Month: June 2013

By www.CentralBankNews.info

By www.CentralBankNews.info    Central banks should stop influencing overall financial conditions and return to their traditional role of controlling short-term rates now that the global financial crises is receding, the Bank for International Settlements (BIS) said.
    In response to extreme pressure on financial markets during the height of the crises, central banks in advanced economies expanded their operations and influence on markets; accepting a wider range of collateral, engaging in large-scale asset purchases and creating special lending schemes.
    But the BIS, known as the central bank to the world’s central banks, said such tools were most suitable for exceptional circumstances and central banks should now return to influencing short-term policy rates only as a way to affect monetary conditions.
    While it acknowledged that it would be tempting for central banks to hold on to their wider range of tools, BIS said there were three reasons to return to a narrower their focus.
    Firstly, central banks’ control over long-term bond yields is limited compared with short-term rates. Long-term bond yields are mainly driven by a governments’ fiscal policies and balance sheet and affected by its debt management operations.
    Secondly, “central bank balance sheet measures can easily blur the distinction between monetary and fiscal policies,” and thirdly, BIS said the expansion in most central banks’ balance sheets in recent years puts their own financial strength at risk.
    Higher bond yields, for example, can lead to losses on central banks’ holdings of bonds while changes in exchange rates expose central banks – such as those in Asia or the Swiss National Bank with large foreign exchange holdings – to potential losses.
    “All this raises tricky issues concerning coordination with the government and operational autonomy,” BIS said. “For these reasons, such tools are best considered suitable for exceptional circumstances only.”
    Since late 2007, central banks’ total assets have roughly doubled to over $20.5 trillion, up from $18 trillion last year, accounting for just over 30 percent of global Gross Domestic Product (GDP), double the ratio of a decade ago.
    In the wake of the crises, many central banks in Asia added to their foreign exchange holdings as they resisted upward pressure on their currencies. Following the Asian financial crises in the late 1990s, central banks in that region started accumulating foreign exchange reserves to avoid a repeat.
    While the rate of accumulation has slowed in recent years, BIS said foreign reserve holdings in Asian economies amounted to $5 trillion at the end of 2012 – about half of the world’s total stock of foreign reserves, with total central bank assets topping 40 percent of their GDP.
    Asian central banks are not the only ones to have boosted their foreign exchange reserves. The Swiss National Bank, which intervened to impose an upper limit on the franc’s exchange rate in September 2011, raised its foreign reserves to some $470 billion by the end of 2012, or 85 percent of Swiss GDP.
    While narrowing their operational focus, BIS said central banks should expand their overall strategy by integrating financial stability into the conduct of monetary policy.
    Prior to the crises, monetary policy frameworks were primarily focused on price stability and independent central bank decision-making.
    And while the crises didn’t discredit this focus, BIS said was clear that an environment of low inflation didn’t’ prevent the build-up of financial imbalances that “ushered in the most severe crises since the Great Depression.”
    Given the tendency of economies to generate long-lasting booms followed by busts, BIS said this “suggests that there are gains from integrating financial stability considerations more systematically into the conduct of monetary policy.”
    While regulatory measures, such as higher capital requirements for banks and regulation of the shadow banking system, will help reduce risks, BIS said some parts of the financial system will be difficult to regulate and macroprudential measures may lose some of their effectiveness over time due to regulatory arbitrage.
    Monetary policy will therefore continue to play a key role as “the policy rate represents the universal price of leverage in a given currency that cannot be bypassed so easily,” BIS said.
    That said, there are “serious analytical challenges” to integrate financial stability into monetary policy as the current macroeconomic models largely ignore the possibility of financial booms and busts.
   Work is underway in many central banks to tackle this challenge and Norway’s central bank recently amended its policy model to capture the notion that interest rates that are too low for long can create distortions over time.
   BIS was hopeful that these analytical efforts would also lead to a more symmetrical monetary policy.
   Over the last 15 years, central banks have responded to every financial crises by slashing policy rates but subsequently only raising them “hesitantly and gradually,” culminating in the current era with rates that are essentially zero.
    “A more symmetrical approach would mean tightening more strongly in booms and easing less aggressively, and less persistently, in busts,” BIS said.
    Another hope of the BIS is that central banks in the future will better appreciate the “global monetary spillovers in the increasingly globalized world” and put more weight on the global side effects and feedbacks from their policy decisions.
    Not only did low interest rates in advanced economies increase global vulnerabilities in the run-up to the financial crises, but they were transmitted and amplified worldwide as emerging markets intervened to counter upward pressure on their currencies and struggled with capital flow pressures.
    “The recent build-up of financial imbalances in a number of emerging market and small advanced economies indicates that this mechanism may be at work again,” warned BIS.

