories set the stage for high sales growth.
The sectors that perform best during this stage are consumer discretionary, financials, industrials and technology.
The middle part of economic expansion is usually the longest-lasting phase with the economy establishing a solid growth rate. Credit remains relatively easy with businesses increasing profit margins, while inventories and sales growth reaches a balanced state.
Most non-defensive sectors perform well during this stage, with few sectors emerging as true leaders. Sector investing is least effective during this stage and investors should focus on identifying trends within sectors.
The economy hits its peak in the late expansion phase with growth beginning to slow down. Inflation peaks and monetary policy switches to a restrictive environment, raising interest rates. Profit margins decline, while sales growth slows down with business inventories beginning to rise.
Energy and materials are typical out-performers during this stage, benefiting from inflation. Defensive sectors begin to become more popular, as well, with consumer staples, healthcare and utilities attracting investments.
The economy retracts during this stage of the cycle with credit availability reaching its lowest point. Business margins plummet, while inventories slowly begin to fall, until an equilibrium with sales is reached.
Defensive sectors, such as consumer staples, healthcare and utilities outperform during this stage, as they produce goods and services that have a steady demand unrelated to economic performance.
While the business cycle can help you find what sectors should outperform, it only helps on a macroscopic scale. In other words, it won’t help you find trends within an industry or tell you what stocks within an industry are considered best-in-class. Some industries, like biotechnology, don’t follow along the business cycle at all, so over-relying on it could mean that you miss out on other opportunities.
Investors typically use several generally recognized methods for analyzing a stock’s value. Basic ratios such as P/E (price-to-earnings), EPS growth, margins and more provide an overview of how a stock is performing. Normally, these ratios work to compare stocks with the broader markets and can reveal whether a stock is under-valued, fairly priced, or over-valued.
But the biotech sector doesn’t necessarily play by the same rules. Because of the nature of the industry – scientific research, FDA approval, and patents – biotech stocks can be extremely lucrative and volatile. Typical fundamental analytical methods like P/E ratio comparisons don’t make sense for this type of stock, so investors need to know the unique nomenclature of the industry in order to understand what to buy or sell.
Key Ratios for Biotechnology Stocks
There are three main ratios in the biotech sector that investors need to be aware of. Some of them might be familiar, while others might be ratios you never thought to look at.
Current Ratio – This ratio tells investors how a company is doing financially. In other words, what is the ability of the company to pay its short term and long term debts. To find the current ratio, you need to compare current assets to current liabilities. The higher the ratio, the more financially stable the company is, while a low ratio – especially under 1 – can be a red flag to investors that the company could be facing financial challenges.
Price-to-Earnings-to-Growth Ratio (PEG) – While the price-to-earnings ratio tells investors how expensive a stock is currently priced at, the PEG ratio provides a more complete picture by taking EPS growth into account, as well. A company that seems expensive based on its P/E might actually be a good deal if that company’s EPS growth rate is equally high.
Research and Development (R&D) to Sales Ratio – The biotech industry lives and dies on its research and development segment. A general rule of thumb is that the more is spent on R&D, the more spent on new, untested products. From an investment standpoint, a lower percentage is better. It tells investors that the company is able to generate profits from existing product lines and isn’t overextending itself on R&D that might turn out to be worthless.
How the Industry Works
Aside from research and development, biotech companies thrive on their patents. The protection of a biotech company’s intellectual property is paramount to success – the more patents owned, the more streams of revenue generated.
It might seem that new products should mean more revenue for a biotech, but the FDA approval process is nowhere near guaranteed and takes years to undergo fully. A new drug developed today would take years before it actually reaches the market – assuming that it can pass all of the FDA’s approval stages.
Investing in biotech can be a a lucrative, risky proposal. One way to add biotech to your portfolio is to use it as a risk mitigation tool. After all, because biotech tends to trade independently of the overall markets, a biotech stock can actually help you reduce overall volatility in your portfolio.
Newly minted investors often turn to mutual funds to meet their financial goals and expectations instead of trading stocks on their own. The idea of taking the fate of your portfolio into your own hands can be intimidating and the availability of investment vehicles that offer diversification and automatic management all-in-one almost makes the decision seem like a no-brainer.
