The ECB is already in the midst of a $1.2 trillion Euro-QE program. As a result of recent comments, investors are now expecting him to boost the pace or magnitude of that program … cut European interest rates deeper into negative territory … or otherwise throw something else against the wall to see if it sticks. The ECB next meets on Dec. 3.
Of course, if QE actually worked to boost prices or growth, euro-zone inflation wouldn’t be running at a 0.1% rate. And Draghi wouldn’t have to talk about doing more QE just a year and change after he starting doing QE.
|Mario Draghi and the ECB Governing Council.|
But the question that matters most here and now is: Should you jump on board the Draghi Express?
Well, I have a handful of conservative, higher-yielding, higher-rated, non-economically sensitive stocks in my Safe Money Report. One of the names I recently put on is flirting with all-time highs. Another is very close to doing so. That goes to show there are some profit opportunities in select names.
But as you know, I’ve been fairly conservative overall — and the credit markets are a key reason. They simply don’t seem to be playing along with the excitement in equities, on up days, down days, or days that are in between.
Take the junk bond ETFs I closely monitor. They’re very close to fresh multi-year lows. The SPDR Barclays High Yield Bond ETF (JNK) is now down 5.5% on the year, and more than 15% from its mid-2014 peak.
Treasury prices have rallied this week as well, pushing yields lower, and the yield curve has flattened. That’s not what you generally see when the appetite for risk taking is on the up and up. And crude oil traded below $40 a barrel yet again, a lingering issue to keep in the back of your mind.
One other caveat worth mentioning comes from the Federal Reserve. The Fed surveys bank lending officers every quarter about trends in loan pricing, demand, and standards. The latest report shows that the slump we’re seeing in the credit markets is starting to spill over into the lending business.
Specifically, take a look at this chart. It shows the net percentage of banks that are tightening or easing lending standards. A reading below zero signifies that banks are easing, on average, while a reading above zero shows they are tightening.
|Tightening vs. Easing …|
You can see that more banks are getting stricter with commercial and industrial loans now than at any time in the last six years.
We’re nowhere near the peak tightening level we saw in the 2007-2009 cycle, or the recessionary peak from the 2000-2002 downturn. But it’s the trend higher that I’m closely monitoring. If banks continue to tighten the screws on borrowers, it’s going to put a damper on economic activity.
Bottom line: If you’re going to swim in bullish equity waters, make sure you’re aware of the credit turbulence beneath the surface. And if you want to add your prognostications and thoughts to the mix, make sure you also use the comment section on this page.
Where are oil prices going? What about stocks? And how will the fight against terrorism play out? Those are a few of the issues you were debating online in the last day.
Reader $1,000 Gold pointed to the positive impact of lower oil prices on the economy, saying: “Oil-producing countries are forced to pump full tilt to meet expenses — they can’t let up for a minute or they face financial disaster. Plus, anytime the price of crude rises, the frackers will move in and keep a lid on prices.
“Cheap oil is here to stay. This is hugely bullish for America’s economy as we depend on oil more than any other country in the world. This extra money saved at the pump every fill up will soon begin working its way back into the economy.”
But Reader Jim countered with the following argument: “Putting the U.S. oil producers out of business isn’t a good thing, and that is their goal. What do you think the Arab countries expect to get out if this? They want to retain their monopoly and hammer the heck out of the oil-consuming nations one more time before oil becomes obsolete.
“Also, there is also not one shred of evidence to indicate low oil prices are helping the economy or ‘working its way through.’ Look at retail sales. Would we have 94 million people not working and 50 million on food stamps? Deflation is a killer no matter what form it takes.”
Meanwhile, Reader Richard weighed in on other markets by saying: “Through 2015, the oligarchs and the elites from other countries have been buying U.S. assets. Because of dropping GDP and turmoil in places like Canada, Australia, Asia, the E.U. and others, they are moving their assets to safer ground.
“Perception is everything. They have been driving up Treasuries, real estate, equities, and the dollar. One thing I learned early on is there are a lot of people around the globe with a lot of money and it is headed to the States.”
Lastly, Reader Craig B. said: “The market is topping out, or is it? Suddenly investor doubts are creeping in. Bullish sentiment and confidence are giving way to worry and fear. For now, it’s a kind of holding pattern.
“But the way I see it, the market must eventually either break up or break down. … My guess is the next big move will be down, then way up as panic here is overshadowed by sheer panic in Europe over their weak currency and economy.”
Thanks for sharing. I believe the whole “Lower gas prices will lead to a spike in spending any day now, just you wait!” argument is wearing thin. Gas prices have been plummeting since July 2014 and there has been NO perceptible impact on sales.
If it hasn’t happened by now, it isn’t going to happen. I believe the reason is that the extra money being saved at the pump is just being socked away or spent on other items that have gone up in price.
As for stocks, I cannot stress enough how we should all be keeping an eye on the deterioration in credit markets. Every single time in history that credit conditions have weakened, lenders have tightened up, and junk bond markets have cracked, it has been bearish for equities. Will “this time be different”? Only time will tell. But those are dangerous words for any investor to latch on to.
Feel free to add any other comments you may have in the section below. I’d love to hear from you.
Terrorists attacked a Radisson Blu hotel in Bamako, the capital of Mali in western Africa. Roughly 170 people were taken hostage, while three were killed, when militants broke in around six in the morning local time.
Later on, local police and foreign special forces (including those from the U.S.) raided the hotel and rescued most of the hostages. Officials said at least 21 people were killed, although details were still sketchy. Mali is a home base for French forces who are fighting various terrorist groups in the region.
Belgian officials suggested they were closing in on the remaining terrorist responsible for the French attacks. It is believed Salah Abdeslam is still in that country, possibly somewhere in Brussels.
Hospitals and health insurers got hammered yesterday after UnitedHealth Group (UNH) said it wouldn’t meet profit targets. The culprit? Obamacare-compliant insurance policies, which could generate as much as $500 million in losses for the firm in 2016.
UnitedHealth is considering pulling out from that business, something that could lead to other insurers doing the same. That, in turn, would hurt hospital admissions and reverse the trend toward lower bad debt that boosted their shares in the last couple of years.
The New York Times weighed in on a key issue I’ve been covering namely, that higher-risk portions of the credit market are deteriorating. That’s making it harder for banks to sell off risky loans and bonds they funded, sticking them with hundreds of millions of dollars in potential losses. That, in turn, could lead to less M&A activity and tighter credit markets overall.
What do you think of the latest terrorist attack in Africa? Will it have repercussions elsewhere, and what do you think about our own nation’s safety? Would an exit by UnitedHealthcare threaten the viability of Obamacare? Should you be concerned about deterioration in high-risk lending markets? Let me hear about it below.
Until next time,
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