The Most Tax-efficient Investment

An AAII member recently asked, �What is the most tax-efficient investment?" Before you answer, stop and give the question some thought. The answer is not as straightforward as it may seem.

A few factors influence the tax efficiency of investing. One, of course, is the type of investment. Municipal bonds receive very favorable tax treatment, particularly if they are held until maturity.

A stock held for the long term can also be very tax-efficient. Since it is held for more than one year, it will qualify for long-term capital gains. An individual stock also gives the investor the ability to sell shares in increments. The latter allows any capital gains to be recognized over time, thereby limiting the size of the tax bill for any calendar year. Losses can also be strategically realized to reduce taxes. Mutual funds, even those managed in a tax-efficient manner, do not give shareholders any control over the timing of distributions.

Another factor is the type of account used. A Roth IRA is funded with aftertax dollars. Once taxes are initially paid (albeit at ordinary income tax rates), no additional taxes will be due. All capital gains accrue tax-free. Similarly, all income received will be tax-free. Even withdrawals are tax-free, subject to certain restrictions regarding age and holding periods.

Health savings accounts (HSAs) offer similar advantages, though with tighter restrictions regarding withdrawals. Capital gains and income accrue tax-free in traditional IRAs. Withdrawals are taxed at ordinary income rates, but those tax rates may be lower in retirement for those earning high incomes during their working years.

Then there is the strategy. An active trading strategy will realize more capital gains, and very possibly short-term capital gains taxed at ordinary income rates. Dividends are taxed at ordinary income rates if the stock is held for the less than the mandatory 61-day period to qualify for the reduced 15% tax rate (20% for high-income earners). Even an exchange-traded fund can be tax-inefficient if it is frequently bought and sold.

The final, and perhaps biggest, influence is the type of account an investment is held in. Referred to as asset allocation, this strategy uses the tax rules to your advantage. Place the least tax-efficient investments and use the least tax-efficient strategies in your tax-preferred accounts. Use your taxable accounts for the most tax-efficient investments and strategies. IRAs (traditional and Roth) are good for avoiding the tax bite of corporate bonds, mutual funds that are not tax-efficient, and investing strategies with higher levels of turnover. Traditional brokerage accounts are better suited for index funds, tax-efficient exchange-traded funds, long-term stock holdings and municipal bonds. A simple rule of thumb is to place investments that are taxed at your ordinary income tax rate in traditional and Roth IRAs.

Realize there is no single golden rule that will apply in every situation. Some judgment calls will need to be made based on your various accounts and investments. For example, losses realized in a taxable account can be used to offset gains; losses realized in IRAs cannot. If you are unsure of what the optimal strategy for your situation is, it can be worth the cost to speak with a tax professional.

The Week Ahead

The U.S. financial markets will be closed on Monday. On behalf of everyone at AAII, I wish you a happy and sunny Memorial Day.

Just three members of the S&P 500 will report earnings next week as first-quarter earnings season wraps up: Medtronic(MDT) on Tuesday, Michael Kors Holdings (KORS) on Wednesday and Broadcom (AVGO) on Thursday.

The week�s first economic reports will be April personal income and outlays, the March S&P Case-Shiller housing index, the May Chicago PMI and the Conference Board�s May consumer confidence survey, all of which will be released on Tuesday. Wednesday will feature the May ADP Employment Report, the May PMI manufacturing index, the May ISM manufacturing index, April construction spending and the Federal Reserve�s periodic Beige Book. May jobs data (including the unemployment rate and the change in nonfarm payrolls), April international trade, April factory orders and the May ISM non-manufacturing index will be released on Friday.

Only two Federal Reserve officials will make public appearances: Federal Reserve Board Governor Jerome Powell on Thursday and Chicago president Charles Evans on Friday.

About The Author - Charles Rotblut, CFA is the VP and Editor for American Association of Individual Investors (AAII). Charles is also the author of Better Good than Lucky. (EconMatters author archive here) 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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3 Years Of Painful Cuts To Bring Serious Oil Crunch

Total global oil production could decline for the next several years in a row as scarce new sources of supply come online. 

