2 Bloomberg TV Interviews on European Central Bank, Oil Price

Bloomberg TV Interview 1: Market Is Expecting a Lot From Mario Draghi: Shing

Bloomberg TV Video Link 1

Bloomberg TV Interview 2: Falling Oil Is an Underplayed Risk: Shing

Bloomberg TV Video Link 2

Bloomberg TV:Debunking "Sell in May and Go Away"

I appeared last week on Bloomberg TV in the morning, talking to host Mark Barton about why the "Sell in May and Go Away" saying is no longer strictly correct - rather, June to September is more the danger period for stocks...

CLick on the Bloomberg link below to see the Interview:

Debunking-sell-in-may-and-go-away

Still time to climb on the housebuilders’ ladder

Surely UK house builders have done so well already, that they can’t possibly have much further to go? When the heated state of the UK housing market becomes headline news on a regular basis, then as a stock investor, you have to be worried, right?

While that might normally make sense, in this case I would beg to differ. It is true that, since I wrote my last article extolling the virtues of UK house builders on February 4 (UK Building is All Systems Go!), the Bloomberg UK house builders’ index has risen some 9%, its pullback today notwithstanding.

But let me present a series of data that I find to be compelling evidence that the current bull market in housing-related stocks  still has some way to run…

Item 1: House Builders have 37% to go to Reach their 2007 Highs

Yes it is true! As a group, house builders like Barratt Developments (BDEV), Berkeley Group (BKG) and Persimmon (PSN) have 37% further to rise before they hit their June 2007 share price highs.

Item 2: Housing Starts Are Picking Up, But Still Below Average 

House builders are breaking ground on more new projects today than at any time since the first quarter of 2008. However they are still a long way from climbing back to the average for quarterly housing starts seen pre-Financial Crisis. 

Item 3: and Building Completions Are Even Worse…

If we look at the rate of building completions in the UK, the situation looks even worse...

Item 4: Mortgage Approvals Go Up, Mortgage Rates Down

And all the while, the UK Government is of course doing its bit to help the purchasing of new-build homes with their Help to Buy schemes, effectively guaranteeing the first 20% of a 95% loan-to-value mortgage, allowing first-time buyers to get on the property ladder with only a 5% deposit. No wonder then that the number of mortgage approvals is going up!

To read on, see the charts and see my favoured stocks for this theme,
click on this web link: 

Still time-to climb on the housebuilders' ladder

Buy Europe! The ECB will have to give the Euro economy a boost

Why you should buy Europe now, before the ECB acts

Yes, I know that you may be hesitant to buy Continental European stock market exposure, given the travails of the Euro zone since 2008. And you would be right to object that the Euro zone sovereign crisis has by no means been definitively solved, with debt loads of countries such as Portugal, Spain and Italy still pretty enormous.

This is all true and I wouldn’t dream of denying any of these facts. But hey, if you are to look at sovereign debt mountains, then you wouldn’t invest a single penny in the US, Japan or the dear old UK! The final exit from the sovereign debt mountains amassed both before and during the last financial crisis will take a very long time for the respective governments to unwind, as noted by the economists Rogoff and Reinhardt in their seminal tome “This Time is Different” (although there have been some subsequent issues raised concerning their calculations).

What I would argue is that there are a number of green shoots poking through for the Euro zone economy, which should be a harbinger of better days ahead. Added to this, I am a firm believer that the European Central Bank (the ECB for short) will need to stimulate the Euro zone further in the months ahead, which should be unabashed good news for the European stock market. And you have a chance today to buy into relatively cheap European stocks before the ECB unleashes one of their economy-boosting “big bazookas”.

Euro Confidence Is On the Up

Whether you look at leading economic indicators or  economic sentiment indices like the Sentix economic confidence index highlighted below (Figure 1),  the improving macro trend is clear...

Please click on the MindfulMoney website link below to read the entire article, see the charts and also the ETF and investment trust suggestions at the end:

Buy-europe-the-ecb-will-have-to-give-the-euro-economy-a-boost

All the best,
Edmund

CNBC TV Guest Host! Why I still prefer Insurance to Banks...

Yes, I was once again Guest Host on CNBC Europe's Squawkbox show from 7 to 9am. Thanks to the London Tube strike, I had to get up at 5am to get a car to the studio at 5:30am! 

We discussed a whole slew of company results, including some of my favourite stocks such as Alcatel-Lucent (restructuring and seeing the benefits in better gross profit margins) and AstraZeneca (which every analyst has loved to hate because of its upcoming drug patent expiries like the statin Crestor). 

I was asked what I thought about European Banks in the wake of the announcement of Credit Suisse's results - I maintained that I still prefer Insurance companies to Banks. To find out why, please click on the CNBC TV web link below to watch the video:

Edmund on CNBC - Prefer Insurance to Banks

While today's Bank of England interest rate announcement should be uneventful, this afternoon's European Central Bank (ECB) announcement could be more interesting, as there is a good argument for the ECB to add further stimulus to help economic growth in the Eurozone. So far, while German manufacturing is picking up nicely, France is lagging badly behind (not helped by President Hollande's antics). 

