Market Perspective for November 28, 2014

This year, Black Friday may be best remembered for OPEC’s Thanksgiving Day sale on black gold, rather than holiday shopping. The oil cartel’s decision to keep oil production levels elevated sent prices tumbling on Thursday.

Heading into Thursday, most oil bears were expecting OPEC to make a token cut in production, but the decision to hold production levels shocked the market and sent West Texas Intermediate Crude below $70 a barrel. This move alone may cause a drop of approximately 15 cents at the gas pump over the coming weeks. Venezuela was desperate for production cuts because the socialist economy is on the verge of collapse as foreign reserves drain. The country recently received a $4 billion loan from China, but spent one-third of it in one week trying to defend the value of their currency. At the rate Venezuela is bleeding capital, its foreign currency reserves could be exhausted within three months.

Oil exporter Nigeria moved to devalue its currency earlier in the week. Norway and Canada saw their currencies weaken on Thursday, and Russia’s ruble again tumbled. The countries most at risk from the oil price decline are those with smaller and less developed economies where the energy sector dominates as a share of GDP. Venezuela faces an acute crisis because it has to repay U.S. dollar denominated bonds and it is fast running out of U.S. dollars. A default in Venezuela would affect global markets because the country makes up more than 5 percent of many emerging bond indexes.

This is all good news for the U.S. consumer a stronger U.S. dollar will push down the prices of other commodities along with the cost of imports. It will however, be problematic for the energy sector. Broad energy funds were down more than 6 percent in early trading on Friday. In contrast, transportation and retail sectors are set to benefit from falling energy prices amidst a growing economy. SPDR Retail (XRT) was up more than 1 percent in Friday trading, as was iShares Dow Jones U.S. Transportation (IYT).

This week the Bureau of Economic Analysis increased its estimate of third quarter GDP growth to 3.9 percent. The spike in growth was due to rising exports, lower imports and more fixed asset investment, even though the consumer has remained largely on the sidelines. The drop in oil prices could easily entice people to spend more during the holiday season and allow the economy to finally fire on all cylinders. A strong dollar, weak commodities and an improving U.S. economy were the conditions for the bull market rally in the late 1990s, which commenced after Republicans won control of Congress under a Democratic president. Similar factors are in place this year. That said, volatility is likely to return in 2015 as oil and commodity exporting countries run into trouble, but prospects look good for extended growth in the United States.

ETF Watchlist for November 26, 2014

United States Oil (USO)
SPDR Energy (XLE)
United States Natural Gas (UNG)
First Trust ISE Revere Natural Gas (FCG)
Global X Nigeria (NGE)

Energy ETFs are in focus this week as OPEC meets on Thanksgiving Day in Vienna. The Washington Post dubbed this week’s meeting as “the most important in years” and investors are in near unanimous agreement. OPEC is weaker than ever because of, ironically, high prices.

OPEC has been facing competition from Russia for more than a decade after it grew to become the world’s largest oil producer in the 2000s. Over the past few years, the shale revolution in the United States has us poised to surpass Saudi Arabian production. Shale oil isn’t a new discovery and the technology needed to tap these reserves is decades old, but low prices had made it unprofitable. High prices have changed the picture and rising production outside of OPEC has reduced its ability to control prices. Mix in a slowing energy demand, partially a result of China’s economic reform efforts, and OPEC is in a tight spot. Several member states are in financial straits. If OPEC cuts production to raise prices, non-OPEC members will benefit and may grab market share. If OPEC doesn’t cut production, they can push high cost shale producers out of the market, but those OPEC nations will still be earning less due to lower prices.

One important aspect of the oil market is that prices are set by the marginal buyer, and that buyer needs someplace to store the oil. Recently, China has been supporting prices by buying up cheaper oil, but even China will eventually run out of storage. If there’s no present demand for oil production and buyers have no place to store their oil, prices could tumble.

Countries that rely on oil prices are starting to see their currencies tumble. On Tuesday, Nigeria devalued their currency and raised interest rates in order to defend their rapidly depleting foreign reserves.

The charts below show rising natural gas prices are helping to stabilize the equity ETFs in the energy sector. Equities are forward looking and investors may also be signaling they believe oil prices will stabilize. Whether that happens may depend to a large degree on what happens at the OPEC meeting tomorrow.

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iShares DJ Transportation Index (IYT)

Transportation stocks remain in a strong uptrend. Yesterday, the Bureau of Economic Analysis released their second estimate of third quarter GDP growth and it increased from the initial estimate of 3.5 to 3.9 percent. A rise in exports and drop in imports helped drive growth in the quarter, as did non-residential fixed asset investment. The one segment on the economy that wasn’t up to speed was the consumer sector, but that has kicked into gear in the fourth quarter thanks to falling oil prices. The U.S. economy is now firing on all cylinders and the highly sensitive transportation sector is poised to benefit.

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PowerShares U.S. Dollar Index Bullish Fund (UUP)

The discussion of the oil market above is very important for the U.S. dollar. Until now, the U.S. dollar has been rallying based on short-term trends: central bank actions in Japan and central bank talk in Europe. The surprise interest rate cut by China on Friday has the U.S. dollar gaining on Asian currencies as well. Everything is working in favor of the dollar, but a major bull market in the U.S. dollar is often accompanied by turmoil overseas. If oil prices tumble, countries such as Nigeria will be at great risk of a currency crisis that could spill over into other emerging markets, providing the fuel for a much larger U.S. dollar rally.

