The world’s pain is America’s gain
America has Three Extreme Advantages.
Our ability to push out more revenue when the foreign economies are weak, is strong and apparent. The US has been enormously beneficial of capital inflows, the buying of debt has done nothing but rise and rise. plus interest rates are still low. Plus confidence in borrowing is still looking positive, and has been on a steady path upward. These are the commonalities put America at a definite advantage, while foreign countries prospects, do not look so well.
These simple factors put American Investors ahead for the Global Race:
- Falling Oil prices and surplus
- Treasury yields
- The U.S. recently became the world’s leading energy producer.
We also have lower energy costs, since the downturn of the Global Economy.
The Global Market is not Immortal
There have been major economic downturns Gasoline prices have dropped nearly a quarter per gallon since the start of June. 60% of our oil consumption is Net imports, that’s due to the worsening surplus.
Where America is still sitting on gains and increasing, Vehicle sales rose to a seasonally adjusted annual rate of 17.5 million in August, the most since January 2006, according to data from Ward’s Automotive Group.
The top financial markets are strong, and opportunities in the US, far exceed the weak economies of some of the worlds power countries. Its definitely the time to pick where to put our hard earned money, while that’s a skid in the dust compared to the billions of dollars that America pumps out compared to the rest of the world.
El-Erian: Investors Must Prepare For A ‘Reckoning’ In The Markets
Investors are too optimistic and need to prepare for tough times ahead, warns Mohamed El-Erian, Allianz’s chief economic adviser and former CEO of Pimco.
El-Erian says the financial stress created by the coronavirus pandemic is “far from over,” in a recent op-ed piece for the Financial Times. He expects a “reckoning” as liquidity concerns spread from the most vulnerable businesses to sovereign borrowers.
What Investors Can Do
Investors can get ahead of the coming troubles by not buying assets at “valuations stunningly decoupled from underlying corporate and economic fundamentals,” he said. Instead, they can focus on the recovery value of their assets to get ahead.
Because the country avoided the worst-case projections for the pandemic, a sense of complacency has overtaken investors. El-Erian says all the liquidity created by government money printing coupled with a surge in new retail investors has helped push stocks higher.
“Liquidity-driven rallies are deceptively attractive and tend to result in excessive risk-taking. This time, retail investors are front and center.”
El-Erian also says you can see cracks starting to form if you know where to look. This is despite the stock market surging higher.
“There are already plenty of worrying signs: a record-breaking pace for corporate bankruptcies; job losses moving from small and medium-sized firms to larger ones; lengthening delays in commercial real estate payments; more households falling behind on rents and continuing to defer credit card payments; and a handful of developing countries delaying debt payments.” says El-Erian
He adds that investors are all too happy to ignore these worries. Some even believe that the government will step in and provide help.
“Yet, judging from a range of market indicators, investors are showing insufficient concern. Some continue to expect a sharp, V-shaped recovery in which a vaccine, or a build-up of immunity in the population, allows for a quick resumption of normal economic activity. Others are relying on more backstops from governments, central banks and international organisations.”
How Things Can Fall Apart
Should we not see a v-shaped recovery or a vaccine soon, things could quickly fall apart. Also, El-Erian warns the destruction will spread beyond the financial markets.
“The potential damage is not limited to finance. Disruptions in capital markets could also undermine the already sluggish economic recovery by making consumers more thrifty, as they worry about their job prospects, and by encouraging companies to postpone investment plans pending a clearer economic outlook.”
This means investors need to be prepared and shift their investing approach.
“The investing challenge may well shift in the months ahead from riding an exceptional wave of liquidity, which lifted virtually all asset prices, to steering through a general correction in prices and complex individual non-payments, says El-Erian.
He adds, “No wonder, then, that an increasing number of asset managers are raising funds in the hope of deploying a dual investment strategy.”
“The first involves waiting for a correction to buy rock-solid companies trading at bargain prices. The second involves engaging in well-structured rescue financing, debt restructurings and collateralised lending as countries, and some bankrupt companies, seek to reorganise and recover.”
Investors should also consider increasing their cash position to have dry powder ready to go. They should do so in case we get the correction that El-Erian expects.
Millionaires Sign Petition To Voluntarily Increase Their Own Taxes
A group of millionaires has signed a petition asking for the government to force them to pay higher taxes. They did so in an effort to help the global recovery from the coronavirus pandemic.
The group, which includes the likes of Ben & Jerry’s co-founder Jerry Greenfield, Walt Disney Co. heiress Abigail Disney and former BlackRock managing director Morris Pearl, call themselves “Millionaires For Humanity.” Their sole objective is to encourage governments to increase taxes on the world’s wealthiest individuals to help pay for the billions of dollars needed to support health care, schools and security.
The letter states: “As Covid-19 strikes the world, millionaires like us have a critical role to play in healing our world. No, we are not the ones caring for the sick in intensive care wards. We are not driving the ambulances that will bring the ill to hospitals. We are not restocking grocery store shelves or delivering food door to door. But we do have money, lots of it. Money that is desperately needed now and will continue to be needed in the years ahead, as our world recovers from this crisis.”