The Eurozone still needs all the help it can get, so here's hoping that President Draghi does something!

Edmund

CNBC Europe Squawkbox appearance: Why I like European stocks

On CNBC Europe's Squawkbox programme this morning (where I was acting as Guest Host), we discussed a number of topics including UK retailers (after the relatively poor results from Tesco, Marks & Spencer and Wm. Morrison).

We also discussed the relative merits of European stocks, given the ongoing support that the European Central Bank is giving to the Euro-zone economy (ECB meeting and press conference taking place today). 

I am a big fan of European stock markets for 2014 after pretty good performance last year: here is a 2-minute video snippet where I discuss why!

CNBC Europe: 9 January 2014

Here's looking to happy investing in 2014,

Edmund

Banks Breaking Higher In Spite of US Political Roadblocks

Given the drag to US economic activity from the ongoing US government shutdown, and the looming need to raise the US debt ceiling (before the US government runs out of money!), I am surprised to see that US investment banks and broker-dealers continue to do very well, with hardly a pullback in sight. 

US Broker-Dealers Bounce off 3m Moving Average

Boosted by Retail Investors Buying Stock Funds

This particular index comprises investment banks such as Goldman Sachs and Morgan Stanley, stock and commodity exchanges such as the CME, ICE and NYSE Euronext, and electronic trading platforms with as TD Ameritrade and E*Trade. They are all clearly benefiting from the current bull market in stocks, and the swtch by retail investors away from bond funds back towards equity funds, e.g. in the form of buying equity ETFs. 

Money Still Flowing Into Equity ETFs

European Financials Lead the Stock Market

In Europe, the same trends can be seen, with both the European Banks and Insurance sectors at or breaking new highs:

European Banks break a new year high

European Insurers also hitting a new high

You might argue that financial markets are perhaps being a little too sanguine over the risk of a US government debt default; the accepted consensus seems to be that a US default would wreak complete havoc on the US and global economies (not to mention global financial markets), and thus will be avoided by a combination of the US Treasury and Federal Reserve at all costs. 

Nevertheless, the fact remains that volatility remains historically low in spite of the political deadlock, and investors are still stuck looking for somewhere to invest their savings where they can garner a half-decent return, which is still leading them back to stocks and shares. 

Implied Volatility Still Close to Multi-Year Lows

Personal caution

I personally would rather be a seller into this rally than a buyer, as I believe that any eventual debt ceiling deal in the US could result in the stock market cooling off, as it is often better to "buy on the rumour, but sell on the news". 

That said, the US and European Banks and Insurance sectors still contain many companies that look attractively valued when looking at P/E, dividend yield or price/book valuation metrics, at a time when the US stock market overall could be argued to be already fully valued (as was argued recently by the famed investor Julian Robertson in a recent CNBC TV interview: Julian Robertson interview).

So what to do? I am still heavily invested in the UK, European, US and Japanese stock markets for now, but I must admit, I am looking to sell down positions sooner rather than later. After all, we are still not even halfway through the month of October, which has proven a pretty volatile month for stock markets in the past (see previous post for details)...

So invest in banks and insurers if you are confident of a successful resolution to the US debt ceiling issue, and if you believe that upcoming quarterly earnings releases from giant US banks such as JP Morgan and Wells Fargo will not disappoint expectations. 

Good luck,

Edmund

Should we invest in Stocks in October, Despite Seasonal Risks?

Stay in Stocks in October?

There are a number of reasons for avoiding risky assets like stocks in the month of October, ranging from seasonal to geopolitical to fundamental:

1. Seasonal: Historically, September and October have traditionally been the most volatile months of the year for stock markets worldwide, the months when most sharp stock market falls have been recorded (think Sept-Oct. 2001, Sept-Oct. 2008). Yes, stock markets have generally made small advances over the month of September, and have done well over the year to date. But isn't that precisely the reason for locking in profits now, at the beginning of October?
2. Political: The partial US government shutdown over the lack of agreement between the Democrats and Republicans over a the US budget could cause further volatility in the US economy and thus in financial markets. Thus far, markets seem to have taken these events in their stride (VIX volatility index close to a year low at under 15), but can we expect this relative calm to persist if no agreement is reached soon?
3. Fundamental: Let's not forget that the US Federal Reserve, having positively surprised the markets by not beginning the infamous "taper" (i.e. not reinvesting the proceeds of maturing bonds back into the US bond market) in September, could nevertheless begin this tapering process very soon. This was even hinted at by St. Louis Fed President James Bullard, who intimated that the taper might even begin in October (i.e. this month!). So the relief rally we have seen in bonds may not last much longer...

But some reasons to stay the course with stocks (for now)

A key reason to remain invested in stocks at the beginning of October is the basic fact that established uptrends in the major US, European and Japanese stock markets remain intact. Each stock market sits above its own 3-month and 6-month moving averages, and has not broken the general pattern of higher highs and higher lows. 

EuroSTOXX index in clear uptrend

Secondly, while it is true that September and October have contained some painful periods of stock market falls, we should not ignore the fact that, on average, the UK stock market has generated an average 2.1% total return (price change + dividends) over the two-month period over the 23 years from 1990 to 2012. 

