Terrorism & the Financial Markets

Wall Street has the potential to recover quickly from geopolitical shocks.

In the past few months, the world has seen several high-profile terrorist attacks. Incidents in the U.S., Belgium, Pakistan, Lebanon, Russia, and France have claimed more than 500 lives and injured approximately 1,000 people. Beyond these incidents, many other deaths and injuries have been caused by terrorist bombings that garnered less media attention.1,2

As an anxious world worries about the ongoing threat posed by ISIS, the Taliban, al-Qaeda, Boko Haram, and other terror groups, there is also concern about the effect of such incidents on global financial markets. Wall Street, which has had a trying first quarter, hopes that such shocks will not prompt downturns. Even in such instances, history suggests that any damage to global shares might be temporary.

While geopolitical shocks tend to scare bulls, the effect is usually short-term. On September 11, 2001, the attack on America occurred roughly at the beginning of the market day. U.S. financial markets immediately closed (as they were a potential target) and remained shuttered the rest of that trading week. When Wall Street reopened, stocks fell sharply; the S&P 500 lost 11.6% and the Nasdaq Composite 16.1% in the week of September 17-21, 2001. Even so, the market rebounded. By October 11, the S&P had returned to the level it was at prior to the tragedy, and it continued to rise for the next few months.3,4

In the U.S., investors seemed only momentarily concerned by the March 11, 2004 Madrid train bombings. The S&P 500 fell 17.11 on that day, as part of a descent that had begun earlier in the month; just a few trading days later, it had gained back what it had lost.5

Perhaps you recall the London Underground bombing of July 7, 2005. That terror attack occurred on a trading day, but U.K. investors were not rattled; the FTSE 100 closed higher on July 8 and gained 21% for the year.4

Wall Street is remarkably resilient. Institutional investors ride through many of these disruptions with remarkable assurance. Investors (especially overseas investors) have acknowledged the threat of terrorism for decades, also realizing that it does not ordinarily impact whole economies or alter market climates for any sustained length of time.

You could argue that the events of fall 2008 panicked U.S. investors perhaps more than any geopolitical event in this century: the credit crisis, the collapse of Lehman Bros. and the troubles of Fannie, Freddie, Merrill Lynch, and Bear Stearns snowballed to encourage the worst bear market in recent times.

When Hurricane Katrina hit in 2005, truly devastating New Orleans and impacting the whole Gulf Coast, it was the costliest natural disaster in the history of the nation. It did $108 billion in damage and took more than 1,200 lives. Yet on the day it slammed ashore, U.S. stocks rose 0.6% while global stocks were flat.4,6

The recent terror attacks in Belgium, Pakistan, and France have stunned us. Attacks like these can stun the financial markets as well, but the markets are capable of rebounding from their initial reaction.

Mike Moffitt may be reached at p# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – nytimes.com/interactive/2016/03/25/world/map-isis-attacks-around-the-world.html [3/25/16]
2 – latimes.com/world/afghanistan-pakistan/la-fg-pakistan-lahore-children-20160328-story.html [3/28/16]
3 – tinyurl.com/pzwzrmb [11/14/15]
4 – moneyobserver.com/opinion/terrorism-terrorises-stocks-fishers-financial-mythbusters [10/22/15]
5 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=3%2F11%2F04&x=34&y=18 [11/14/15]
6 – cnn.com/2013/08/23/us/hurricane-katrina-statistics-fast-facts/ [8/23/15]

China’s Stock Market Turmoil

Can U.S. shares hold up in the wake of January’s shocks?

On January 7, China halted stock trading for the second time in four days. The benchmark Shanghai Composite sank 7.0% on January 4 and dropped 7.3% three days later, both times activating a new circuit-breaker rule that stopped the trading session.1

Markets worldwide fell in reaction to these dramatic plunges. On January 7 alone, Japan’s Nikkei 225 and Germany’s DAX both suffered selloffs of 2.3%. On the same day, the Dow Jones Industrial Average dropped below the 17,000 level and the S&P 500 closed below 2,000.1,2,3

While the Dow and S&P respectively lost 2.3% and 2.4% Thursday, the Nasdaq Composite lost 3% and actually corrected from its July record settlement of 5,218.86.3