According to data from Rystad Energy, overall global oil output will fall this year as natural depletion overwhelms all new sources of supply. But the deficit will only widen in the years ahead due to the dramatic scaling back in spending on new exploration and development. 

Statoil says that global capex is set to fall for two years in a row, and is on track to fall for a third year in 2017 as more spending cuts are likely. "For the first time in history, we've seen cutting of capex two years in a row and potentially we risk a third year as well for 2017," Statoil's Chief Financial Officer Hans Jakob Hegge told Bloomberg in a recent interview. "It might be that we see quite a dramatic reduction in replacing the capacity and of course that will have an impact, eventually, on price." 

Oil companies are making painful cuts to spending, which will translate into much lower production than expected in the years ahead. 

Although markets have dealt with the supply overhang for the better part of two years, the surplus could flip to a deficit as early as this year, as declines exceed new sources of production by a few hundred thousand barrels per day. That widens to more than a million barrels per day in both 2017 and 2018. To be sure, there are extremely large volumes of oil sitting in storage, which will take a few years to work through. That will prevent any short-term price spike even if depletion surpasses new production. But Statoil's CFO said the world could start to see supply problems by 2020. 

According to a separate report from SAFE, a Washington-based think tank, the oil industry has cut somewhere around $225 billion in capex in 2015 and 2016, which will lead to global supplies 4 million barrels per day lower in 2018-2020, compared to what market analysts expected as of 2014. 

Of course, these figures are not inevitable. A sharp rise in oil prices would spur new investment and new drilling. In other words, deficits create profit opportunities for drillers, ushering in new supplies. The price acts as a self-correcting mechanism. 

The problem is that, unlike many other industries, resource extraction is extremely volatile, with supply responses very delayed. Many oil projects, after all, take years to develop. Supply overshot demand, crashed prices, and in response, supplies will undershoot demand in the next few years. The industry has always suffered from booms and busts, and there is little reason to think that it will change, at least in the short run. 

But we tend to have a myopic view on what to expect. When oil prices go up, people buy fuel efficient cars. When they go down, SUVs are back in style. When the world is dealing with too much supply, market watchers predict oil prices will stay low for years to come. If spot oil prices suddenly rise, forecasts are revised sharply upwards. 

Here's another example: the WSJ reports that oil prices are entering a "sweet spot," a range between $50 and $60 per barrel that could finally be good for the global economy � low enough to provide consumers with a bit of a stimulus, but high enough to keep the industry and capital spending afloat. Also, crude at $50, as opposed to $30, can provide a bit of inflation to the deflation-beset economies in Europe and Japan. "Crude between $50 and $60 would be the absolute sweet spot," Mark Watkins, regional investment manager at U.S. Bank Wealth Management, told the WSJ. "Everybody wins there." 

That is all well and good, but who expects oil to trade between $50 and $60 for any lengthy period of time? If there is one thing that we have learned over the past two years, it is that nobody has a crystal ball on prices. And if the industry indeed cuts capex for three consecutive years, at a time when demand continues to rise, the one thing we can be sure of is more volatility. 

Courtesy of Nick Cunningham. Oilprice.com 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Home Buying: Top 4 Reasons to Get a Brand New House

The idea of buying a new home is a nice one, but most people don�t actually buy a brand new home. In fact, when you actually go buy a new property the only reason it is new is because you haven�t lived there before. What you need to consider is instead of buying someone else�s old house, perhaps you should look into buying a brand new one instead and avoid all of the extra hassle that comes with an old home. Here are the top four reasons to consider buying brand new. 

You Can Put Your Own Touch On It 

Even though not all new builds are going to be completely customizable, you have a much better chance of asking for the contractors and builders to make changes and considerations if you are the first one in the house then if you are buying from another person. Understanding the nuances of how the home is built means that it�s a lot easier to make changes to it before it is fully built. And, if you are working with the original builders while they are still building the structure, then you might find they are more likely to make modifications to the structure and work with you on many issues. By taking the time to search DDProperty for new developments you will be able to get that much closer to the property of your dreams.  