Millionaires Call for Higher Taxes
The letter continues by asking governments to raise taxes on “people like us. Immediately. Substantially. Permanently.”
The group warned that the impact of the crisis will last for decades. They also mentioned that it could push 500 million people into poverty. Hundreds of millions of people are at risk of losing their jobs, many permanently, the group said. Nearly 1 billion children are out of school due to the pandemic. They also mentioned that many of these kids lack any resources to continue their education.
The petition adds, “Unlike tens of millions of people around the world, we do not have to worry about losing our jobs, our homes, or our ability to support our families. We are not fighting on the frontlines of this emergency and we are much less likely to be its victims.”
“So please. Tax us. Tax us. Tax us. It is the right choice. It is the only choice.”
This petition serves as Pearl’s second attempt to make millionaires – himself included – pay higher taxes.
A Similar Call
He wrote a letter last year supporting the “millionaire’s surtax” introduced in Congress. In it, he said any new tax plan has to be “relatively easy to enact and relatively hard to avoid.”
“Rich people like me are good at dodging taxes. We can lobby to stop new taxes from ever becoming law, or if they do get enacted, find loopholes to get around them.”
“Any plan to tax me and my fellow wealthy Americans needs to be relatively easy to enact and relatively hard to avoid,” Pearl also said.
The millionaire’s surtax, as Pearl points out, would only affect married couples making more than $2 million per year. Alternatively, it also affects a single tax filer making more than $1 million.
“This tax would simply add 10 percentage points to the existing tax rates paid by couples making over $2 million a year and singles making over a million. Though it would only apply to the wealthiest 0.2 percent of taxpayers like me (or about 330,000 taxpayers) the millionaires surtax would raise an estimated $635 billion over 10 years, according to the Tax Policy Center.”
Pearl, undoubtedly knowing that many will doubt his motives, says he’d rather pay higher taxes than see his country falter economically.
“You may well ask: Why would anyone push to pay higher taxes, like I’m doing by supporting the millionaires surtax? It’s because I know it’s not actually in my long-term economic interests for the United States to become more and more like a developing nation, with a tiny elite at the top of the mountain and everybody else struggling for a foothold.”
Thus far, 80 individuals have signed the Millionaires For Humanity petition.
As Earnings Season Begins, Prepare For A Bumpy Ride
The stock market has rallied nearly xx% in the second quarter of the year. However, don’t expect the upcoming corporate earnings season to paint an equally rosy picture.
Expectations are for Q2 corporate earnings to be the worst in more than 10 years. It dates back to the depths of the financial crisis.
Adding to the uncertainty for investors, a significant number of companies have withdrawn their guidance – including almost a third of S&P 500 companies – and many more have yet to provide quarterly updates ahead of their scheduled earnings release.
“There’s a deficit of information that needs to be filled at some point,” said Sebastien Leburn, senior portfolio manager at Boston Private, during an interview with MarketWatch.
A Possible Disconnect from Reality?
That means investors will only be able to start matching up actual corporate performance with the stock performance on the earnings call. That could lead to some massive repricing if the stock prices have disconnected from reality.
“That’s why I think earnings will be very important, because they’ll provide a dose of reality,” said Brad Cornell, professor emeritus of finance at UCLA. “They are going to tell us exactly whether a company is on a path that justifies this run-up.”
“It’s all about clarity and having some guidance,” said Boston Private’s Leburn. “Without that, you have nothing to work with.”
Particularly worrisome are the expectations for year-over-year growth estimates for earnings per share. On March 31, expectations were for an 11.1% decline in EPS growth during Q2.
As of yesterday morning, that decline in EPS growth has ballooned to a -44.6%, according to FactSet data. That would be the largest decline in earnings since the fourth quarter of 2008. In that year, earnings fell 70% in the depth of the financial crisis.
Somehow, this massive decline in EPS growth since the end of Q1 has coincided with the stock market rallying xx%. This provided bearish investors with more proof that a detachment exits between the markets and reality.
The Rally’s Vulnerability
The stock market rally could be particularly vulnerable should just one or two of the larger S&P 500 companies post disappointing numbers.
Just five companies now make up more than 20% of the index. These include Apple Inc., Microsoft Corp., Amazon.com Inc., Google parent Alphabet Inc., and Facebook Inc. Additionally, a poor earnings report from any one of those companies could drag the index down. It can even bring the rally to a grinding halt.
It’s unlikely that one of those five companies will decide to “kitchen sink” the quarter. However, you can expect many companies to take advantage of the pandemic to flush all the bad news, bad ideas, and bad decisions out at once.
“Second-quarter earnings will likely be a ‘kitchen sink’ report from many companies,” said Marc Lichtenfeld, chief income strategist with the Oxford Club, an independent investment newsletter publisher. “They can throw in all of their write-offs and other expenses and know they will likely be forgiven for an earnings miss due to the extenuating circumstances.”
Most importantly, investors need to view corporate performance and stock performance as two completely separate indicators of a company’s overall health.
James Gellert, CEO of Rapid Ratings, a data and analytics company that assesses the financial health of private and public companies, says “Nobody should equate strength in the S&P 500 with underlying corporate strength.”
Buckle up, the next few weeks could be a bumpy ride.
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