Why is China’s stock market slipping? You can cite several reasons. You have the well-noted slowdown of the country’s manufacturing sector, its rocky credit markets, and the instability in its exchange rate. You have Chinese concerns about the slide in oil prices, heightened at the beginning of January by the erosion of diplomatic ties between Iran and Saudi Arabia. You have China’s neighbor, North Korea, proclaiming that its arsenal now includes the hydrogen bomb. Finally, you have a wave of small investors caught up in margin trading and playing the market “like visitors to the dog track,” as reporter Evan Osnos wrote in the New Yorker. More than 38 million new retail brokerage accounts opened in China in a three-month period in 2015, shortly after the Communist Party spurred households to invest in stocks. Less than 10 million new brokerage accounts had opened in China in all of 2014.1,4

In trying to calm its markets, China may have done more harm than good. Chinese officials spent more than $1 trillion in 2015 to try and reassure investors, and right now they have little to show for it. Interest rates have been lowered; the yuan has been devalued again and again. The government has also made two abrupt (and to some observers, questionable) moves.2

Last July, they barred all shareholders owning 5% or more of a company from selling their stock for six months. That ban was set to expire on January 8, and that deadline stirred up bearish sentiment in the market this week. The prohibition was just renewed, with modifications, for three more months.4

On January 4, the China Securities Regulatory Commission instituted a circuit-breaker rule that would pause trading for 15 minutes upon a 5% market dive and end the trading day when stocks slumped 7% or more. On January 7, the CSRC scrapped the rule amid criticism that it was being triggered too easily; Thursday ended up being the shortest trading day in the history of China’s stock market. In the view of Hao Hong, chief China strategist at Bocom International Holdings, the circuit-breaker rule clearly backfired: it produced a “magnet effect,” with selloffs accelerating and liquidity evaporating as prices approached the breaker.1,2

As Peking University HSBC Business School economics professor Christopher Balding commented to Quartz, the CSRC seems to lack sufficient understanding of “what markets are, how they work or how they are going to react.” Quite possibly, China will make further dramatic moves to try and reduce stock market volatility this month. Will U.S. stocks rally upon such measures? Possibly, possibly not.2

Wall Street is contending with other headwinds. The oversupply of oil continues: according to Yardeni Research, world crude oil output rose 2.4% in the 12 months ending in November to a new record of 95.2 million barrels a day.1

Additionally, the pace of American manufacturing is a worldwide concern. In December, the Institute for Supply Management’s manufacturing PMI showed sector contraction (a reading under 50) for a second straight month. Factory orders were down for a thirteenth consecutive month in November (the first time a streak of declines that long has occurred outside of a recession) and the November durable goods orders report also disappointed investors.1,5

Citigroup maintains an Economic Surprise Index – a measure of the distance between analyst forecasts and actual numbers for various economic indicators. It just touched lows unseen since early last year, which is not a good sign as equities tend to react the most to surprises.1

If the Labor Department’s December employment report and the upcoming earnings season live up to expectations, stocks might recover from this descent even if China does little to stem the volatility in its market. The greater probability is that more market turmoil lies ahead. That short-term probability should not dissuade an investor from the long-run potential of stocks.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – cbsnews.com/news/7-reasons-the-dow-lost-17000/ [1/7/16]
2 – qz.com/588386/chinas-new-stock-market-circuit-breaker-is-broken-and-it-is-panicking-investors/ [1/7/16]
3 – usatoday.com/story/money/markets/2016/01/06/china-stocks/78390650/ [1/7/16]
4 – latimes.com/business/hiltzik/la-fi-mh-a-reminder-china-s-stock-market-is-a-clown-show-20160107-column.html# [1/7/16]
5 – briefing.com/investor/calendars/economic/2016/01/04-08 [1/7/16]

Terrorism & the Financial Markets

Wall Street has the potential to recover quickly from geopolitical shocks.

The worst terrorist attack in Europe since 2004 has rattled governments and investors. The French government has closed the nation’s borders and placed thousands of soldiers on the streets of the country’s major cities.1

As an anxious world watches the response of France (and perhaps other nations) to the ISIS attacks, there is also concern about European and global financial markets. Wall Street, which is coming off its second-worst week of the year, hopes that fear will not drive a major selloff.2

Even if it does, history suggests that any damage to global shares might be temporary.