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db X-Trackers Harvest CSI 300 A-Shares (ASHR)

Just when it looked as if Chinese stocks had run out of steam, the People’s Bank of China (PBOC) reignited the market with an interest rate cut. The Hong Kong-Shanghai stock connect scheme saw a big first day on Monday of last week, but interest declined over subsequent days. The PBOC’s decision to cut rates ignited stocks, sending some financial sector equities up double digits in one day. Whether this rally lasts is another question. Rate cuts typically herald bad news because central bankers are a lagging indicator: they start cutting rates once a downturn is well underway and they raise rates well after the recovery is going strong. Rising bad debts at Chinese banks, which make up a large portion of many China indexes and ETFs, could weigh on stock performance. On the other hand, Chinese stocks are still very cheap, as they are still technically in a bear market that began in 2008.

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iShares Barclays 20+ Year Treasury (TLT)

Treasury bonds could be on the verge of another breakout, which would also mean interest rates are headed for a tumble. Shares of TLT are climbing back towards their high for the year and building a rounded bottom pattern that often leads to a bullish breakout. Although bonds tend to do well when stocks do poorly, if there is a major U.S. dollar rally or turmoil overseas, foreign buyers of treasury bonds could hold interest rates low even as the U.S. economy and stock market remain strong.

Lower interest rates would be good news for interest rate sensitive sectors such as housing, real estate and utilities. All three sectors have been performing well and are at or near their highs for the year.

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WisdomTree Emerging Markets Dividend Growth ETF Has Potential

WisdomTree Emerging Markets Dividend Growth ETF Has Potential

A Seeking Alpha Contribution

Summary

  • DGRE has a 30-day SEC yield of 2.9%.
  • Although DGRE has a short history, WisdomTree has a good track record with other dividend growth ETFs.
  • DGRE is very underweight China and financials relative to other emerging market ETFs.

Investors hunting for dividend growth have two options available. One is the very low volume EGShares Emerging Markets Dividend Growth ETF(NYSEARCA:EMDG). Another fund with a bit more volume, though still on the low side, is the WisdomTree Emerging Markets Dividend Growth ETF (NASDAQ:DGRE).

Index & Strategy

DGRE tracks the WisdomTree Emerging Markets Dividend Growth Index. This index is a subset of the WisdomTree Emerging Markets Dividend Index, selecting stocks from the index based on dividend growth characteristics. Companies are ranked on long-term earnings growth expectations, plus the three year average return on equity and three year average return on assets. Holdings are weighted by dividend payments, not yield….To Continue Reading, Please Click Here.

*Please note, this article was written and published as a contribution for Seeking Alpha. To finish reading the article you will be redirected to their site.

Contrarian Perspective: Are Brazil ETFs Now A Buy?

Contrarian Perspective: Are Brazil ETFs Now A Buy?

A Seeking Alpha Contribution

Summary

  • Brazil has endured a litany of bad news for investors in the past months, topped off by the recent re-election of Dilma Rousseff as president. The markets have overreacted.
  • The Bovespa, the Brazilian stock market, has fallen more than 15 percent since the beginning of September, and now offers value with a 6.9 P/E ratio.
  • The market has taken the recent bad news and risks into account, and is poised to move upwards as soon as there is a catalyst.
  • The top ETFs to invest in now are EWZ, BRF and DBBR. DBBR is the best option, as it hedges the currency risk.

A contrarian investor attempts to make a profit by going against the conventional wisdom, especially when they believe that the crowd is mispricing securities due to extreme pessimism. The Bovespa, the Brazilian stock market, has fallen precipitously from its recent high of 61,896 on September 2 to sit at 51,772 at the close on November 14. That’s a 15.3 percent drop. It’s true that most of the Brazil-related economic and market news has been bad lately, and there hasn’t yet been a catalyst to draw investors back into the exchange. However, given that all of these negatives are currently accounted for by the market – and that the market likely overreacted to the re-election of Dilma Rousseff as president – Brazil is a buying opportunity for contrarian investors… To Continue Reading, Please Click Here.

*Please note, this article was written and published as a contribution for Seeking Alpha. To finish reading the article you will be redirected to their site.

Market Perspective for November 24, 2014

Global stocks are off to a strong start on Monday, thanks to China’s decision to cut interest rates. Chinese listed shares in Hong Kong rallied more than 3 percent on Monday and European markets followed with a positive open.

China’s decision to cut rates is good news for the U.S. dollar, which could reach a new multi-year high over the coming weeks. With China now cutting rates and the European Central Bank talking about doing more, many of the world’s major economies are weakening their currencies. In addition to central bank actions, changes including the shale revolution in the United States, continues to support the dollar. Today, the Financial Times is reporting that U.S. oil imports from OPEC are at 30-year lows. This is all strongly positive for U.S. stocks and bonds.

Trading on Monday and Tuesday will set the tone for the week as the U.S. market will be closed on Thanksgiving. Additionally, volume is typically light on Wednesday and again in the half-day trading session on Friday. Even though it is a shortened week, there are some big earnings announcements, led by Hewlett-Packard (HPQ). The company is expected to report an increase in earnings and a decline in sales on Tuesday after the market closes. A few retailers will also report this week, including Tiffany (TIF).

Economic data will be light, but on Tuesday the BEA will announce the second estimate of third quarter GDP growth. Analysts expect the revised number will be 3.3 percent, down from the initial 3.5 percent growth rate announced in October. Several consumer data points will be released, including consumer spending in October and consumer confidence in November. All are expected to be positive in the wake of lower oil prices, with the stronger U.S. dollar also chipping in some support for consumers.