    www.CentralBankNews.info

By www.CentralBankNews.info     A sharp rise in interest rates from major central banks’ exit from extraordinary accommodative policy could raise the risk of stress in the financial system as banks hold large portfolios of long-dated fixed income assets that will fall in value, warned the Bank for International Settlements (BIS).
    In its annual report, published as financial market shudder from the Federal Reserve’s decision to start cutting back on asset purchases later this year, BIS warned of the challenges facing central banks in striking the right balance between a premature exit and the risks from delaying an exit further.
    “These considerations highlight the possibility that disruptive market dynamics could even materialize as soon as central banks signal that an exit is imminent,” said Swiss-based BIS, as if it had been looking into a crystal ball at last week’s plunge in global bond and stock markets.
    The annual report went to the printers on June 14, the week before the Federal Reserve on June 19 laid out its timetable for pulling back from quantitative easing, underlining the uncanny ability of BIS to spot and anticipate financial events.
    In its 2006 annual report – a full 12 months before the first signs of a global liquidity shortages – it warned of “financial market turmoil or a long period of relatively slower global growth” from the unwinding of financial imbalances.  And in 2008, a few months before the bankruptcy of Lehman Bros., BIS predicted a “more protracted global downturn that the consensus view seems to expect.”
     While central banks have more tools at their disposal, are more transparent and experienced in managing expectations that in 1994 – when a tightening of U.S. monetary policy lead to turbulence in global bond markets – BIS said the situation now is much more complex with the exit requiring “a sequencing of both interest rate increases and the unwinding of balance sheet policies.”
    Central banks’ will be exiting at a time of very high levels of debt with much issued at record low levels, raising the risk of public and government anger over higher interest payments and losses.
    A rise in U.S. Treasury yields by 300 basis points, for example, would result in losses to holders of those securities that exceed $1 trillion, or almost 8 percent of U.S. GDP.  While yields are not likely to jump that much overnight, BIS noted that yields in 1994 rose some 200 basis points during one year in a number of countries, illustrating that “a big upward move can happen relatively fast.”
    Central banks’ communications skills will be severely tested during the exits from easy policy, putting a premium on careful, advance preparation at the same time that central banks have to shore up their anti-inflation credentials.
    “Retaining the flexibility and wherewithal to exit is critical to avoid being overtaken by markets,” BIS said.
    Despite progress in slashing deficits, gross government debt in most advanced governments has continued to rise. This year it is projected to reach some 110 percent of Gross Domestic Product in the United States, the United Kingdom and France, some 230 percent in Japan and close to 90 percent in Germany.
    In most large and advanced economies, the total debt of households, non-financial corporations and governments has risen by $33 trillion from 2007 to 2012, with debt ratios in a number of emerging economies rising even faster.
    In addition to slashing policy rates to effectively zero to avoid a total financial collapse, central banks also embarked on large-scale asset purchases to aid the economic recovery.
    Since late 2007 central banks’ total assets worldwide have roughly doubled to over $20.5 trillion, or just over 30 percent of global Gross Domestic Product. Among the emerging Asian countries, central banks’ assets correspond to over 40 percent of GDP as banks boosted their foreign currency reserves.
    “Open questions remain about how well markets will react to a change in course of monetary policy, not least as central banks have taken on such a large role in key  markets,” said BIS.
    In some markets central banks are effectively seen as the marginal buyer of longer-term bonds while in others they have provided a liquidity backstop and “in effect become core intermediaries in interbank markets.”
    Financial institutions will face the challenge of managing this interest rate risk and efforts by regulators’ to stress-test for the impact of higher yields take on added importance along with banks’ and investors’ ability to hedge risks.
    “That said, there may be limits to investors’ ability to hedge effectively if the transition to higher returns turns out to be particularly abrupt and bumpy,” BIS warned.
     Emerging market economies and small advanced economies will also feel the draft from the exiting by major central banks – witness the outflow of capital from emerging markets since early May – possibly leading to volatile capital flows and exchange rates and financial stability.
    Apart from the major financial repercussions of the exit, central bankers will face political pressure as households, companies and governments object to the rise in interest rates, making the exit even harder.
    “For instance, it is easy to imagine tensions arising between central banks trying to exit and debt management offices seeking to keep servicing costs low,” BIS said.
    Central banks’ own finances may also come under strain, “possibly even undermining the institutions’ financial independence. The public’s tolerance for central bank losses may be quite low.”
 