But, despite the proliferation of mutual funds in the investment industry, they might not be the bargains they appear to be. There’s been a lot pf discussion lately about the importance of mutual funds in a portfolio and whether or not they actually add more value than ETF’s, stocks, or index funds. There’s also evidence that most mutual funds consistently under-perform benchmark indexes, such as the S&P 500, indicating that the age of the mutual fund as an investment portfolio pillar may soon be coming to an end.
The Hidden Disadvantages of Mutual Funds
Most mutual funds appear to be complete investment vehicles with built-in diversification and professional management. But when we compare them to other investment vehicles and strategies, mutual funds tend to lose their luster.
While mutual funds have built-in management, either by an individual or a team, management is limited in what they are allowed to do. Manager’s aren’t free to invest as they please – they are required to invest within certain guidelines and maintain certain percentages of their holdings in line with what the fund is designed to do. This can hurt overall performance by preventing managers from making changes as the economy ebbs and wanes along the natural business cycle.
Mutual fund returns need to be taken with a grain of salt, as well, considering they come with an expense ratio. This ratio basically covers the fees for management and marketing of the fund, but work against the total return of the fund. In other words, even if a mutual fund manages to keep pace with the broader indexes, it will still provide a lower return for investors.
In order to determine which funds are doing well and which aren’t, we can look at a fund’s alpha ratio. This tells us how the fund is doing relative to its benchmark index. A high alpha indicates the fund is beating the index, while a low one lets investors know it’s lagging. This ratio can be misleading as it doesn’t follow management – it follows the fund. So a fund that has a new manager, but shows a high alpha isn’t necessarily reflecting the fund’s true potential.
Because mutual funds have been lagging the markets for the past several years, investors have begun transitioning to other options, like ETF’s. Money outflows from mutual funds have plagued the industry, while ETF’s have seen steady inflows. This suggests that investors are moving their money away from under-performing mutual funds with high fees and expenses to ETF’s, which offer more competitive gains for less.
An exception to this trend could be the index fund – a mutual fund that doesn’t have active asset management, but is designed to simply track a benchmark index. While investors might not get the downside protection a traditional mutual fund offers, index funds could replace mutual funds for long term investors looking to maximize their gains.
The energy industry has been on a bit of a roller coaster ride over the past few years. Oil prices crashed in the summer of 2014 as the threat of new oil production from non-OPEC sources, like U.S. shale oil, triggered a price war. OPEC nations pumped out more oil than global demand called for, creating a huge supply glut. As oil prices plummeted, many energy companies struggled to stay afloat, even as the low cost of oil benefited certain industries like transportation.
But just a few years ago, the energy industry was looking at a different revolution in the form of alternative energy. Solar stocks were Wall Street darlings, with technology providing more cost-competitive means of production, that is until oil prices dropped and natural gas came back into focus. But fossil fuels are still a limited resource, while alternative energy continues to clear the path as a long term solution for energy.
The State of Green Energy
The Trump administration has not pulled any punches when it comes to their energy policies. Coal has been one of Donald Trump’s primary focuses, hoping to revitalize the industry and causing across-the-board drops in green energy company stocks after the election results came in in November.
The combination of cheap oil and natural gas, along with an administration viewed as being unfriendly toward green energy, has put a damper on alternative energy stocks. Guggenheim Solar ETF (TAN) has dropped more than 54 percent in the past two years from $38.89 to $17.79, revealing just how out of favor alternative energy has become.
One of the problems alternative energy faces is the extremely high cost of starting up. It takes a significant amount of time for green energy companies to recoup those initial costs – on average around 20 years. They also tend to take out a large amount of debt to pay for operational costs, making them sensitive to interest rate changes. With interest rates on their way back up again, it’s just one more headwind the alternative energy industry faces.
Some stocks are well positioned to weather the storm, though. The hydroelectric company, Brookfield Renewable Partners (BEP), generates stable cash flows, allowing it to profit despite the issues facing alternative energy. They also pay out a hefty dividend, yielding just over 6 percent – giving investors some downside protection.
The long term expectations for alternative energy are still optimistic, despite the short term headwinds that have been plaguing the industry. For now, Trump’s plan to remove environmental protections that restrict coal and oil companies will undoubtedly provide gains for those industries, while curbing growth in alternative energy. Investors should be wary of green energy companies that have high debt loads and diversify to avoid risk in any one company.