UK stock market has gained 15 times out of 23 Sept+Oct periods

Indeed, over the past four years we have seen positive 2-month returns on each occasion... So from this simple statistic, I would say that the jury is out on whether these months should be completely avoided or not. 

Be pragmatic, use a stop-loss!

My pragmatic approach to investing in stocks at this time of year is relatively simple: I favour using liquid index-based ETFs rather than individual stocks, as then I can easily manage the level of risk in my portfolio by selling or reducing only a few investments. I also put in place a relatively tight stop-loss, so that I reduce my stock market investments before losses become painful. 

But, for this month of October, my ETF-based investment strategy is 100% invested in stocks, via UK Small-Caps (ETF code: CUKS), Euro Low Volatility stocks (IMV), US Small-Caps (ISP6), Emerging Markets Low Volatility stocks (EMMV) and FX_hedged Japanese stocks (IJPH). But in each case, I will be closely monitoring weekly moves, and selling them if they exceed the stop-loss levels I have set in place as of today. 

Year-to-date performance of my re-christened STAS

On a final note, I just wanted to point out that my asset allocation trending system STAS (Signal-driven Tactical Allocation System) has now gained 15.1% net of costs over the year to the end of September, including a monthly gain of 1.3% for September alone despite being 40% invested in cash. So far, still so good...

Post BoE/ECB Markets Landscape: Small-caps, US Dollar show relative strength, Commodities still laggards

BoE, ECB lower for longer?

Following the forward guidance given both by the new Bank of England Governor Mark Carney, and President Draghi of the European Central Bank at their respective central bank rate-setting meetings, what can we divine from the reaction of various financial markets?

First off, no bones about it - both the Bank of England and the ECB remain fully engaged in supporting the fragile economic growth rates seen in Europe (Bloomberg - ECB signals prolonged low rates). We have been recently reminded of how fragile any economic stability is across the Continent by the volatile reactions to the resignations of 2 ministers in the Portuguese government, plus the emergence of cracks in support for the incumbent Italian government. Notice how the Portuguese bond yield surged beyond 7% in short order in response to this renewed political volatility, triggering reactions across the whole of Europe. 

Portuguese 10-year bond yield spikes up to 7+%

Let's have a quick tour of the various financial markets, to see where there are enduring trends to be identified. 

FX: US Dollar rules

As far as currencies go, the strength of the US employment data on Friday with 195,000 new jobs created in the month of June, plus upwards revisions to the jobs data for both April and May (BLS - US employment situation, June 2013), supported the US dollar, with the US dollar index (DXY) responding by making a new 1-year high.

US Dollar index breaks a new 12-month high

Sterling has been a major loser in contrast, with GBP/USD dipping below $1.50 following the Bank of England statement. 

Bonds: Still making new lows

The bond markets have not managed to reverse their bearish trend, with bond indices still sliding lower following the various central bank statements and the US economic data releases on Friday. Not yet time to dip back into buying government bonds, just yet then. 

US Treasury bond ETFs hit a new 12-month low on Friday

Commodities: Industrial metals, foodstuffs still weak as well

Another area not yet ready for buying is the commodities space: despite sizeable slumps in industrial metals, precious metals, and foodstuffs over the last 12 months, there has not yet been any discernable change in underlying trend... The mining sector continues to mirror this commodities malaise, still the worst-performing sector in the European stock market in the year to date.

Sugar dives ever lower

Don't try to catch this European Mining falling knife

Stock Markets: Small-caps holding up best,
No reason to return to Emerging markets yet

Looking at the UK and US stock markets, the outperformance of small-cap stocks continues to surprise me. However, they remain of course a good play on improving economic momentum in both countries, particularly relative to other areas such as Banks (which tend to be large-caps) or even Emerging Markets. Within Asian equities, Japan clearly remains the place to be, with the Baillie Gifford Japan investment trust (BGFD) returning to within a whisker of its 2013 peak on Friday.

US S&P Smallcap 600 Index Breaks New Highs

While UK Small-caps also look ready to return to recent highs

However, within European large-caps I would be wary of the Banks sector which has broken its 200-day moving average, while Emerging Market equities remain firmly out of favour. 

No inflection point yet for Emerging Market equities

And European Banks also look vulnerable

Conclusion: Small-Cap stocks look good, but beware Banks, Commodities

Stay long UK, US small-caps, and housing-related areas including Lumber (but not US homebuilders, which have already benefited from enormous revaluation). Stay long Japanese shares too, although the Yen will likely weaken further against the US dollar.

In contrast, there is a long list of financial assets to avoid or even short outright potentially: Emerging Market equities, European banks, industrial metals like copper and the related Mining stocks, and European Oil & Gas stocks. This is not to mention most commodity foodstuffs like sugar and coffee, which continue to touch new 12-month lows. 

Good luck for Monday and hope you are profiting from the belated arrival of Summer in the UK and France,

Edmund

Video: Banking on Longer-Lasting Stimulus?