    www.CentralBankNews.info

By www.CentralBankNews.info     With five years of ultra-easy monetary policy slowly coming to an end, politicians need to make up for lost time and speed up needed reforms of labor and product markets so societies can more easily adjust and return to economic growth, the Bank for International Settlements (BIS) said.
    Despite years of rock-bottom interest rates and massive asset purchases, global economic growth remains lackluster, unemployment high, public finances unsustainable and many households and firms are still struggling to restore financial balances. Total debt has continued to rise.
    With the risks and side effects of easy monetary policy growing and the benefits dwindling, central banks – first and foremost the U.S. Federal Reserve – are now starting to look towards the exit. Easy monetary policy has helped overcome the global financial crises and nursed economies back to recovery, but time provided by central banks for households and firms to repair balance sheets and governments to restore fiscal health has largely been squandered.
    “The time has not been well used,” the respected BIS wrote in its latest annual report.
    “Continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits and easy for the authorities to delay needed reforms in the real economy and in the financial sector.”
    As illustrated by the Federal Reserve’s decision last week to wind up quantitative easing later this year, overburdened central banks have reached a crossroad. Delaying the inevitable exit from very easy monetary policies just makes the exit more challenging.
    “Alas, central banks cannot do more without compounding the risks they have already created,” said Swiss-based BIS, known as the central bankers’ bank.
    Continuing with loose monetary policy, will only tend to encourage aggressive risk-taking, the build-up of financial imbalances and distorted prices. In addition, low rates in advanced economies have spilled over to emerging economies, pushing up exchange rates and creating credit and property booms.
    Instead of retarding needed changes in societies with near-zero interest rates and further purchases of government debt, BIS said central banks must return to their traditional focus and thereby encourage policy makers to change.
    “After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change,” said BIS.
    Sluggish economic growth is not only causing hardship for millions of people, but also explains why central banks have continued to loosen policy over the last year and why “even more radical ideas have been entertained” BIS said, referring to nominal GDP targeting or monetization of fiscal deficits.
    Unlike previous years, when BIS rarely ventured into specific public policy recommendations, the world’s oldest financial institution is not holding back in highlighting the reforms that it believes most economies need to tackle to return to strong and sustainable growth.
    Continued financial reform and repair of the finances of households, firms and governments is necessary but not enough.
    “Authorities need to hasten labor and product market reforms so that economic resources can shift more easily to high-productivity sectors,” Stephen Cecchetti told journalists as he completes his five-year term at the BIS as economic adviser.
    BIS pointed out that long-run economic growth and labor productivity has been trending downward in most advanced economies well before the financial crises in 2007, suggesting that part of the slowdown may be due to other factors.
    “From that point of view, the crises aggravated the slowdown, but it was not the only cause,” BIS said.
    Slower investment in information technology, for example, accompanied a drop in U.S. productivity and the U.S. employment rate peaked around 2000 and has been steadily falling since then for reasons that are still being debated.
    Another point raised by BIS is that in the countries at the center of the financial bust, the sustainable growth path was likely overstated as financial booms tend to conceal structural misallocations of resources – construction, finance and real estate – and imbalances are first revealed when things go bust. Using previous growth rates as a benchmark is therefore not only inappropriate, but it also leads to widespread disappointment with current growth.
    In order to improve growth, those past misallocations have to be put right, BIS said.
    In some countries, workers and capital will need to shift away from industries that over-expanded during the boom to other sectors. In other countries, such as Italy that did not see a housing boom, productivity must rise.
    In the long run, economic growth comes from new goods and services, and innovative ways of producing and delivering them.
    “Regulations that obstruct innovation and change will therefore slow growth,” said BIS, adding that hindering a reallocation of capital and workers across sectors “puts the brakes on the economic engine of creative destruction.”
    As such reforms typically produces winners and losers, policy makers only tend to act when their hand is forced, said BIS, noting those countries that have endured the most intense market pressure in recent years have pushed through such reforms.