The technological revolution arguably began with the proliferation of the personal computer. From there global industries began to change incorporating technology into their everyday operations. Entirely new industries like telecommunications sprung up almost overnight and the world became interconnected in a way that had never before been seen in human history.
A new emerging trend in technology known as IoT (Internet of Things) is proving to be just as disruptive. IoT is “smart” technology that interacts with other technology, allowing for things like energy grids to be able to self-repair or vehicles that can identify maintenance issues before they happen. But it’s the retail industry that’s undergoing a paradigm shift with the changes IoT is creating right now.
A Closer Look at the State of Retail
Consumer tastes are changing and the retail industry is struggling to keep up. The traditional brick-and-mortar model of customers walking into shops and making purchases is starting to lose its appeal. Now, people all over the globe are shopping online.
Companies like Amazon are thriving because they’re taking advantage of how consumers want to shop. Reducing overhead costs by eliminating physical locations has allowed Amazon to gain an edge over other retailers and maximize efficiency. Meanwhile, traditional retailers have not fared so well.
Big brand names like J.C. Penny’s and Kohl’s haven’t been able to make the transition easily. Earnings are down and their stocks are being downgraded, while store closures rise in an attempt to curb losses. But not all retailers are in trouble. Nordstrom has done well with its ecommerce system and has successfully kept customers faithful by providing online ordering options.
IoT is taking the internet to a new level though. Interactive technology is a game changer and other companies are already making preparations. Korean-based Samsung launched a refrigerator model last year that comes equipped with a camera to let you see what’s inside your fridge without even opening it. But the company isn’t stopping there. Samsung recently partnered with Grubhub – a company that let’s customers order delivery from thousands of restaurants – to create a model that allows you to place orders directly from your refrigerator.
Grocery stores are changing too. Aside from the shift away from cheap options to organic food, grocery stores will soon be able to interact with your refrigerator. IoT is developing ways for you to grocery shop right from home and even have it delivered without ever stepping outside.
These radical changes in technology come with numerous risks and pitfalls. Experienced investors might remember the dot-com crash back in 2000 after rapid commercial growth of the internet industry. Anything ending in a .com attracted investment, (regardless of real world application,) creating an unstable environment. IoT seems to be following similar tracks and investors should be careful to maintain discipline and focus on fundamentals in order to navigate through these changes.
Now that the election is over, investors have begun turning from hopeful optimism to nervous skepticism. The Trump administration was viewed as good for American manufacturing and investors began to buy industrials and materials, while commodity prices in metals like copper enjoyed similar gains. With the actions of the administration early in office, though, investors are beginning to feel a sense of fear.
But fear has never resulted in profit. Smart investors know that high volatility just means more trading opportunities. Instead of panicked trading moves, some investors do the opposite and pull their money out of the markets completely. This can lead to missing out on later gains and under-performing the broader indexes.
But there are more than just two moves investors can make. There’s always a bull market somewhere – not all assets perform equally at the same time.
Play the Fear Trade
When volatility rises and uncertainty becomes the primary factor when determining investment choices, safe haven assets like gold often perform well. Increasing your holdings in gold can be accomplished either through direct gold commodity purchases or gold mining stocks. Silver also falls into this category and actually experiences larger swings in returns, although its performance lags behind gold. When gold prices start moving up, silver won’t be far behind.
Investing in conservative stocks is another way to mitigate risks without sacrificing returns. High-yield dividend payers provide investors with protection from downside movements and do well when the markets trade erratically. They also boost returns when markets are going up, so you don’t miss out on any upside movements, either.
Conservative sectors like healthcare, consumer staples and utilities are good places to invest during uncertain times, as well. These stocks tend to be inversely correlated with the broader indexes and outperform when other sectors are falling. Energy MLP’s and REIT’s can provide investors with protection, too.
Finally, options are a great way to play the market when you’re unsure of its direction. There’s plenty of strategies that allow you to profit from either upside or downside movements through calls and puts. As long as the stock moves out of a certain trading range, you’ll earn a profit.