While geopolitical shocks tend to scare bulls, the effect is usually short-term. On September 11, 2001, the attack on America occurred roughly at the beginning of the market day. U.S. financial markets immediately closed (as they were a potential target) and remained shuttered the rest of that trading week. When Wall Street reopened, stocks fell sharply – the S&P 500 lost 11.6% and the Nasdaq Composite 16.1% in the week of September 17-21, 2001. Even so, the market rebounded. By October 11, the S&P had returned to the level it was at prior to the tragedy, and it continued to rise for the next few months.3,4

In the U.S., investors seemed only momentarily concerned by the March 11, 2004 Madrid train bombings. The S&P 500 fell 17.11 on that day, as part of a descent that had begun earlier in the month; just a few trading days later, it had gained back what it had lost.5

Perhaps you recall the London Underground bombing of July 7, 2005. That terror attack occurred on a trading day, but U.K. investors were not rattled – the FTSE 100 closed higher on July 8 and gained 21% for the year.4

Wall Street is remarkably resilient. Institutional investors ride through many of these disruptions with remarkable assurance. Investors (especially overseas investors) have acknowledged the threat of terrorism for decades, also realizing that it does not ordinarily impact whole economies or alter market climates for any sustained length of time.

You could argue that the events of fall 2008 panicked U.S. investors perhaps more than any geopolitical event in this century – the credit crisis, the collapse of Lehman Bros. and the troubles of Fannie, Freddie, Merrill Lynch and Bear Stearns snowballed to encourage the worst bear market in recent times.

When Hurricane Katrina hit in 2005, truly devastating New Orleans and impacting the whole Gulf Coast, it was the costliest natural disaster in the history of the nation. It did $108 billion in damage and took more than 1,200 lives. Yet on the day it slammed ashore, U.S. stocks rose 0.6% while global stocks were flat.4,6

The terror attacks in France and Lebanon have stunned us. They may stun the financial markets as well, but perhaps not for long.

Mike Moffitt may be reached at ph# 641-782-5577 or email mikem@cfgiowa.com

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – cnbc.com/2015/11/13/french-police-report-shootout-and-explosion-in-paris.html [11/13/15]

2 – abcnews.go.com/Business/wireStory/stocks-set-end-winning-streak-retail-slammed-35177303 [11/13/15]

3 – tinyurl.com/pzwzrmb [11/14/15]

4 – moneyobserver.com/opinion/terrorism-terrorises-stocks-fishers-financial-mythbusters [10/22/15]

5 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=3%2F11%2F04&x=34&y=18 [11/14/15]

6 – cnn.com/2013/08/23/us/hurricane-katrina-statistics-fast-facts/ [8/23/15]

 

 

 

 

 

What Affects Oil Prices

While doing your holiday shopping this year, you may have noticed something strange going on. Suddenly, you had more money to spend than you did this time last year. A Christmas miracle? Perhaps, but more likely it’s due to the massive drop in oil prices.

Even if you didn’t do any shopping, you’ve probably noticed that prices at the pump are lower than they’ve been in years. Consumers all over the country are rejoicing in fact that filling up their care isn’t quite as emptying on their wallet. My clients have been no exception, but they’re also wondering, “Why?”

It’s a great question. Why exactly are oil prices falling? And what does it mean for the markets?

Read on to find out.

Oil prices 101

Contrary to popular belief, the price of oil isn’t set by any one man or entity. Oil prices are dictated by two things: the law of supply and demand, and by the expectation of future supply and demand. The former is fairly easy to understand. When the demand for oil is greater than the supply, the price rises. Conversely, when the supply of oil is greater than the demand for it, prices drop. This is partially what’s happening now. Partially.

You see, current supply and demand is not the only thing driving oil prices. As I mentioned, expected supply and demand plays a large role, too. In this case, when the expectation is that future demand will decrease, oil prices fall as a result.