Minimal Waste

Not everyone is going to think of the environment when they are attempting to turn a house into a home. However, when you think about all of the materials that are wasted during a renovation as well as the emissions of gasses that you are going to use for any chemicals and power tools, the idea that you can have your dream residence with minimal waste is a major advantage for some. Instead of just ripping out the time, effort, and energy that someone else put into a house years ago, you can truly get ahead if you just build the structure that you want the first time and the best thing is you will have it done quicker. 

Consider the amount of time that it takes to do demolition work on a residence and you can see how long a renovation job becomes. Not only are you just taking a sledgehammer to everything, but you also need to carry all of that debris out of the property and finally clean it up. This is all on top of the fact that you still need to be concerned with hidden wires, supports, and pipes within the walls. Demolitions take time and energy as well as money to haul it all away, according to an article on the Allstate Blog, so consider doing it right the first time and putting it all up by yourself.  

Professionalism and Warranties Included 

The professionalism of an original contractor can go a lot farther than an inexperienced novice who is only doing upgrades and renovations so that the house looks better cosmetically. You don�t know the craftsmanship of the work, and you also don�t know if it is fully safe let alone if it has been done to code. By working with the original builders you can possibly get property warranties as well as knowing the craftsmanship is safe and correct, according to the Federal Trade Commission. 

Trustworthy Neighbors 

While it might seem like a slightly unfair thing to say, sometimes you can find a great house but have terrible neighbors. And, even if your neighbors are nice, you don�t know if they are in the same monetary class as you are. This might not make them any less of people and it doesn�t judge them in any way, but if you buy a property and invest time and money into it, then the last thing you need is for a neighbor to bring down the property value of the neighborhood. 

When you go to buy a brand new house that is inside of a new home development, you not only get a brand new place to live, but you also are certain that most if not all of your neighbors are also getting brand new residences as well. The chances that any of them will actually turn around and move out again in the next few years is slim to none because who wants to waste all of that money on closing costs? By securing your spot in a quality neighborhood when it is being built from the ground up you will be able to lock in the property of your dreams while ensuring you know the other people who are going to be around you for a fairly long time. 

Know what you are getting yourself into long before you look for your dream house. If you are going to move into a place that can become your new address, then why not make sure you are getting exactly what you want to receive? It is a lot easier to do things right the first time than it is to restart, rip out, change, and hope that it was done correctly before. Look to see what you can have with a new home development and avoid the hassle today.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Chevron is the Poster Child for an Overpriced Market (Video)

By EconMatters

When reviewing the financial metrics of CVX, this stock is overpriced relative to the fundamentals of the company. CVX should Conservatively Retest $88 before year end. With over $42 Billion in Debt, a $50 oil price, and a 4% dividend this company is mismanaging capital right now trying to prop up the stock in the short term versus prudent fiscal management for the long term. This stock is a short on any pops into year end. Even with $60 oil this stock is overpriced as costs in the oil services sector are only going to go up from here! There are a lot of overpriced stocks right now, but CVX is one of the most offensive in our opinion.

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Politicians: It`s not the Jobs Stupid, It`s the Job`s Strategy Stupid (Video)

By EconMatters

We compare Germany and South Korea`s Business Development Strategy versus the United States - and how important top down leadership is in cultivating a strategic vision for a country`s growth prospects.

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What to Expect out of the ECB Meeting on Thursday (Video)

By EconMatters

I expect the Euro to appreciate against the Dollar after the ECB Meeting, going into a tepid forecast for the US Employment Report on Friday. We look at some key technical levels in the Euro currency, and what levels to scrutinize in terms of potential break out trades.

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Buy the VIX and Sell Equities into June Rate Hikes (Video)

By EconMatters

On Friday Janet Yellen gave the go ahead to rate hikes, and this change in Monetary Policy (Tightening) in not currently priced into financial markets.

