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Federal Reserve Leaves Rates Untouched

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Federal Reserve Leaves Rates Untouched

The Federal Reserve has yet again failed to change interest rates.

Interest rates have remained frozen since last December.

Rates remain the same

Janet Yellen, Chair of the Federal Reserve, announced on June 15th that yet again interest rates would remain the same, despite slow signs of growth in some regions of the economy.

Interest rates rose for the first time since the financial crisis in December 2015, and the Federal Reserve have not raised the interest rate since.

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Why do rates remain frozen?

The Federal Reserve is currently reluctant to increase interest rates for some reasons, these include:

  • The rate of employment has slowed down
  • Fixed investments in business have been cautious
  • Market measures of inflation have fallen
  • The upcoming UK referendum regarding the EU
  • The German 10-year bund remains small

The key focuses for keep interest rates unchanged, however, have been the decline in the job market and the EU referendum in the UK (Brexit).

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Slow Jobs Market

The slowdown in the jobs market has concerned the Federal Reserve.

Work vacancy production plummeted in May 2016, the Federal Reserve are planning to review the figures in July to see if there are signs of improvement in the jobs market this month.

The vacancy production in the US fell to the lowest levels in six years in May 2016.

While the figures for job production are disappointing, Loretta Mester, Federal Reserve President in Cleveland, has reportedly stated that we should not focus on one number too much.

She believes there are many factors to take into consideration such as seasonal demands.

Job production has been falling since February when the rate of job production was 233k.

The rate fell to 186k in March and 123k in April.

The last recorded figure was in May when job production dropped to 38k.

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Brexit

Yellen has said that the upcoming Brexit has influenced the Federal Reserve’s decision to keep interest rates unchanged.

Opinion polls for the upcoming referendum show that results are still close.

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Yellen has warned of the possible financial consequences that the results of the referendum could have on global markets.

The Bank of England has recently stated that the UK leaving the EU would cause a global financial crisis.

Signs of growth in the markets

Although it may not appear so, there is evidence of growth in the US economy.

The Federal Reserve predicts that unemployment will remain below 5% for the next three years.

Earlier this month there were reports that the manufacturing industry experienced an unexpected boost.

Manufacturing companies have welcomed the news, but they have remained cautious.

They have called the increase a move in the right direction.

The journey to economic recovery

There have been signs of a US recovery for years.

With this in mind, lack of change in interest rates have surprised and frustrated many.

The US economy started to show signs of growth back in the second half of 2009.

Current production of services and goods have risen 10% higher than its pre-recession figures, and is 15% higher than the lowest point during the recession.

The slowdown in growth, however, predates back before the recession.

The decline of growth is due to some different factors:

The US economy has had a slow journey to recovery, and there is still a long way to go.

The Federal Reserve’s interest rate policy has played its part.

Only so much will protect the US from the potential global economic breakdown.

Summing it up

The current state of the US interest rates has frustrated many people;  Janet Yellen and the Federal Reserve have been determined to keep interest rates at a steady level for six years.

There has only been one increase in six years, and the next growth is uncertain.

There are many reasons for the Federal Reserve’s reluctance to increase interest rates, mainly the current lack of job production and the upcoming UK referendum.

The fall of job production in May has had many people alarmed.

However, Loretta Mester has stressed that we cannot focus on one figure.

The upcoming UK referendum has the potential to cause an economic catastrophe.

The UK public remains evenly divided with opinion polls showing an almost 50-50 split.

The US has come a long way in its journey to recovery, but there is still a long way to go.

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Business

FDA’s Plan to Regulate Nicotine Levels a Major Blow for Big Tobacco

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Tobacco has an interesting history in the U.S. The country was basically founded on the stuff, giving Americans (and the world) a high opinion of the plant for centuries. But in the modern world, tobacco has lost much of its luster as the harmful side effects of smoking have been revealed. Yet Big Tobacco has survived and thrived in spite of the growing public opinion against smoking. Now, however, the FDA has just thrown a massive punch against the industry by announcing plans to cut nicotine levels to non-addictive levels.

