Wall Street’s biggest headline yesterday was the release of notes from the latest Federal Open Market Committee’s (FOMC) meeting and the results of the Fed’s stress tests on America’s 19 largest banks. In the statement released by the FOMC, the Fed expects moderate economic growth over the coming quarters and expects unemployment to decline gradually but noted it is still elevated. The Fed also reiterated its federal funds target rate range of between 0 and 0.25% through late 2014. While the economic update was important, it was the results of the stress tests that generated the biggest buzz.
Expect the next several months to be characterized by modest U.S. economic growth, elevated oil prices that will hit consumers, and uncertainty over the European sovereign debt crisis.
Every day, there are dramatic headlines highlighting the uncertainty of the global economy. In this volatile environment it is difficult to invest long term but as any great investor knows, there is always money to be made. It is impossible to ignore the interdependence we are forming with our smartphones. In the fourth quarter of 2011 alone 157.8 million smartphones were sold domestically. Smartphones are more profitable than regular cell phones because of the data plan and AT&T (T) and Verizon (VZ) have a dominant position as America’s most utilized cell phone networks. The industry is growing fast enough that you do not need to pick one of these great communications companies to invest in; owning both in your portfolio would be a wiser decision.
Credit default swaps (CDS) are a type of derivate that insures against the default of an underlying security. The investor pays the underwriter a premium and in return they receive a security that pays out the face value of the underlying security if it defaults. Purchasing CDSs allow investors to hedge their risk of loss on investments such as sovereign debt. Large banks and other financial institutions purchase default swaps to hedge their exposure to Greek and other European sovereign debt.
We see US corporate bonds as a safe investment because since the financial crisis, a large number of corporations have bolstered their cash holdings making them a relatively safe investment with a larger return than Treasuries. Domestic companies that do not rely heavily on foreign demand like JetBlue present a very attractive upside for investors.
Despite Standard & Poor’s recent downgrade of United States debt, from AAA to AA+, demand for Treasuries has skyrocketed. Yesterday, the attractiveness of U.S. government debt was reaffirmed. At the second of three auctions this week the Treasury sold $21 billion of 10- year notes at 1.90 percent, a record low yield. Recently, Fitch Ratings announced that it would not downgrade France’s AAA credit standing. (News, 2012) However, speculation of a downgrade and the expectation of a worsening sovereign debt crisis in Europe strengthened the appeal of U.S. debt. (Walker, 2012) Fitch said yesterday that there is a significant chance that Italy’s credit rating will be downgraded and that Spain’s credit will be reviewed, contributing to the appeal of stable U.S. debt comparatively.
Despite what you may have heard, U.S. gross domestic product will expand 2.1% next year, compared with 1.25% for all G-10 nations, the ten countries that agreed to make funds available to the IMF for drawing by members, according to Bloomberg’s survey of economists. This shows that the domestic economy is not as bad as the media and the general public perceives it to be.
Based on a Bloomberg News survey, the Fed is expected to start another round of Quantitative Easing (QE) by purchasing about $545 billion in home-loan debt starting next quarter. This is not uncommon for the Fed seeing as they bought $2.3 trillion of Treasury and mortgage-related bonds between January 2008 and June 2011. Some policy [...]
On Wednesday, November 23, Germany held an auction on ten-year bonds and was unable to sell 35% of the bonds, the highest proportion of unsold debt since 1995. The securities were sold at an average yield of 1.98% but the rate quickly rose to 2.13% in the secondary market following the auction. The rise in [...]
The recent financial crisis has opened up the eyes of economists and financial professionals around the world to the effects of globalization. Today, a new danger threatens the global economy; the sovereign debt crisis occurring across the European Union. Investors now recognize that the world has shrunk. Contagion, the likelihood of economic conditions spreading from one country to another, has significantly increased with globalization. Stock Prices in the United States are tied to the success or failure of the resolution of the European debt situation. As the graph below illustrates, the S&P 500 price index has been extremely volatile over the past 20 years, increasing over 100% in the late 1990s only to fall over 33% when the technology bubble burst in the early 20th century.