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The Utopian Central Bank Financial Market (Video)

By EconMatters

Central Banks Need to either go all the way with Policy Goals, or get out of financial asset purchases altogether. The current stop and start cycling sets the financial markets up for huge crash scenarios every ten years.

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The 5 Fatal Flaws of Trading

The 5 Fatal Flaws of Trading

By Elliott Wave International

Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit -- and more importantly, do it consistently. How do they do that?

That's an age-old question. While there is no magic formula, Elliott Wave International's own Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don't claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person's life. Maybe you'll find one in Jeffrey's take on trading. We sincerely hope so.

The following is an excerpt form Jeffrey Kennedy's Trader's Classroom Collection eBook.

---

Why Do Traders Lose?

If you've been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn't seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can't seem to prevent that invisible hand from depleting your trading account funds.

Which brings us to the question: Why do traders lose? Or maybe we should ask, "How do you stop the Hand?" Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.

Fatal Flaw No. 1 -- Lack of Methodology

If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won't work over the long run. If you don't have a defined trading methodology, then you don't have a way to know what constitutes a buy or sell signal. Moreover, you can't even consistently correctly identify the trend.

How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn't matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can't fit it on the back of a business card, it's probably too complicated.

Fatal Flaw No. 2 -- Lack of Discipline

When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.

Fatal Flaw No. 3 -- Unrealistic Expectations

Between you and me, nothing makes me angrier than those commercials that say something like, "...$5,000 properly positioned in Natural Gas can give you returns of over $40,000..." Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.

Yes, it is possible to experience above-average returns trading your own account. However, it's difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader -- 50%, 100%, 200%? Whoa, let's rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them -- and achieve them -- you will fend off the Hand.

Fatal Flaw No. 4 -- Lack of Patience

The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.

That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you're a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.

All too often, because trading is inherently exciting (and anything involving money usually is exciting), it's easy to feel like you're missing the party if you don't trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.

How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don't worry about missing an opportunity today, because there will be another one tomorrow, next week and next month...I promise.

I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: "Aim small, miss small." I offer the same advice in this new context. To aim small requires patience. So be patient, and you'll miss small.

Fatal Flaw No. 5 -- Lack of Money Management

The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.

Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% - 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50 - $150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.

Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn't even address the size that they trade (i.e., multiple contracts).

To overcome this fatal flaw, let me expand on the logic from the "aim small, miss small" movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you're out altogether.

Break the Hand's Grip

Trading successfully is not easy. It's hard work...damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I've outlined, you won't be caught red-handed stealing from your own account.

14 Critical Lessons Every Trader Should Know Since 1999, our Trader's Classroom editor, Jeffrey Kennedy, has produced hundreds of actionable trading lessons to help traders spot opportunities in their own charts. This 45-page chart-packed eBook titled "The Best of Trader's Classroom" gives you our top picks: 14 of the best lessons every trader should see. Get Free, Instant Access to The Best of Trader's Classroom eBook.

This article was syndicated by Elliott Wave International and was originally published under the headline The 5 Fatal Flaws of Trading. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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It`s A Technological Arm`s Race (Video)

By EconMatters

I have made some changes to my Trading Rig Configuration to account for more Natural Gas Trading, the US Dollar Index, the VIX and Bonds.

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Another Shoe Falls After Manufacturing

Markit�s Services PMI fell to just 51.2 in May, dropping a rather large 1.6 points from 52.8 in April. That meant the combined US Composite PMI, which puts together both manufacturing and services, was barely above 50, registering just 50.8. As with all PMI�s the distinction around 50 is unimportant, what matters is the direction and for more than a single month. On that count, services reflect what we have seen in manufacturing: that the �rebound� in March and April was nothing more than a small relative improvement after the liquidation-driven start to the year. The economy didn�t get better, it for a few months just failed to get worse.