Is this a Death Blow for Big Tobacco?

According to the CDC, every year there are more than 480,000 cigarette smoking related deaths in the U.S. And that includes more than 41,000 deaths from secondhand smoke. So it’s no surprise that the FDA and CDC would love to combat tobacco, or at least increase regulations on smoking. And now they’re doing exactly that as the FDA proposed on Friday a plan to cut nicotine levels in cigarettes to “non-addictive” levels.

Cigarette Butts | FDA’s Plan to Regulate Nicotine Levels a Major Blow for Big Tobacco

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That’s huge news for the tobacco industry — and not in a good way.

Big Tobacco has already been struggling after coming under fire in the UK after regulators issued stricter packaging rules. Those regulations stated that all cigarettes must be sold in standardised green packaging with graphic warnings of the dangers of smoking included on all labels.

That move shifted Big Tobacco’s focus more towards the U.S., where marketing could still be a major differentiator for a company. But that’s not such a sure thing anymore. With the FDA’s Friday announcement, tobacco companies should be worried.

The tobacco industry is a lot like the casino industry. People line up to give the company money, then come back and do it over and over again. With casinos, people leave once they run out of money. With tobacco, though, people don’t leave. Nicotine is extremely addictive, which is why cigarette companies are always willing to spend so much to acquire a customer. The lifetime value of a smoker can be measured in the millions.

Cigarettes | FDA’s Plan to Regulate Nicotine Levels a Major Blowf or Big Tobacco

Image via Visual Hunt

By lowering the amount of nicotine allowed in cigarettes, the FDA is making it easier for smokers to quit smoking And that means tobacco companies are about to lose a big chunk of their loyal client base. The regulations are meant to drive smokers to vaping and ecigs, widely regarded as healthier alternatives for smokers.

Watch the video from The National regarding FDA’s new nicotine level plan:

After the proposal was announced, tobacco companies such as Altria Group (MO), British American Tobacco (BTI), and Philip Morris International (PM) all tumbled down, with only PM closing positive. Expect shares of all tobacco companies to drop from the news, and plunge once the regulations go into effect.

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This publication provides general information about certain subjects, and should not be construed or taken as advice (legal, financial, investment, tax, or otherwise). Do not construe or take any information in this publication as a solicitation, offer, opinion, or recommendation to buy or sell any securities, bonds, or other financial instruments or to provide any legal, financial, investment, tax, or other advice or service about the suitability or profitability of any financial instruments or investments.

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Commodities

Top 4 Gold Investment Strategies

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Gold is a hugely popular investment for many finance-minded people.

Several hedge fund managers have publicly espoused their endorsement of this precious metal, especially since the 2008 economic crisis and subsequent recession.

It is non-corrosive and carries a weight and prestige, unlike any other asset.

With a remarkably constant price over the last 100 years, it is also gaining popularity thanks to the disillusionment of many investors with the Fed’s toing and froing.

If, like them, you are looking to use it to expand your portfolio, read on for the ways in which you can do so.

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Physical Ownership

This can be done in the form of bullion, coins, or jewelry.

Bullion is gold before it has been coined or melted down into other shapes.

Having the physical item gives a security unparalleled by any other form of investment.

In any event, even a financial crash, the item cannot be taken from you.

That is unless your house is burgled.

But we can’t prevent that.

Even in other forms, it still mirrors the market price.

Gold brokers don’t mind what form it is in, be it a necklace, chain, ring or what have you.

Gold is gold if it is up to scratch.

On the flip side, you often have to pay a premium to obtain and store gold as well as insurance costs.

And since it is classed as a collectible, it comes under this tax burden.

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An Exchange Traded Fund or ETF

This is a form of indirect ownership that allows investors to obtain gold exposure easily.

There are many different ETFs to choose from.

One of them is SPDR Gold Shares, which allows investors to own shares in its gold bullion-holding trust.