By Profit Confidential

The so-called “powerhouse” of the global economy, China is witnessing an economic slowdown like never before—the repercussions of which will be felt here in North America.

The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) continued its slide in June, registering 48.3—a nine-month low—compared to 49.2 in May. (Source: Markit, June 20, 2013.) Any number below 50 suggests contraction in the manufacturing sector.

China is a leading indicator of the global economy, because it exports a significant portion of its products worldwide. If manufacturing in China declines, it suggests the economic hubs of the global economy aren’t really buying much.

Similarly, Germany, the fourth-biggest economy in the global economy, is also facing dismal economic conditions. The country’s Flash Manufacturing PMI declined to a two-month low in June, standing at 48.7 compared to 49.4 in May. (Source Markit, June 20, 2013.)

And Russia seems to be headed towards an economic slowdown as well. The International Monetary Fund (IMF) has slashed its growth forecasts for the country. The IMF expects the Russian economy to grow only 2.5% in 2013, and 3.25% in 2014. I think the IMF is way off with both estimates—we see growth coming in much lower for Russia this year and next.

As an economic slowdown in the global economy emerges, we are seeing U.S.-based companies report weak demand. Caterpillar Inc. (NYSE/CAT), the big construction and mining company, reports that in the last three months ending in May, its total machine retail sales in the global economy fell seven percent from the same period a year ago. Caterpillar’s retail machine sales declined in every region of the global economy except for Latin America! (Source: Bloomberg, June 20, 2013.)

Caterpillar’s retail sales declining in the global economy may just be the beginning of what may become the norm for second-quarter earnings results for other large American multinational companies—weak revenue.

My opinion hasn’t changed; the global economy is treading in dangerous waters. Very few in the media are covering this story. It’s a global economy: if China, the eurozone, Japan and other big economies are all facing soft demand from their consumers and businesses, big American companies operating in these countries will eventually feel the pain as well. That pain will eventually make its way to the stock prices of those companies.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in Profit Confidential, June 2, 2005. Michael recommended Google Inc. (NASDAQ/GOOG) as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached US$700.00 per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.

Article by profitconfidential.com

By Profit Confidential

The already struggling U.S. housing market recovery took it on the chin this week…

While most investors were focused on the collapsing stock market, courtesy of the Fed’s announcement Wednesday that it would pull back on its $85.0-trillion-a-month paper money printing program some time later this year, bond yields rose sharply.

The yield on the bellwether 10-year U.S. Treasury bill has jumped almost 50% over the past 12 months—and that means mortgage rates are rising sharply. This should be of no surprise to my readers, as I have been warning about higher interest rates for some time now. (See “Gone Are the Days When the U.S. Bond Market Was the Place to Be.”)

If there is one factor that affects activity in the housing market the most, it is interest rates. That’s why the nail in the coffin for the housing market might now be in.

The National Association of Realtors reports first-time home buyers accounted for only 28% of all the existing-home purchases in the U.S. housing market in May. What’s even more troubling is that they have been declining in number. In April, first-time home buyers accounted for 29% of purchases; and in the same period a year ago, they bought 34% of all existing homes in the U.S. housing market. (Source: National Association of Realtors, June 20, 2013.)

