Defense Stocks Teeter on Budget Ax’s Edge

Apr 18, 2011, 12:16 pm EDT

Before Monday’s broad market selloff, shares of major U.S. defense contractors had shown some bounce after taking a hit on the prospects of staggering cuts in defense spending.

Investors initially responded to President Obama’s threat last week to carve $400 billion from the defense budget over the next 12 years by selling off big defense names like Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), Orbital Sciences (NYSE:ORB), Raytheon (NYSE:RTN) and General Dynamics (NYSE:GD)

But by Friday, stocks were bouncing back, as investors perhaps remembered that gridlock in Washington is a far more likely outcome 18 months before a presidential election.   Read 

How to Play The Gap Between Chinese and U.S. Interest Rate Policy

Apr 18, 2011, 11:58 am EDT

The U.S. and China are the world’s two largest economies. So when they pursue radically different policies towards setting interest rates, investors should expect threats and opportunities.

At the core of the different interest rate policies is a fundamentally different concept of inflation and how to control it.  The U.S. ignores inflation that pains consumers – such as rising food and energy prices – and fears most deeply the inflation that cuts into corporate profits via rising wages.  By contrast, Chinese leaders fear consumer inflation because they believe that if China’s citizens can’t afford the basics of life, they will protest in the streets.

With wages dropping in the U.S., the Fed is determined to keep interest rates near zero. By contrast, in China, the government is raising interest rates and bank reserve requirements — four times in the last year or so — to try to cut off the flow of debt that drives up prices. How can investors profit from these different policies? The best way for an American might be to open a savings account at Bank of China. Read 

Why a Measly 0.02% 2011 Budget Cut Is Good for Investors

Apr 18, 2011, 6:25 am EDT

The budget deal that kept the government from shutting down on April 9 reduced spending by next to nothing in U.S. budget terms. And that’s great news for investors in U.S. stocks.

How so? A quick look across the pond is all it takes to answer that one. The UK is in aggressive budget balancing mode and all the cutting of its government spending is sending its economy in reverse.

And a shrinking economy is an awfully hard place for companies to beat earnings expectations. If the U.S. had passed meaningful budget cuts, they would have the same economic braking effect as they did in the UK. And thanks to bitter rifts within the Republican party as 2012 approaches, the Democratic leadership should have little trouble exploiting those divisions to keep the Republicans from derailing the economic recovery. Read 

3 Stocks That Will Lead the Next China Rally

Apr 15, 2011, 12:01 am EDT
3 Stocks That Will Lead the Next China Rally

In the past six months, we’ve seen four rate hikes by the People’s Bank of China (PBOC), and rather than continuing to decline as everyone had expected, Chinese A-Share stocks are now rallying. What gives?

Well, I think the stock market feels that the end of the PBOC rate hikes is near. The Chinese economy had been growing at an unsustainable pace — an alarming 11.9% in the first quarter of 2010 — so the monetary tightening that came in the form of short-term rate hikes, reserve requirement increases, and lending quota cuts was to be expected.

This naturally caused mainland Chinese equity indexes to underperform, as the tightening applies extra pressure on financial stocks and property developers. Yet even with those actions, there is still no evidence of the crash in the Chinese commercial and residential property markets that had been feared by bears in the camp of Jim Chanos and the like. Read 

Spain is the Last (and Largest) of the PIIGS to Fall

Apr 12, 2011, 12:43 pm EDT

Basic economic theory states ceteris paribus — “all else being equal” — meaning the higher yielding a currency in real terms, the stronger the exchange rate should be against a lower yielding currency. There are, of course, many other factors that affect the exchange rate, but yield is certainly toward the top of the list.

And lately, the euro has been going up on expectations of European Central Bank (ECB) rate hikes in the next couple of years, while the interest rate outlook in the United States is still uncertain.

I think those coming ECB rate hikes will backfire because of the fundamental disconnect between different countries with divergent monetary policy needs, and single currency being exacerbated by the rate hikes. For example, Spain needs interest rate cuts, while Germany probably needs the hikes. Read 

Housing – Wall Street’s Kryptonite

Apr 12, 2011, 10:01 am EDT

No rational person could think the housing market will somehow magically “repair itself” anytime in the near future. Today we’ll examine the current stagnation to see why economic growth will continue to stall — barring intervention by Federal Reserve Chairman Ben Bernanke — and look closely at the housing market as the catalyst for current and future market conditions.

In the United States, a broken housing sector must, by definition, mean a significantly underperforming economy — and that, in turn, will hit corporate profits before year-end.

Of the jobs created between 2002 and 2007, 40% were linked to residential construction. And current homebuilding is off its peak by roughly 80%. Read 

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