You can also use options to hedge your current positions. One of the most common, a covered call, will net you upfront gains by selling a call at a higher price on a stock you currently own. You’ll miss out on any upsides above that strike price, but you also hedge your portfolio from downside movements.
While panic almost always leads to poor decision making and negative returns, there’s nothing wrong with hedging your portfolio against new risks. If you have profits in a trade, it might be a smart idea to take your original investment off the table and play with the house’s money. You’re guaranteed to at least break even in the worst case scenario, while still leaving yourself open to more profits.
Wall Street loves volatility – the more chaos, the more opportunities for profit. It’s relatively easy to turn a profit when the market is going up and just as easy when the markets are going down. It’s when volatility dries up and markets trade in a holding pattern that investors see drops in returns. It can often lead to making high risk moves that result in big losses when volatility returns.
But just because the markets aren’t moving doesn’t mean there aren’t moves you can make to keep your portfolio returns up. While high volatility might make it easier to buy and sell stocks, there are other investment strategies you can employ to avoid stagnation. Why let just the bulls and bears make all the money?
One way investors can take advantage of markets that are treading water is to buy dividend paying stocks. Not only will it help mitigate your downside risk, it also boosts returns through quarterly dividend payments. While dividend stocks are primarily thought of as conservative investments, investors can use them to increase their overall portfolio returns when growth is hard to come by.
MLPs in particular are good alternative options when the markets aren’t doing much. They typically offer higher dividend yields than you might find in stocks with more consistency. Many offers yield in excess of 5 percent, which means even limited growth of just 5 percent would result in a 10 percent overall annual gain.
Options are another great way to take advantage of stagnant markets. Many strategies allow investors to make money as long as the underlying stock doesn’t go up or down by a specified amount. It also allows investors to leverage their money and mitigate risk.
One of the most common option strategies known as a covered call can be a good way to increase your returns as well. By selling a call at a higher price on a stock you own, you can immediately earn a profit. It also provides some downside protection if the stock dips at the cost of limiting your total upside potential.
Find the Niche that Works
Underneath the seemingly calm surface waters of neutral markets, there are often raging currents taking place unseen by investors who aren’t looking for them. There’s always a bull market happening somewhere. Even when it seems as if the broader indexes aren’t experiencing much activity, there can be certain sectors or asset classes that are.
Macroeconomic events can create opportunities that won’t affect the market as a whole. For example, a biotech company could be experiencing gains due to a new drug they’ve developed or a commodity like gold or silver may be rising in value for a number of various reasons.
It’s important to keep diversification in mind when designing a portfolio for sideways markets. Investing heavily in dividend paying stocks might seem like a good, conservative way to generate a steady stream of income and boost your portfolio returns, but they’ll under-perform in a bull market when growth stock outpace income stocks. Regardless of how the market is performing, there’s always a strategy available for investors to make a profit.
Oil has been a sore spot for investors over the past couple of years. The Organization of the Petroleum Exporting Countries (OPEC) decided to maximize oil production regardless of global demand, driving prices down in an attempt to bankrupt foreign competitors, like U.S. shale oil, and keep control over the oil market. In the summer of 2014, oil took a hit and fell precipitously to the upper $30’s back in early 2016.
For years, oil struggled to break out of the $40 price range, leaving energy investors on the sidelines wondering when the crisis would end. Protracted low oil had a detrimental effect on companies that needed oil at a higher price to justify their cost of operations. But OPEC’s war had the unintended side effect of streamlining the companies that were able to weather the storm, making them leaner and more efficient.
The Winds are Changing
Non-OPEC oil producers met OPEC’s challenge head-on. The companies that were able to adapt only became more competitive, to the point that even OPEC-producing countries like Saudi Arabia could no longer sustain oil at such low values.
With oil beginning to tick higher toward the end of 2016 and trade based on macroeconomic fundamentals rather than OPEC cartel influences, a historic deal was made. An agreement to cut production by 1.8 million barrels a day was made for 2017 with the first cuts already enacted. Saudi Arabia surprised analysts by cutting more than expected in January, helping lift oil prices to the mid-$50’s – a level not seen in two years.
But the production deal isn’t the only tailwind for oil right now. Oil production in the United States is ramping up again thanks to development in the Permian Basin in west Texas. Activity in the region is responsible for more than half of all U.S. oil rigs with 267 currently in operation.