Looking forward, I won’t be surprised to see the number of first-time home buyers decline even further, because the Federal Reserve has pulled the rug right out from under their feet by saying it may pull back on its quantitative easing later this year, thus pushing mortgage rates sharply higher.

The standard 30-year fixed mortgage rate jumped to 4.24% today, up from only 3.67% a month ago.

As I have been writing, the U.S. housing market has been propped up this year by institutional investors moving in and buying single-family homes for the sole purpose of renting them out—for investment purposes. Institutional investors became major buyers of single-family homes in key areas of the U.S. housing market and even bid up prices.

But now that yields across the board are rising, is the housing market that attractive to institutional investors? Money flows to the highest and safest returns. With rates rising, the big-money guys might finally have other investment alternatives to look at. Combine less focus on the housing market from institutional investors with declining demand from first-time buyers and rising interest rates, and quickly the housing recovery becomes a has-been.

Michael’s Personal Notes:

The so-called “powerhouse” of the global economy, China is witnessing an economic slowdown like never before—the repercussions of which will be felt here in North America.

The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) continued its slide in June, registering 48.3—a nine-month low—compared to 49.2 in May. (Source: Markit, June 20, 2013.) Any number below 50 suggests contraction in the manufacturing sector.

China is a leading indicator of the global economy, because it exports a significant portion of its products worldwide. If manufacturing in China declines, it suggests the economic hubs of the global economy aren’t really buying much.

Similarly, Germany, the fourth-biggest economy in the global economy, is also facing dismal economic conditions. The country’s Flash Manufacturing PMI declined to a two-month low in June, standing at 48.7 compared to 49.4 in May. (Source Markit, June 20, 2013.)

And Russia seems to be headed towards an economic slowdown as well. The International Monetary Fund (IMF) has slashed its growth forecasts for the country. The IMF expects the Russian economy to grow only 2.5% in 2013, and 3.25% in 2014. I think the IMF is way off with both estimates—we see growth coming in much lower for Russia this year and next.

As an economic slowdown in the global economy emerges, we are seeing U.S.-based companies report weak demand. Caterpillar Inc. (NYSE/CAT), the big construction and mining company, reports that in the last three months ending in May, its total machine retail sales in the global economy fell seven percent from the same period a year ago. Caterpillar’s retail machine sales declined in every region of the global economy except for Latin America! (Source: Bloomberg, June 20, 2013.)

Caterpillar’s retail sales declining in the global economy may just be the beginning of what may become the norm for second-quarter earnings results for other large American multinational companies—weak revenue.

My opinion hasn’t changed; the global economy is treading in dangerous waters. Very few in the media are covering this story. It’s a global economy: if China, the eurozone, Japan and other big economies are all facing soft demand from their consumers and businesses, big American companies operating in these countries will eventually feel the pain as well. That pain will eventually make its way to the stock prices of those companies.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in Profit Confidential, June 2, 2005. Michael recommended Google Inc. (NASDAQ/GOOG) as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached US$700.00 per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.

Article by profitconfidential.com

By Profit Confidential

The business of freight is always a benchmark.

FedEx Corporation (FDX) reported its fiscal fourth-quarter numbers that can only be described as mediocre. The stock went up on the news.

The company reported that its fourth-quarter sales grew four percent to $11.4 million, while earnings dropped 45% to $303 million, compared to its $550 million a year ago. Earnings per share fell similarly from $1.73 to $0.95.

FedEx noted that international customers were opting for less premium freight services, which is what affected the company’s earnings. The company is retiring older planes and undertaking voluntary employee buyouts, which added to costs.

FedEx’s earnings results are emblematic of the softness in the eurozone marketplace. The company increased its adjusted earnings forecast for fiscal 2014, but it was a little bit short of existing consensus.

The company’s share price went up on its earnings release day, when the broader stock market finished a full one percent lower. United Parcel Service, Inc. (UPS) reports in another month.