Who sets these expectations? Speculators. A speculator is defined as:

“A person who trades derivatives, commodities, bonds, equities or currencies with a higher-than-average risk in return for a higher-than-average profit potential. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains.”1

Basically, speculators are a special breed of investors who try to project whether the value of a commodity will rise or fall in the future, then either buy or sell that commodity accordingly.

In this case, speculators felt earlier in the year that the demand for oil would drop for several reasons:

  • The continued economic weakness around the world means less people are traveling or commuting, meaning they are spending less on gasoline.
  • While oil is still the world’s primary fuel source, more people and businesses are turning to other forms of energy.
  • The supply of oil would remain stable or even increase.

This last point is important. Several of the various oil-exporting nations around the world could still take steps to raise prices if they wanted to.   How? By cutting back on their own production. (Remember, when supply goes down, demand goes up, thus raising prices.) But none of these nations are taking the bait. The two main players are Saudi Arabia and Russia. Saudi Arabia is the most influential member of OPEC, the Organization of Petroleum Exporting Countries. Saudi Arabia has refused to cut oil production despite the fact that the world’s supply far outpaces the demand for it. Why? Because if oil prices were to rise, it would benefit several of Saudi Arabia’s main competitors, especially the United States, Russia, and Iran, who all need higher prices to turn a profit. Saudi Arabia, on the other hand, can survive on lower oil prices because of their massive cash reserves, and because extracting oil is far less costly for them. This means that lower oil prices harm their competitors while leaving them unscathed, allowing them to dominate more of the market.

Russia has also refused to cut production, despite the fact that falling prices is severely hurting their economy. (More on this in a moment.) Russia reasons that if they cut production, the countries they normally export to would increase their own production and have no need for Russian oil in the future.

So there you have it: a few reasons why oil prices have fallen so dramatically. But what does the future hold? And what does this all mean for the markets?

How Falling Oil Prices Affect the Markets

As you already know, falling oil prices means lower prices at the gas station. But oil prices aren’t the only thing dropping.

When the price of oil falls, it takes everything dependent on oil prices with it. Take Russia, for instance. Some economists estimate that Russia loses about $2 billon in revenue every time the price of oil drops by a dollar. That’s because the sale of oil and gas makes up 70% of its export income.2 This in turn affects the value of the ruble, Russia’s currency, which is veering on the edge of collapse. A falling ruble, meanwhile, hurts bonds and other positions investing in emerging markets, of which Russia is one.

Closer to home, falling oil prices makes life harder for energy companies and companies closely aligned with the energy industry. The result: falling stock prices, which leads to market volatility as a whole. The United States markets got a taste of this in early December. Oil shock hit Canada even harder, thanks to the sheer number of Canadian energy companies trading on the markets. In this global economy, economic stress in one region usually leads to a tremor in another. And one person’s good fortune can be another’s bad luck.

But Here’s the Good News

With that said, I believe the overall impact of falling oil prices is a positive one. Whether you’re at the pump or paying your monthly heating bill, the numbers have to make you smile.

For the most part, spending less money on energy consumption is a good thing! It’s good for consumers and it’s good for the overall economy. After all, less money spent on gas means more spent on other goods and services, thereby pumping additional money into other sectors of the economy. This creates a kind of “rising tide that lifts all boats” effect.

The volatility I mentioned earlier has largely subsided as investors get used to the idea of cheaper oil. Since then, the markets have been surging. As of this writing, the Dow has topped 18,000 for the first time in history, and the S&P 500 is trading at an all-time high as well.3 Investors are realizing that the money they aren’t spending on gas can be put to good use. Furthermore, the United States’ overall economy is looking healthier, having grown 5% in the third quarter.4 And the holiday season—the “Santa Claus” rally, as some call it—is almost always a wonderful time for the markets. The end of the year looks to be a good one.

Where Does Oil Go from Here?

It’s almost impossible to know for sure what oil prices will do in 2015. There are just too many factors in play—economic, environmental, and geopolitical. (Friendly tip: if you are ever looking for an effective sedative, just start reading crude oil forecast reports. Works like a charm.) That said, most of the estimates I’ve seen suggest prices will likely rise somewhat in 2015, but remain far below what they were in early 2014 when oil was selling for over $100 a barrel.5 That means cheaper oil for the immediate future. To celebrate, I want you to do two things for me:

  1. Enjoy cheap(er) gas for as long as it lasts! Maybe go on that road trip you’ve always wanted to take … just don’t forget to send me pictures!
  2. Remember that my team and I are always watching the markets—and your portfolio—carefully. If we see any major developments, we’ll certainly let you know.

