Download Weekly Advisor Analysis 01-27-14 PAA

Weekly Advisor Analysis
January 27, 2014
Overseas Frenzy Spreads to the United States
Stocks took a rare thumping last week as investors worried how severely recent problems in
emerging markets would impact the global economy. In what proved to be the worst week of
performance for the S&P 500 since June 2012, the popular index retreated 2.6 percent with most
of the negative performance taking place on the last trading day of the week. The slide in stocks
may have felt particularly severe considering the S&P 500 is coming off an impressive 30 percent
return in 2013 and still hasn’t experienced a correction of 10 percent or more for well over a year.
Source: Yahoo! Finance
Emerging Economies in Crisis: Taper to Blame?
Currencies in many countries labeled “emerging markets” continued plummeting towards fiveyear lows last week, according to Bloomberg, and some believe this coinciding with a reversal in
Federal Reserve monetary policy is no coincidence. To be fair, we must also keep in mind some of
the countries, such as Turkey and Venezuela, have plenty of political and economic problems
aside from tapering to warrant currency troubles. However, as the same problems spread to
countries such as South Africa, Brazil, India, and China, investors are giving more credence to the
theory that tapering may prove to be a major negative catalyst for certain countries overseas.
While we can’t precisely gauge the impact Federal Reserve policy has on what’s going on
overseas, it’s evident the rapid flow of capital out of emerging markets was cause for considerable
anxiety for investors across all asset classes last week.
China Also Sends Sobering Signal
The second largest economy in the world may be experiencing its most important sector,
manufacturing, suffering its first contraction in six months. The Purchasing Managers’ Index,
(PMI), as conducted by HSBC, indicated a reading of only 49.6 for January. Any reading below
50.0 indicates a contraction in activity. According to a median estimate of 50 analysts polled by
Bloomberg, China’s economy is expected to grow at a 24-year low of 7.4 percent in 2014. While a
deceleration of overall economic activity is expected, these survey results were surprisingly poor.
This particular index is based on the results of 85-90 percent of responses received by surveying
more than 420 manufacturers, according to Bloomberg. It’s worth noting each of the last nine
months, the HSBC PMI reading has registered below the official Chinese government reading on
manufacturing which will be released on February 1.
Source: FactSet; Bloomberg
Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector.
The PMI index is based on five major indicators: new orders, inventory levels, production, supplier
deliveries, and the employment environment.
Treasury Yields Back to Pre-Taper Levels
After having breached the 3.0 percent level following the Federal Reserve’s announcement to
begin tapering monthly bond purchases, the 10-year Treasury yield has retreated to an eight week
low. Investors are seeking refuge in U.S. Treasury bonds most likely because they fear the recent
disarray of currency values and economic readings overseas. While emerging markets were
popular vehicles for growth over the last several years, as developed economies struggled to find
growth, they now could be a major threat to global economic growth. It will be imperative to
continue to monitor these recent trends to determine whether or not this is a slight distraction or
the beginning of something much larger.
Best regards,
UDB Financial
Securities offered through LPL Financial, Member FINRA/SIPC.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the
named broker/dealer.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the
U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark
for the long-term bond market.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to
predict future performance.
*The economic forecasts sets forth in the presentation may not develop as predicted and there can be no
guarantee that strategies promoted will be successful.
*International and emerging market investing involves special risks such as currency fluctuation and
political instability and may not be suitable for all investors.
*Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of
principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
Sources:
http://www.cnbc.com/id/101361746
http://chart.finance.yahoo.com/z?s=%5eGSPC&t=5d&q=&l=&z=l&a=v&p=s&lang=en-US&region=US
(Chart)
http://www.latimes.com/business/la-fi-us-stocks-20140125,0,5540513.story#axzz2rVuLmenG
http://www.dailymail.co.uk/money/markets/article-2545800/Shares-hit-global-investors-run-scaredpolitical-crises.html
http://www.latimes.com/business/la-fi-us-stocks-20140125,0,5540513.story#axzz2rVuLmenG
http://www.economist.com/news/finance-and-economics/21589459-after-decade-long-boom-emergingmarkets-have-flopped-and-then-bounced
http://cdn.static-economist.com/sites/default/files/imagecache/original-size/images/printedition/20131109_FNC729.png (Chart)
http://www.marketminder.com/a/fisher-investments-giving-credit-where-its-due/903b434b-2c44-417db0de-1e44ae7e70ca.aspx
http://www.bloomberg.com/news/2014-01-23/china-manufacturing-index-falls-preliminary-readingshows.html
http://marketminder.com/img/China-PMIs-bars.jpg (Chart)
http://www.bloomberg.com/news/2014-01-24/treasury-yields-set-for-longest-drop-in-9-months-on-havendemand.html
http://www.usfunds.com/media/images/investor-alert/_2014/2014-01-24/BND-10-Year-Treasury-Yield01242014.gif (Chart)