FedEx’s four-percent revenue gain wasn’t bad for such a large, mature enterprise. Noticeable in the company’s numbers were a 10% reduction in fuel costs and a 25% jump in purchased transportation expenses.

Like many corporations, the company’s cash balance increased to $4.9 billion, up from $2.8 billion (partially due to $1.74 billion in new long-term debt).

International air freight was the real weak point in the most recent quarter. U.S. total freight revenues were slightly positive. The company’s long-term stock chart is featured below:

Chart courtesy of www.StockCharts.com

Given the company’s modest earnings report and the weakness apparent in international markets, I’d say the stock is expensively priced, with a price-to-earnings ratio of approximately 18.

Weakness abroad is an ongoing theme, and the fact that international customers are moving their business away from higher-margin priority shipping is worrisome. It’s something I’m sure FedEx doesn’t want to see continue.

It’s very early days for this earnings season, but already, mediocrity stands out. The stock market’s action has been all about the Fed, but now it’s time for the bread and butter; if the numbers continue like this, stocks should pull back. (See “Action in Dow Jones Transports, Utilities Signaling Caution.”)

The marketplace knows that there’s been a reduction in second-quarter earnings expectations on the part of Wall Street analysts. There have also been a few earnings warnings from corporations.

Considering how far the stock market has come since the beginning of the year, it’s very difficult to get enthusiastic about second-quarter earnings season yet.

A prolonged break in the main market indices is overdue.

Article by profitconfidential.com

By Profit Confidential

The Japanese Nikkei 225 continues to hold above 13,000, but with the index still up 56% from its recent low in mid-October, I continue to advise you to look elsewhere. The index was down 23% after its recent correction, but it has rallied four percent since. Even so, I would avoid Japanese stocks. (Read “Why Nikkei Sell-Off May Foreshadow Things to Come.”)

My feeling is that the emerging markets will continue to offer the best risk-to-reward investment opportunities. This is where the new wealth is and where people want to spend. The end result will be a rise in consumer spending in the emerging markets and their respective economies.

Longer-term, China remains a top area among the emerging markets, but we have to get past the near-term growth issues and an underperforming stock market.

I would rather be looking at some of the smaller Asian emerging markets that have major trading with China and Japan. Here, we have the four “Little Tigers,” comprising Hong Kong, Singapore, South Korea, and Taiwan. While South Korea has been disappointing, Taiwan has delivered some excellent returns this year; Singapore has, too, but to a lesser degree.

In my view, South Korea is worth a closer look for those in search of a market that has underperformed. The country has numerous global multinationals, such as Samsung Electronics Co. Ltd., Kia Motors Corporation, Hyundai Motor Co. Ltd., and LG Corporation. The region is hurting a bit now due to the associated stalling in China and the recession in the eurozone, but longer-term, I’m bullish on South Korea.

Another country from the BRIC (Brazil, Russia, India, China) group that has been under duress is Brazil. The country is facing high inflation from years of expansion and spending. Inflation has become problematic in the country, with the inflation rate at an annualized 6.13% in January, which makes interest rate risk quite high. The country’s gross domestic product (GDP) growth slowed to an annualized 2.2% in the first quarter, which is well below the readings in the previous years. In my estimation, Brazil will face hurdles in the short term, but there are opportunities to buy on current weakness.

My reasoning is that the newfound wealth and growing middle class in these emerging markets will drive consumer spending and economic growth.

The chart below of the iShares MSCI Emerging Markets index shows the mixed trading since early 2011; but notice the possible formation of a bullish flag, as indicated by the blue lines on the chart.

Chart courtesy of www.StockCharts.com

In Europe, while the eurozone is gripped in a recession, there will be buying opportunities in the emerging markets of Eastern Europe—namely Russia, the largest economy in Eastern Europe, and Poland, the second-largest economy in the region.

The bottom line is: to diversify and drive up higher returns, take a look at the emerging markets and the companies that operate there, especially those with a presence in the global economy.