Understanding the ins and outs of oil prices can be difficult even for those who do it for a living. I hope this made the situation a little clearer! But if you have any questions about this or any other topic, please don’t hesitate to let me know. I always enjoy hearing from you.

On behalf of all of us here at Cornerstone Financial Group, have a Happy New Year!

Mike Moffitt may be reached at 641-782-5577 or email: mikem@cfgiowa.com.

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The fast price swings in commodities will result in significant volatility in an investor’s holdings.

Resources:

1 “Definition of Speculator”, Investopedia.com, accessed December 19, 2014.http://www.investopedia.com/terms/s/speculator.asp#axzz1qtKjMwIt

2 Tim Bowler, “Falling oil prices: Who are the winners and losers?” BBC, December 16, 2014. http://www.bbc.com/news/business-29643612

3 Jesse Solomon, “Dow hits 18,000 for first time ever,” CNN Money, December 23, 2014. http://money.cnn.com/2014/12/23/investing/stocks-markets-dow-18000/

4 Matt Egan, “US economy grows incredible 5%,” CNN Money, December 23, 2014. http://money.cnn.com/2014/12/23/news/economy/us-gdp-economy-5-percent-growth/

5 “Short-Term Energy Outlook,” U.S. Energy Information Administration, December 9, 2014. http://www.eia.gov/forecasts/steo/report/prices.cfm

 

 

 

 

Dollar on the Verge?

As has been the case since late 2008 when the Federal Reserve (Fed) began its quantitative easing (QE) program, there has been a great deal of concern lately among some market participants that the dollar is on the verge of collapse, but is that a likely scenario?

Corporate America More Concerned with Rising, Not Falling Dollar

455 of the 500 corporations in the S&P 500 Index have reported results for the first quarter of 2014 and, in many cases, have also provided guidance on their operations in the current quarter and for the remainder of the year. As always, when discussing the business environments, corporate management cited swings in the value of the dollar versus the currencies of the nations in which they do business, but none sounded the alarm about an imminent collapse in the dollar. Indeed, many were more concerned about the value of the dollar rising. Why? Because a rising dollar makes U.S. goods and services more expensive to foreign buyers.

Fed Influence

Similarly, in the five press conferences held by Fed Chairman Ben Bernanke and current Fed Chair Janet Yellen since early 2013 following Federal Open Market Committee (FOMC) mettings, the value of the dollar was not mentioned once. The last time the dollar came up at a Fed Chair’s post-FOMC press conference was in December 2012, when then-Fed Chairman Bernanke was asked if the size of the Fed’s balance sheet following QE threatened the credibility of the dollar as the world’s leading currency.

Bernanke’s response: “We’re not the only central bank that has increased the size of its balance sheet. The Japanses, the Europeans, the British have all done the same, and very much more or less to the same extent in terms of the fraction of GDP, and I think the sophisticated market players and the public understand that this is part of a collective need, a need to provide additional accommodation to weak economies and not an accommodation of fiscal policy.”

Bernanke was pointing out here tht the value of the dollar is set in global markets, and that other central banks were pursuing the same policies as the Fed, in some respects cancelling out the impact of the Fed’s QE program on the value of the dollar.

The Key Drivers

Aside from two periods in the early 1980s and late 1990s, the US dollar has been declining since it went off the gold standard in the early 1970s. As Bernanke noted in late 2012, the value of the dollar is set in the open market, although the Fed, Congress, and the President can have an impact on the dollar. Of the three, the Fed probably has the most direct impact on the value of the dollar, as it sets short-term interest rates, which often have a big influence on the value of a nation’s currency. The Fed’s QE program, which is winding down and set to conclude by year-end 2014, has increased the number of dollars in the global economy. The law of supply and demand suggests that the greater the supply of an item, the lower the price, so at the margin, QE has put downward pressure on the dollar.