Total rig count is growing as well, with more being added every week. Total rig count is up to 655, up from a historic low of 404 back in March, less than a year ago. Compared to the growth in the Permian Basin, the next most active drilling site is Eagle Ford shale, which is home to 47 rigs.
Oil is now trading steadily above $50 per barrel with most analysts expecting prices to continue to rise as the year goes on. But the industry still faces some challenges that may be hard to overcome.
Despite Cuts, Challenges Remain
U.S. shale producers were a major factor along with the OPEC overproduction in 2014 that sent oil prices crashing. Since then, though, surviving oil producers have managed to become far more efficient and are able to produce oil at a much lower cost.
That means oil companies are able to increase production with oil at much lower prices than before, effectively canceling out the OPEC production cut for 2017. New developments like the Keystone XL and Dakota Access are set to come online this year, as well, which could easily provide enough oil to overshadow the cuts, despite growing concerns of the tribe people who live there, who rely on safe, clean drinking water and who have been protesting its development for months.
In the end, investors need to be careful with future oil price expectations. The OPEC deal to cut production seems to balance out the increase in U.S. shale oil production. While OPEC’s market cartel might officially be on its way out, the forces of supply and demand aren’t forgiving. Oil will start to trade more in line with fundamentals moving forward, and as the environmental ramifications of oil drilling continue to shape public opinion, global growth will be one of the major factors in how oil prices perform.
Stock indexes are near all-time highs with the average price-to-earnings ratio of the S&P 500 over 25 times earnings. Even traditionally conservative sectors like consumer staples are getting overpriced, making it difficult to find good deals and value buys in this market.
But despite the highs the domestic markets are hitting, that doesn’t mean value can’t be found. Globalization has changed the way investors make trades and diversification means expanding your portfolio to include overseas markets.
Going overseas to find new investment opportunities can be a good strategy, but with so many possibilities, it might be difficult to find real value. Emerging markets offer the most returns to investors and recent developments have churned up value opportunities that Wall Street hasn’t quite caught on to yet.
The New BRIC
The BRIC countries – Brazil, Russia, India and China – have been the leading emerging markets for investors to put their money for the past decade and more. But deep recessions in Russia and Brazil have made investments there unwise and unprofitable. Emerging market BRIC funds have been experiencing huge outflows as investors lose faith in these countries’ economies and a new paradigm begins to emerge.
Despite the decelerating economy, China remains a profitable investment option. GDP growth is still nearly triple that of the US’s economy while India continues to grow through radical political reforms that’s opening its economy up to foreign investment.
That leaves two unaccounted for though. The new replacements are Taiwan and South Korea – affectionately known as TICKS. The big energy companies of Russia and Brazil are no longer the engine of growth. Instead, technology is the new generator and Taiwan and South Korea deliver big. Companies like Samsung – a South Korean company – are making waves in the technology world with innovative ideas that are changing the way the world works.
At the forefront of IoT, Samsung is a leader with its new smart-fridge, which allows consumers to literally see what’s inside their fridge and place orders for meals all from the kitchen. But it’s not just technology that’s driving these economies. South Korean make-up company AmorePacific gained more than 150 percent in the past year, revealing just how much the emerging middle class means to emerging market growth.
The former BRIC economies are giving way to an explosion of middle class growth and the TICKS countries are well prepared to supply the demand. The new technological revolution, combined with the growth in the middle class from former BRIC economies should drive growth going forward.
Investing overseas carries unique risks that investors need to be aware of. Currency fluctuations can add or subtract to real world gains and with the dollar hovering near all-time highs, loss due to exchanges is a real concern. Additionally, technological growth is decidedly unsteady, making markets unpredictably unstable, as well.
The current bull market has been alive and well as of March 2009, which means it’s coming up on 8-years-old. Considering that the average bull market lasts about 4 years, many investors are beginning to wonder if we’ll see a correction soon, or if the bull still has plenty of room left to run.
It’s now the second longest bull market on record, with the longest being the internet-fueled dotcom bull that lasted for 4,494 days spanning from 1987 to 2000 – more than 12 years. Now after 8 years, investors worry about what lies ahead and whether they should start preparing for the worst. Luckily, there are ways to objectively examine a market and see how strong the bull actually is and what dangers it may face.