Read: Manufacturing Recession Goes Global

In terms of the Services survey, Markit reports several distressing indications including respondents� views for the immediate future:

May data highlighted a renewed fall in business optimism across the service economy. Reflecting this, the balance of service sector firms forecasting a rise in business activity over the year-ahead eased to its lowest since the survey began in October 2009. Anecdotal evidence suggested that uncertainty related to the presidential election and concerns about the general economic outlook had continued to weigh on business confidence. [emphasis added]

While I don�t want to overemphasize individual parts of individual sentiment surveys, it is quite a contrasting summation with the apparent self-delivered economic approval of the FOMC to execute the next policy communication (rate hike in name only). And this is not manufacturing, it is the services component that is supposed to steer the economy far away from the �manufacturing recession.� That was always a dubious proposition, particularly when so much of the supposed �services economy� itself relates to the transportation, management, and then sale of goods.

On that count, Markit�s Chief Economist Chris Williamson noted that May�s update reflected very poorly on measurement expectations for Q2:

Service sector growth has slowed in May to one of the weakest rates seen since 2009, and manufacturing is already in its steepest downturn since the recession.

Having correctly forewarned of the near-stalling of the economy in the first quarter, the surveys are now pointing to just 0.7% annualised GDP growth in the second quarter, notwithstanding any sudden change in June.

This is all a dramatic change condensed tellingly into a rather short economic window. The manufacturing sector has been shrinking for almost two years, but in the service sector indications (such as these PMI�s) had only pointed to a slowing from 2014�s supposedly upbeat pace. Even just six months ago, in the flash Markit US Services PMI for November, the mood was entirely different:

Looking ahead, service sector companies were upbeat overall about their prospects for growth over the next 12 months. However, the degree of positive sentiment remained subdued in comparison to the post-crisis average. Some panel members noted that signs of weaker global economic conditions were a factor leading to caution about the outlook for business activity at their units.

Williamson added:

The US economy is showing further robust economic growth in the fourth quarter, with the pace of expansion picking up in November.

Again, it�s another indication that �something� changed toward the end of last year. In November 2015, service businesses were suggesting only �signs of weaker global economic conditions� but now in May 2016 that has been transformed into �concerns about the general economic outlook� such that forward economic optimism is like 2009 and nothing at all like what is in Janet Yellen�s world. We don�t have to wonder why that would be, as even the FOMC has provided all the necessary indications about �global turmoil� as shorthand for the �dollar.�

Even from a purely psychological standpoint, two successive, massive global financial disruptions (which weren�t really about the stock market, though it shows you just how deep they were that they would so interrupt the third equity bubble this century) both of which were declared �impossible� would wear down a wide margin of those still waiting on Yellen�s recovery to occur. That has been the story throughout the slowdown back to 2012, as markets and economic agents alike have given the orthodoxy wide berth to continue to claim �it is coming� even though evidence for that view remained powerfully scarce. The belief may have been more emotional than rational (even �recession fatigue� after the Great Recession had seemed to linger in the air for year after year) as people beaten down by continued disappointment will latch onto even the most fantastical hope. That was QE3.

What was left of the �recovery�, then, was little more than that faith. Once the plausibility of the happy ending was sufficiently challenged, there was little left to offer actual economic support. The successive �dollar� events of the past year certainly erased a good deal of that plausibility; the first one in August was just enough to entertain doubts no matter how many times Yellen said the words �transitory� and �unemployment rate�, and then the bigger one in January clinched them. I think that is why we have seen this shift in apparent economic condition and outlook, and why it happened when it did.

When Citigroup�s economics team proposed in December that the �outlook for the global economy next year is darkening� I wrote that it represented, apologies to Winston Churchill, the end of the beginning. It was a starkly different view from what they had forecast the prior December (2014) or even in individual statements made by members of the team just months before.

What has changed since? For one, Citi seems to have sensed that the Fed�s role is only to make matters worse, thus their citation of yield curve inversion. More than that, the �manufacturing recession�, for whatever proportion of the economy it might directly effect, has become real not just in more indisputable fact but more so in what it suggests about the direction of the economy, services and all. Citigroup may still be lagging financial indications, especially the �dollar�, that were suggesting this fate long ago and projecting it into commodity and fixed income markets, but at least they appear to be approaching it with a refreshing accountability to something other than Yellen�s models and �next year�s� certainty.