The value of the dollar has declined 8% relative to the currencies of our major developed market trading partners (the Eurozone, Canada, Japan, the United Kingdom, Switzerland, Australia, and Sweden) since the onset of the first round of QE in November 2008. The 8% drop in the 5.5 years since the onset of QE1 (about 1.5% per year) is about double the 0.75% pace of annual depreciation seen in the dollar between the early 1970s and late 2008, when the first round of QE began. The weaker dollar
has, at the margin, made our exports more attractive, pushed up the costs of goods we import, and, most importantly, pushed the prices of globally traded commodities higher. It has not eroded global market participants’ appetite for Treasury notes and bonds however. As of May 9, 2014, the yield on the 10-year Treasury note was near 2.65%. At the start of QE, the yield on the 10-year Treasury note was near 3.25%. As the Fed begins to wind up QE, and begins to debate when to begin raising rates, the influence of QE on the dollar should begin to fade, and, at minimum, the pace of the dollar’s depreciation should return to its pre-2008 pace of around 0.7% per year. But what about our major trading partners, whose monetary policies Fed Chairman Bernanke cited in late 2012?

Global Monetary Policy Influence

The monetary policy of nations outside the United States may also have an influence on the value of the dollar in world markets. As we noted in our Weekly Economic Commentary: Central Bank Pulse (May 5, 2014), global central bank policies have diverged in recent years, after mainly moving in the same direction — easier policy — between 2007 and 2011. Among our largest trading partners, both the European Central Bank (ECB) and Bank of Japan (BOJ) are easing and poised to do more, while the Bank of England (BOE) is likely the next major central bank to consider exiting QE and beginning the process of normalizing rates. The Bank of Canada — the central bank of our largest trading partner — looks to be on hold for the foreseeable future. The dynamics of central bank actions also suggests a slower pace of depreciation in the dollar (and even some possible appreciation) in the period ahead, not a collapse in the value of the dollar as some may fear.

Foreign Selling?

Another concern often raised by those predicting an imminent collapse in the dollar is that countries with large holdings of Treasuries (and dollars) like China, Japan, and, to a lesser extent, Russia, will suddenly sell all of these holdings in the open market all at once for either political reasons (disagreements with the U.S.) or economic reasons (loss of confidence in the U.S. economy, the Fed, Congress etc.). Our view remains that a major shift in China’s or Japan’s or even Russia’s holdings of dollars and Treasuries is unlikely anytime soon given the tight trade linkages between the countries. China and Russia depend on U.S. goods and services to help advance their own economies, making it difficult for them to operate their economies efficiently without dollar holdings to fund purchases of
goods and services. Over time (years and decades, not days and weeks), economies outside the U.S. are likely to continue to move away from the dollar and Treasuries — a trend that has already been in place for some time now — but a move out of dollar holdings all at once would not be in the best economic interest of the selling country.

“Twin Deficit” Influence

Trade policy, broad economic policy, and even foreign policy — set by Congress and/or the President — can also have an impact on the value of the dollar. Our “twin deficits” (trade and budget) have put downward pressure on the dollar over the past several decades. However, both the budget and trade deficit are narrowing, the budget deficit since 2009 and the trade deficit since mid-2005. Should these trends persist, they will tend to support the value of the dollar, suggesting, at minimum,
a slowdown in the rate of dollar depreciation that we have seen since the start of the QE era in 2008.

Since the United States is the world’s largest economy, most global trade is denominated in dollars, making the dollar the world’s “reserve currency.” As noted above, central banks and governments of most nations outside the United States hold reserves in dollars, although the rise of China’s economy
and the sheer size of the Eurozone’s economy has eroded the dollar’s “reserve currency” status in recent years. Still, the dollar is still viewed as a “safe haven” currency, as are U.S. Treasury notes and bonds, which, of course, are denominated in dollars. In times of economic and political uncertainty around the globe, the dollar normally rises in value, as investors must use dollars to purchase Treasuries, the ultimate “safe haven” asset.