Or, you could invest in an ETF that holds stocks in a basket (a set of) gold mining companies.

These are like the previous in that they allow a low-cost substitute for physically owning gold, but they do carry certain risks.

The main concern people have with this form of gold ownership is the one they have with any other investment inequities or intangible goods (as in buying a stake in something that produces gold rather than the gold itself).

These carry a basic risk, just as any investment in a company carries a basic risk: the security of the deposits that are backed by the shares, the performance of the company in question, the economy in which the company is located (a basket could have companies all over the world and in some unstable political climates).

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Gold Mutuals

Gold mutual funds are for those who are comfortable and familiar with mutual fund investing, and in these, you can invest in the stocks of companies whose primary (but not necessarily only) revenue is gold mining.

One of these is the FSAGX, or Fidelity Select Gold Portfolio, which has a mixed bag of exploration, development, production, and marketing of gold.

Part of it is dedicated to holding gold bullion.

Again, these carry the same risk as equity investments; it could increase or decrease depending on outside forces.

Compared to ETFs, mutual funds have lower liquidity, as their shares can only be redeemed at the price of closing, the end-of-day price, and also very often carry high expense ratios when compared to ETFs.

Here is a list of 16 notable ETFs.

Futures

A gold futures contract essentially offers a very highly leveraged investment.

There could be $5k in margin money (money borrowed to make the investment) that will give the buyer the right to a futures contract in a set amount of gold.

There is an ability to make profits far beyond the original investment.

But you could just as easily lose more than the original investment, and these are quite volatile and advised against unless one is an experienced and capable investor.

Final Word

One individual positively sick of the Fed’s policy over the last ten months is Stanley Druckenmiller, who is the former chairman of the Duquesne Capital hedge fund.

He is bearish on the stock market and bullish on gold, which is reasonable in the light of Brexit, the British electorate’s decision to leave the EU.

He sees the Fed as having no long term plan and merely trying to prevent short term disaster.

Prescient as always, Druckenmiller predicted equity markets being elevated to higher levels thanks to increased Central Bank activity in 2013.

Since then it has changed, with quantitative easing reaching its limit.

Using gold as a hedge investment in this light is advised by David Einhorn, Greenlight Capital’s President.

Like Druckenmiller, he believes QE has gone on too long, and it will only have negative effects on the economy.

He uses an analogy of QE ending up being a session of gorging on biscuits and cream when a cup of tea would have done in the first place.

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High & Low Quality Value Stocks: A Battle

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High & Low Quality Value Stocks: A Battle

There is no doubt that value stocks can outperform growth stocks

When the two are compared, the evidence clearly shows that this is true. 

However, the question becomes, which will exceed the other when talking about high-quality or low-quality value stocks?

The simple answer is that high-quality value stocks rarely outperform low-quality value stocks. 

In fact, in most cases it is the lower quality value stocks that will shine when the two are compared.

The following chart shows an example of the growth of $1000 investments between 2010 – 2015. 

If you look at the graph, you can see that low-quality investments were consistently higher.

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What does Quality Refer to?

The word quality can have numerous different meanings. 

When speaking regarding high-quality value stocks and low-quality value stocks; quality has a specific definition and meaning.

When used in this context, the term quality  is specifically referring the underlying company’s growth and profitability.

There are investors out there that will only invest in stocks that have proven themselves. 

These investors look at the numbers and insist on investing in nothing but those that have the numbers to prove they have continuous growth, and those that consistently come with high profitability.

The problem arises in the fact that past performance does not necessarily indicate how the stock will perform in the future. 

Yes, profitability and growth are characteristics essential to any good investment; but the way they carried out in the past should not be the only two factors looked at when considering what investments to make.

Highly profitable companies that have high growth rates are too often assumed to continue their success by investors. 

However, just because a company is profitable in the past does not mean that the firm will be able to keep its head above water forever.

When deciding, which investments should be made; investors should always look toward the future. 

The past is in the past, but the future holds new possibilities, new promises, and new challenges for each and every business in the marketplace. 