Article by profitconfidential.com

By Sasha Cekerevac

Over the past few months, it appears that the first-quarter economic growth spurt has begun to decelerate in America. This is troublesome, as stock market investors had anticipated that we would be seeing economic growth finally gain steam.

Unfortunately, we don’t have the global economy on which to rely. Much of the world remains quite weak, and this lack of demand in the global economy is creating a drag on our own nation.

While first-quarter economic growth was relatively strong at 2.4% real gross domestic product (GDP), it appears that in the second quarter, economic growth slowed to less than two percent. This was on the heels of tax increases, a slowdown in manufacturing, and budget cuts by the federal government.

Also Read: NYSE Holidays 2013

The real goal for economic growth is to have a rate of increase that is close to optimal, which is approximately 2.5%. An economic growth rate above this level would be extremely positive, as it would quickly eliminate any slack in the labor market; however, it would be best if it didn’t grow too high,because that would create strains in the economy
and could lead to inflation.

We have seen only anemic job creation, partly because the economy has averaged an economic growth rate of just 2.1% since hitting a bottom in 2009. While the growth is positive, it simply is not strong enough to generate the number of jobs needed to fill the void left by so many lay-offs during the recession.

This weakness in the global economy is also a factor in the lack of manufacturing jobs. Many of the jobs created over the past two years have been in the low-wage service sectors, not manufacturing. The level of the job creation for manufacturing will be an important part of the total economic growth rate for the remainder of the year.

Many parts of the global economy are slow, but not all nations are experiencing the same economic problems. Some parts of the global economy are still mired with deflation, such as Japan; other parts are lacking access to credit, such as certain countries in the European Union; and some areas of the global economy have extremely high levels of inflation, such as India.

While the global economy remains mixed, consumer sentiment within America is quite resilient in spite of relatively anemic levels of economic growth. This could be a result of rebounding home prices and the stock market at all-time highs.

However, economic growth needs to be able to accelerate for a continuation of not only consumer sentiment, but also job creation. No business will start hiring people until it’s a safe bet that their business can grow revenues and earnings in excess of the costs of labor.

With economic growth showing signs of slowing over the past month here in America, and the global economy not reaccelerating, there needs to be several months of data indicating that this trend is reversing before I would be comfortable in saying that the coast is clear.

This article Coast Isn’t Clear for America, Economic Growth Slowing was originally published at Investment Contrarians

By Intellitraders

For a new trader or an amateur, a way of managing risk and not incurring colossal losses is to play safe and sure. This means basing your positions in the market on slow, but sure elements. This is precisely the reason, that trends are expressed in the markets, as “The trend is your friend.” Even experienced traders seek trends on which they can base their positions.

Why Use Trends

So what makes even experienced traders seek a strong trend, and why should the inexperienced ones also find one? The answer lies in the ease in trading it offers to the traders. The strategy is simple, find a strong trend and then trade in the trend’s direction. It becomes less important to time your trade entries. This is because, if the market shows a declining trend, all you need to do is go short. However, you should always watch out for reversals in trends. This, therefore, means that you have to be careful in timing your exits.

Here’s another reason why you should trade in the trend’s direction. A small research will show you that there are more pips available to profit on when you move in a trend’s direction, than against it. This is simple, a trend shows where the price graph is inclining over a given period, up or down. So if price has moved in a given direction in more days than less, there are more pips to bank on in the same direction.

Identifying Trends

Identifying trends is not too hard, if you have a good broker at your service who allows you many charting tools to play with. But you don’t need a hefty tool for this, just extract a chart with 100 to 200 candle bars on it. Now you can see a trend going in one direction or the other. If you see higher highs and higher lows, that’s a rising trend. On the other hand, if you see lower highs and lower lows, well that’s a declining trend. The trend changes, when you notice highs and lows contrary to the existing or previous trend.

So is there a special way to pick trends? No, the basic idea is to pick those pairs to trade that have the most obvious trends forming up. There are at least 30 most popular pairs available which you can trade. You can further improve your trade by following only those signals that follow your pair’s trend, this way you will improve your probabilities.

James Fanklen

Intellitraders