While our “twin deficits” and the Fed’s actions to stimulate the economy have put downward pressure on the dollar, the dollar’s status as the world’s reserve currency, and the United States’ position as the world’s largest economy and largest exporter, with its diversified and dynamic economy and labor force, suggests that a sudden sharp decline in the value of the dollar is unlikely. The recent ramp up in energy production in the U.S., sometimes referred to as the “energy renaissance,” has aided in reducing
our dependence on foreign oil and helped to reduce our trade deficit as well.

In the next few months and quarters, the dollar may appreciate as the economy accelerates and the Fed moves closer to ending its quantitative easing program and begins to raise rates. In the longer term, however, we continue to believe the dollar will slowly depreciate over time — continuing the trend that has been in place since the early 1970s, but at a pace that will not undermine the nation’s health or its role as a global economic power.

Michael Moffitt may be reached at 1-800-827-5577 or email: mikem@cfgiowa.com Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

This research material has been prepared by LPL Financial.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

China, Ukraine & the Markets

Dow drops again, analysts wonder. March 13 saw another triple-digit descent for the blue chips – the Dow Jones Industrial Average plummeted more than 230 points, the second market day in less than two weeks to witness a loss of 150 points or greater. The S&P 500’s (small) YTD gain was also wiped out by the selloff. As the bull market enters its sixth year, it faces some sudden and potentially stiff headwinds, hopefully short-term.1,2

In Ukraine, the situation is fluid. As the trading week ended, much was unresolved about the nation’s future. The parliament of its autonomous Crimea region had announced a March 16 referendum, which gave voters two options: rejoin Russia, or break away from Ukraine and form a new nation.3

Ukraine’s government calls the referendum unconstitutional. The United States and key European Union (EU) members agree and claim it violates international law. Russia welcomes the vote – 60% of the Crimean Peninsula’s population is made up of ethnic Russians, and Russian troops more or less control the region now.3

Russia wants the real estate (its Black Sea naval fleet is based on the Crimean Peninsula) and could spread its economic influence further with the annexation of that region. The cost: economic sanctions, probably harsh ones. Should diplomacy fail to stop the secession vote, then Russia can expect “a very serious series of steps Monday in Europe and [the United States],” according to Secretary of State John Kerry.3

So far, the moves have been largely symbolic: a suspension of the 2014 G8 summit and the talks on Russia’s entry into the OECD, and asset freezes for individuals and companies deemed to be hurting democracy in Ukraine. Additional “serious” steps could include financial sanctions for Russian banks, an embargo on arms exports to Russia, and the EU opting to get more of its energy supplies from other nations. Russia could respond in kind, of course, with similar asset freezes and possible pressure on eurozone companies doing business in Ukraine. The fact that Russia has already staged war games near Ukraine adds another layer of anxiety for global markets.4

Investors see China’s growth clearly slowing. Its exports were down 18.1% year-over-year in February. Analysts polled by Reuters projected China’s industrial output rising 9.5% across January and February, but the gain was actually just 8.6%. The Reuters consensus for a yearly retail sales gain of 13.5% for China was also way off; the advance measured in February was 11.8%. These disappointments bothered Wall Street greatly on Thursday. The news also roiled the metals market – copper fell 1.3% on March 13, its third down day on the week.

Besides being the world’s top copper user, China also employs the base metal as collateral for bank loans.1,5,6

As Chinese Premier Li Keqiang noted on March 13, the nation’s 2014 growth target is 7.5%; the respected (and very bearish) economist Marc Faber told CNBC he suspects China’s growth is more like 4%. The upside, Faber commented, is that “4 percent growth in a world that has no growth is actually very good.”6

Will the bull market pass the test? It has passed many so far, and it is just several days away from becoming the fifth-longest bull in history (outlasting the 1982-7 advance). Bears wonder how long it can keep going, referencing a P-E (price-to-earnings) ratio of 17 for the S&P 500 right now (rivaling where it was in 2008 before the downturn), and the 1.9% consensus estimate of U.S. Q1 earnings growth in Bloomberg’s latest survey of Wall Street analysts (down from a 6.6% forecast when 2014 began).1

Then again, the weather is getting warmer and the new data stateside is encouraging: February saw the first rise in U.S. retail sales in three months, and jobless claims touched a 4-month low last week. Maybe Wall Street (and the world) can keep these signs of the U.S. economic rebound in mind as stocks deal with momentary headwinds.1

Michael Moffitt may be reached at 1-800-827-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and, securities are offered through LPL Financial, member FINRA/SIPC.  Investment advice offered through Advantage Investment Management, a registered investment advisor and a separate entity from LPL Financial.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.

