Have you heard of Mervyn King? King is the United Kingdom’s version of Ben Bernanke. In a speech earlier this year, King provided an informative description of how monetary policy works: “Monetary policy works, at least in part, by providing incentives to households and businesses to bring forward spending from the future to the present. But that reduces spending plans tomorrow.” Monetary policy impacts asset markets in much the same way that it impacts spending. After a monster liquidity driven rally (unsupported by the fundamentals) U.S. stocks are now priced to deliver medium-term (7-year) returns of less than 4%.
We are now at the point in the cycle where you want to be on the outlook for opportunities to trim or eliminate positions most at risk in your portfolio. In this month's issue, we have four sell recommendations for you, one of which, Peyto Energy, is up over 70% since we first advised it. With new money (or the proceeds from your sales) we favor areas of the global equity markets that have not yet been picked over. One of our favored international markets is the Nordic market, which offers favorable values without the direct risk of a euro-area breakup. This month's new buy, based in Norway, brings you the potential one-two punch of multiple and margin expansion that could result in a soaring share price, plus a generous yield of 5% and the prospect of future dividend hikes and special dividends that could result in an effective yield of up to 15%. More >>
The impressive strength of global equity markets in recent months may be in large measure due to the $155 billion of liquidity that the Fed and the BOJ are pumping into global financial system monthly. Stock market strength can't be attributed to accelerating global growth. Why? Well, because there is none. Every indicator from copper to FedEx to euro-area PMI to the coincident-to-lagging index is sounding warning bells. But
as has been the case for much of the last four years, investors are focused almost entirely on monetary policy. "Don't fight the Fed" is the mantra on Wall Street.
Global central banks have so distorted equity markets that positive economic news is met with buying and negative economic news is met with even more buying.
Your best defense against the prospect of another vicious bear market is to focus on stocks whose prices aren't unduly detached from underlying fundamentals. Here the opportunities are more abundant internationally. And on the fixed income side, it isn't often that a case can be made for holding a significant portion of your assets in cash, but this is one of those times. Hold some cash in reserve and wait for a fat pitch. With the balance of your fixed income money, we favor a combination of GNMA securities, floating rate notes, and corporate bonds, which will net you close to 2% with minimal duration risk. We understand 2% isn't compelling, and relative to a stock market that seems like it can only go up it looks worse, but investors eschewing the safety of bonds today will regret it when the next bear market comes. More >>
The Young Research Natural Gas chart book includes short and long-term charts on the natural gas market.
The Young Research U.S. Economy chart book includes short and long-term charts on output and activity, the labor market, inflation, and consumer and business sentiment.
Since 1896, the average bull market has lasted 835 days and resulted in a doubling of stock prices. For more historical perspective on the duration and magnitude of bull and bear markets, check out our new Dow Bull and Bear Markets table.
Our Credit Markets chart book includes many of the charts we monitor and use regularly to formulate fixed-income investment strategy. The chart book includes long-term charts on nominal and inflation-adjusted treasury rates, policy rates, interest rate valuation indicators, and credit spreads.
Jeremy Jones, CFA, is the director of research for Young Research & Publishing and editor of the Global Investment Strategy newsletter. Jeremy is also the Chief Investment Officer at Richard C. Young & Co., Ltd., an investment advisor to high net-worth families and businesses. More »