One of the simplest ways to check the status of the stock market is to take a look at how expensive stocks are. This can be done by examining the price-to-earnings ratio of a broad index like the S&P 500. It will tell us what multiple investors are paying for future company earnings – a higher than average multiple could mean that stocks are getting unreasonably expensive and could face a correction back to the mean.
The historic S&P 500 P/E mean average is 15.64 times earnings and right now it’s reading 25.41. That’s a considerable premium and should trigger a red flag for investors. But, bear in mind, that markets can stay at high premiums for an extended period of time before correcting. The average P/E of the S&P 500 stayed above this level for years in the late 1990’s and early 2000’s going as high as 44 times earnings before finally correcting back down.
One of the most tried and true methods for predicting market corrections comes from looking at investor debt margin levels in the markets. Investors that are bullish tend to buy stocks on margin and leverage their money to achieve higher returns. When margins get too high though, it means that investors have hit the peak and the amount of money available to buy stocks and keep prices high runs out causing stocks to fall.
Historically, margins peaked right before major events like the Great Depression in 1929 and again more recently prior to the 2008 financial crisis. The most recent margin data from November 2016 shows margin debt over $500 billion – one of the highest on record and double the level back in 2010. But interestingly, debt levels have more or less stayed the same for the past three years now drifting from the mid $450 billion range to $500 billion. Normally that would indicate that investors are neutral about the market but the gains we’ve seen in the S&P 500 over the past three years tell a different story.
It’s important to note that correlation doesn’t equal causation. High margins don’t always mean a collapse is inevitable nor does a high P/E ratio mean that the market is overpriced. But with a number of red flags coming in from multiple data points, it seems prudent to be cautious about this bull market right now. With the change in political administrations, investors might want to consider taking any gains off the table for now but not withdraw from the markets completely.
If you watch any financial news program or read investment-based articles, you might notice something interesting – they’re usually about stocks. There might be a bit about currencies, commodities and bonds, but by and large stocks get the most coverage.
There’s a good reason for it: stocks tend to be the first type of asset class anyone can invest in, generally through mutual funds and 401k’s. When you open up a brokerage account, you’ll likely trade stocks and not get access to more complex investments, like futures and currencies. The problem is that this unequal distribution can lead to investors neglecting other assets like bonds in favor of stocks. A portfolio made up of just one asset class – even if it’s internally diversified – can lead to big losses for those that aren’t aware of the risk they’re taking on.
Allocation and Risk Tolerance
Having a diverse set of assets in your portfolio is the key to maximizing returns without taking on undue risks. But, in order to know what kind of setup you need to have, you need to first ask yourself what kind of risk you’re willing to take on. You need to know what your risk tolerance is.
While there are a number of tools online that will help you figure out what type of investor you are, there’s a good chance you already know if you’re conservative or aggressive. A good rule of thumb for building a portfolio is to take your current age and subtract it from a number to figure out what percentage you should have in stocks and bonds.
Conservative investors should subtract their current age from 100 and use that number as the percentage of their portfolio that should be invested in stocks. For example, if you’re 30 years old and fairly conservative, you should have 70 percent of your portfolio in stocks and 30 percent in bonds.
More aggressive investors can subtract from 115. In that case, you would want 85 percent in stocks and 15 percent in bonds.
Following this simple rule can help you avoid unexpected losses without disregarding the importance of exposing your portfolio to profitable investments.
One thing to keep in mind when constructing a portfolio is what type of financial instrument you should be using. With stocks, there are a number of options, such as mutual funds, ETF’s and individual equities. But bonds are a little trickier to invest in. Typically, bonds are purchased in lots of $10,000 each per bond. So unless you have a large nest egg built up, you probably won’t get the kind of diversification you need by investing directly in bonds.
Instead, you should use mutual funds to get exposure to bonds. These investment vehicles hold portfolios made up of different types of bonds in multiple industries with a diverse range of maturity dates.
Finally, you should check your portfolio allocation at least once a year. Because stocks typically outpace bonds, over time your portfolio will become more heavily weighted in stocks, which could throw off your balance. You should make adjustments as needed so your portfolio doesn’t get off track as you approach retirement.