The Dow Jones Industrial Average (the ‘Dow’) is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

The P/E ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio.

International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – bloomberg.com/news/2014-03-12/nikkei-futures-fall-before-china-data-while-oil-rebounds.html [3/12/14]
2 – ajc.com/feed/business/stock-market-today-dow-jones-industrial-average/fYjPS/ [3/3/14]
3 – cnn.com/2014/03/13/politics/crimea-referendum-explainer/ [3/13/14]
4 – uk.reuters.com/article/2014/03/13/uk-ukraine-crisis-factbox-idUKBREA2C19L20140313 [3/13/14]
5 – cnbc.com/id/101492226 [3/13/14]
6 – cnbc.com/id/101489500 [3/13/14]

Why the National Debt is Higher Than You Think

We all can recite some of the biggest accounting scandals in history.  Lehman Brothers, Enron, and AIG all come to mind. Each of their accounting “practices” lost their investors money. But would you believe that our government is also using accounting tactics to make the deficit appear smaller than it really is?

According to a recent report by USA Today the US government reports that the federal deficit is at $1.3 trillion. However, those calculations do not include liabilities for retirement programs such as Social Security and Medicare. Those two liabilities alone rose $3.7 trillion in just the last year.

So, how can the federal government make such a large discrepancy in the national debt? Congress actually exempts itself from having to include retirement liabilities in its debt projections. Yet all other business-like entities including corporations and state and local governments are required by law to report their retirement liabilities on their financial statements.

What does this mean for younger workers?  You may not believe that this will have an effect on you but if you’re not yet retired, it may.  There is a chance that the government may increase taxes and/or decrease retirement benefits in the years ahead out of necessity. If tomorrow, Congress passes a law that increases taxes by 15% to try and get the deficit under control, would you feel comfortable in your current financial situation?  Consider that question carefully as the deficit continues to grow.

Deficit Won’t Go Away Without Major Changes

I’ve been watching with interest the federal government’s struggle with the budget process and how to reduce the deficit.  I look at it from a logical standpoint.  David Walker the former US Comptroller General of the Government Accountability Office, has presented the facts succinctly for many years.  Bottom line: without big changes, entitlements (Social Security, Medicare and Medicaid) will occupy the entire federal budget Walker says “the survival of the republic is at stake.” You can watch the video in it’s entirety below.

He says by 2040 the government will only have enough money to pay interest on the federal debt and some entitlements – nothing else.  Not defense, not education, not homeland security.

Is Gasoline High?

Back around 1960, my Dad bought an old Sinclair gas pump to fill his 1940s-vintage gas farm tractors. He never bothered to ever change the price on the pump, so it was always stuck at 28 cents a gallon. Wouldn’t that be nice? It certainly appears that gas is higher now than in “the good old days”. But compared to what?

Well, the prices are relative to the currency in which you buy gas – dollars, euros, etc. Historically gold represents the best available standard in terms of which to define the value of a monetary unit like a dollar. In 1960, 100 gallons of gas cost roughly the same (in dollars) as about .88 ounces of gold ($35.27). And in 2012, the 100 gallons are equivalent to about .23 ounces of gold ($1711.50).

So even though it takes many more dollars to buy a gallon of gas today than it did in 1960, it takes much less gold to do the same thing. It’s not gas prices going up so much as it is the dollar going down. Wages of many people aren’t going up as fast as the dollar is going down, so we all feel the pinch. If oil companies are bad guys for raising gas prices, those in charge of U.S. fiscal policy and deficit spending should shoulder part of the blame as well.

For more on this see http://www.forbes.com/sites/louiswoodhill/2012/02/22/gasoline-prices-are-not-rising-the-dollar-is-falling.

References: http://www.nma.org/pdf/gold/his_gold_prices.pdf, http://www.randomuseless.info/gasprice/gasprice.html , http://goldprice.org/gold-price-history.html

*Commodities Disclosure