Five months later, having gone through the second liquidation with no traction of a real economic rebound from it, phase shift does appear to be the growing prognosis. Whether or not that adds up to the historically conforming recession cycle isn�t clear, and may not truly matter in the end. As noted here, the more important factor is whether any recession would be a true cycle or just another ratchet down toward further and lengthy abyss. The PMI�s of late are in agreement that the slowdown is moving past the �manufacturing recession� phase to whatever it is that might await the economy next.

Courtesy of Jeffrey P. Snider, Alhambra Investment Partners (More from Alhambra Here)  

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Rate Hike? Chart Says Don't Bank on It

By Dana Lyon, Dana Lyon's Tumblr

Bank stocks spiked on rate hike speculation; however, potential chart resistance suggests their upside may be limited.  

The big news in the markets this week was the release of the Fed minutes and the market�s interpretation that impending rate hikes may be much more likely than previously thought. Now we spend exactly 0% of our time and resources pondering what the Fed is going to do or say. All of the necessary information gets filtered through the markets anyway. However, in the short-term, obviously Fed-speak can produce fluctuations. The funny thing, as we have mentioned before, is that these rumors and resulting fluctuations have a strong tendency to occur when markets are technically in position to support such a move.

For example, consider this chart we posted on Wednesday morning, prior to the release of the minutes. It shows that bank stocks, in the form of the KBW Bank Index (BKX), were hitting potential short-term support at the time, in the form of the short-term post-February Up trendline. Banks, as you may know, make up one sector that, on the margin (no pun intended), can benefit from rising interest rates.  

Regardless of whether this positioning led to the rate hike conjecture or not, banks were certainly in position to respond positively to the input. And respond positively they did, jumping some 4% to finish the week.

Now, before you bankers and rate hike enthusiasts get too bulled up, from a longer-term perspective, the chart is sending the complete opposite message, in our view. That is, the BKX is approaching, or hitting, significant potential resistance.

Here is the immediate-term resistance we are seeing just above 69 on the BKX chart (right where the rally stopped this week, by the way):

• The 61.8% Fibonacci Retracement of the April-May decline
• The 200-day simple moving average

From a longer-term perspective, if the BKX can get above this ~69 level, more significant potential resistance lies in the mid-71 area, including:

• The 61.8% Fibonacci Retracement of the July-February decline
• The 500-day simple moving average
• The post-July Down trendline
• The breakdown level from early January

In our view, this evidence forms a potentially substantial challenge to the post-February bank rally continuing much further. If that is the case, and if our notion of rumors occurring when markets are technically set up to receive them is valid, then perhaps the message here is � don�t bank on an impending rate hike.

________

Courtesy Dana Lyons' Tumbler (More Articles Here)   More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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ALL ETFs Are Complete Garbage (Video)

By EconMatters

We review the relative short term performance of the USO ETF in tracking the Oil Futures market, and it fails miserably as a proxy for the oil market.

The existence of these failed class of instruments is enabled by the reluctance of brokerages to offer futures contracts to their clients. How long has Fidelity had their customers investing in these garbage proxies through the years because they had no other options within their brokerage services?!  It is about time regulation shuts these garbage instruments down.

If you are going to offer a product or service, basic competency is a must, especially as an investment vehicle as it is hard enough to just get the direction right of an asset, an investor doesn`t need the additional stress of having the investment instrument itself being flawed.

Especially when the SEC has had 10 years in the case of the USO to review the performance of this ETF, and close it down due to massive incompetence as an acceptable proxy for the oil market. This goes the same for all the other boatload of ETF offerings of the last 15 years, where have the regulators been in the review process?

The obvious takeaway is that investors can never count on regulators, exchanges, members of the investment community, etc. to protect their interests. Just assume that everyone out there is trying to scam you as an investor.  Distrust everything, Caveat Emptor - Let the Buyer Beware. Just assume that you are the mark at the investing table so to speak, and avoid being the sucker by being highly skeptical of every investment vehicle until proven otherwise.