Just because a company performed at the top of their game in the past few years does not necessarily mean they will be able to keep it up for the next few.

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High Quality or Low Quality?

Information can be found just about anywhere on the internet. 

The truth is that anyone can post anything, and if they set up their web page correctly, you can find information that may or may not be true. 

For this reason, the best source of information continues to come in the form of Scholarly articles.

Scholarly articles provide information in the field by professionals of the field. 

There have been several scholarly articles that have addressed the topic of how value stocks over perform when compared to the rest of the marketplace. 

Similar terms used to define value stocks across these articles have been: Out of favor and low prices ratios.

However, very few scholarly articles look at the quality as a factor when discussing quality value stocks.

Further Evidence on Investor Overreaction and Stock Market Seasonality, a paper written in 1987 by De Bondt and  Thaler, explains why it is that stocks having recently risen the most are consistently outperformed by stocks that have fallen the most end up. 

The authors used their reasoning and explained that it was natural for the “winners” to become “losers” and vice versa because of the reversals that take place in operating performance.

Simply put, a reversal that takes place in an operating performance is simply another way of stating that high-quality companies shift to low-quality businesses and vice versa. 

The value stocks that the authors used in their study had low price ratios simply because investors automatically, and inaccurately, assumed that performance by these companies would continue to decline. 

However, stock prices climbed when things went differently than expected.

It’s all Cyclical

The Most Important Thing is a book written by the billionaire Howard Marks. 

It was here that he stated that “everything is cyclical,” which has become a famous quote within the industry and something all investors should take to heart. 

He also wrote the following two rules when writing his book:

  • No. 1: Most things will prove to be cyclical.
  • No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.

            Any investor, or any individual for that matter, wanting to make a profit dealing with the stock market should do the following:

  • Read the above two rules as mentioned earlier by Marks.
  • Read them again.
  • Live by this regulation.

Understanding that everything within the stock market is cyclical allows those who are planning to invest to avoid missing the best available opportunities available to spend their money. 

The truth is that low-quality value stocks typically have low price ratios as a result of their operating results being poor; while high-quality value stocks will typically have low-cost rates as a result of passing their peak within the economic cycle.

A + B = C, or something like that

            The Magic Formula Joel Greenblatt’s high stock screen, was created to allow investors a way of locating high-quality value stocks. 

What this screen does is finds stocks that are highly profitable but have cheap price ratios. 

The system takes each stock and ranks them based on two factors.  

Those factors are the earnings yield ratio and the return on capital.

Once the calculations have taken place, the stock that has the best combination of both factors is selected for the screen. 

The magic formula is a strategy that has been consistently proven to beat the S&P 500 through vigorous testing. 

The following graph shows a comparison between the magic formula and the S&P 500:

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How’s the Magic Formula Hold Up?

Wes Gray and Tobias Carlisle decided to test the Magic formula against just the return on capital factor and just the earnings yield factor and discuss the surprising results in a book titled the Quantitative Value

They used the period of 1974 to 2011 for part of their test. 

During this time, the found that the Magic Formula annually returned around 13.9%; compared to the nearly 10.5% returned annually by the S&P 500 during the same time.

When the study looked at the earnings yield factor; they did not filter for return on capital. 

The magic formula was shown to produce nearly a 16% return; which is 2% higher than what it is when screening for return on capital.

However, when looking at the return on capital alone; the return is right under the total return of the S&P 500. 

In fact, they are nearly equal. 

The magic number produced around 10.3% for the annual return when only looking at return on capital.

Quality Should Be Avoided

The truth is that quality should be prevented. 

However, it should not be avoided only with the intention of preventing quality itself. 

Remember that the whole point is to invest in stocks that are undervalued and have cheap price ratios.

Investors shouldn’t worry about how much quality the company has, but rather should select their stocks based on valuations. 

When investors pass over stocks that appear to have low profitability and low growth rates associated with them, they risk passing up on stocks that are on the verge of turning around.

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