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3 Reasons Not To Give Up on China

By Terry Simpson, CFA, BlackRock

Strong pessimism has become the norm when conversations gravitate to China. Ever since last August�s domestic stock market crash and disappointing first-quarter economic growth, being a China bear seems to have become more popular. Most recently, negative sentiment has focused on China�s debt level, slowing growth and sluggish implementation of reforms.

But there are good reasons not to give up on China just yet.

China�s debt level is a problem but not at an imminent debt-crisis level.

China certainly has a high absolute level of debt, with levels much higher than those seen in other emerging market (EM) countries who experienced debt crises, according to Bloomberg data. But an imminent debt crisis seems unlikely, due to the different nature of China�s current debt.

First, consider who owns the debt. During the Mexico debt crisis in 1994, the Asian debt crisis in 1997 or the Brazil crisis in 2002, foreign investors were the dominant stakeholder. In contrast, according to UBS, more than 90 percent of Chinese debt is currently domestically owned.

Second, past crises centered around currency devaluations and foreign money flowing out. The potential for a Chinese currency devaluation is low, in our opinion. So, now it�s more about how Chinese investors feel about the debt issue. The irony is that the growth of Chinese debt is related to Chinese citizens� limited set of investment options: invest in debt or save (as capital controls restrict money from flowing out of the country). The corporate sector has been a large borrower, happy to issue debt to provide interest to the Chinese investor. Corporate debt grew from 102 percent of Chinese gross domestic product (GDP) in 2007 to 165 percent by 2015, as the chart below shows.

The national savings rate may in fact justify the high debt level, as some have argued, with Chinese savings matched to debt issuance. Case in point: China�s gross savings rate has been high for decades, averaging around 45 percent of GDP for the last 20 years, per the World Bank.

The Chinese economy still has the potential to grow, just not at double-digit rates.

The recent decline in China�s GDP to below 7 percent from an average of 10 percent from 1980 to 2010 has some worried that the country is on the verge of hitting the middle-income trap, and a dangerous downward growth streak is ahead. The numbers contest this worry. China�s real GDP per capita (person) is $8,100, compared with $56,000 in the U.S., $33,000 in Japan and an EM average of $10,600. Furthermore, there have been instances where EM countries have managed to escape the middle-income trap.

China is also likely to benefit from its 1.2 billion population. Creating economic growth will not only be about bringing people into the labor force, but it�ll also be about how to allocate those human resources efficiently. The relaxation of the Hukou system means people can move from rural areas to cities where economic growth is vibrant. This relocation process, still in progress, is likely to support growth going forward. According to the World Bank, China�s urban population was 54 percent at the end of 2014 versus 81 percent in the U.S. and 79 percent in Mexico. Lastly, the elimination of the one-child policy has the potential to boost household consumption in the short term and to slow China�s worsening demographic picture over the longer run.

Policymakers recognize what needs to be done.

Reforms need to be implemented to support the country�s long-term growth potential. The goal is to transition the economy to a more sustainable and stable path based around consumption rather than investment. And, as I�ve written before, though the pace of reform has slowed lately due to cyclical pressures, the reforms that have been implemented are ones that are supportive to growth. These include the privatization of State Owned Enterprises (SOE) and structural reforms, like the relaxing of the Hukou system and the one-child policy mentioned above.

Though we have adopted a more favorable view of China lately, we are cognizant of headwinds to Chinese growth. Excessive leverage and overcapacity remain major risks for the country�s long-term growth prospects. Debt levels that are left unmanaged and allowed to grow exponentially would create problems.

But China has proved the skeptics wrong before, experiencing many bumps along its road to economic power. Bottom line: Don�t give up on the Chinese economy and Chinese equities just yet, but be prepared for market volatility as China�s new chapter is written.

About the Author: Terry Simpson, CFA, is a multi-asset strategist for the BlackRock Investment Institute. He is a regular contributor to The BlackRock Blog.

Investing involves risk, including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets, in concentrations of single countries or smaller capital markets. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of May 2016 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain �forward-looking" information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. �2016 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners. USR-9407

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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