What Caused the Great Depression?

Posted on March 7, 2016 by Anthony Jerdine

What Caused the Great Depression?
By Anthony Jerdine

What Caused The Great Depression?
Economists may dream of a perfect market where no bubbles, crashes, or recessions occur, but these phenomena are inevitable when the players are human. The Great Depression, one of the worst blows to the world economy, serves as a prime example of how vulnerable markets can be.

The stock market crash of 1929, usually cited as the beginning of the Great Depression, was preceded by the Roaring ’20s, a period when the American public discovered the stock market and dove in head first. The crash wiped out many people’s investments and the public was understandably shaken. When bank failures erased the savings of those who weren’t even invested in the stock market, people were shattered. Although the market crash was unavoidable, the bank failures could have been prevented with better regulation. Read on to find out how the Great Depression occurred.

The Fickle Fed
Twenty-two years earlier, the panic of 1907 offered a similar scenario, as panic selling sent the New York Stock Exchange (NYSE) spiraling downward and led to a bank run to boot. With no Federal Reserve to inject cash into the market, it fell upon investment banker J.P. Morgan to organize Wall Street. Morgan rallied people who had cash to spare and moved that capital to banks lacking funds. The panic led the government to create the Federal Reserve, in part to cut its reliance on financial figures like Morgan in the future. (For more on the Federal Reserve, read How the Federal Reserve Was Formed.)

In the crash of 1929, however, the Fed took the opposite course by cutting the money supply by nearly a third, thus choking off hopes of a recovery. Consequently, many banks suffering liquidity problems simply went under. The Fed’s harsh reaction, while difficult to understand, may have occurred because it wished to give Wall Street some tough love by refusing to bail out careless banks, a response that it felt would only encourage more fiscal irresponsibility in the future. (For insight on the crash of 1929, see The Crash of 1929 – Could It Happen Again?)

Ironically, by increasing the money supply and keeping interest rates low during the roaring twenties, the Fed instigated the rapid expansion that preceded the collapse. In some ways, it set up the market bubble leading to the crash and then kicked the economy when it was down. Although some people, such as Milton Friedman have rightly suggested that the Fed’s mismanagement of the economic situation greatly contributed to the Great Depression, there still would probably have been a minor recession regardless of government involvement.

Presidential Blunders
President Roosevelt rode into office by characterizing a “do nothing” attitude. In truth, however, his predecessor, Herbert Hoover, had done far too much to try to halt the recession following the crash. One of Hoover’s main concerns was that workers’ wages would be cut following the economic downturn. In order to ensure artificially high wages among all businesses, he reasoned, prices needed to stay high so companies would continue producing. To keep prices high, consumers with the money would need to pay more. Yet the public had been burned badly in the crash, and most did not have the resources to overpay for products.

This bleak reality forced Hoover to use legislation, the government’s trump card, to try to prop up wages. Following in the unfortunate tradition of the protectionists, Congress tried to restrict the flow of foreign goods by passing the Smoot-Hawley Tariff Act. Because foreign nations weren’t willing to buy over-priced American goods any more than Americans were, Hoover decided to choke out cheap imports. The Smoot-Hawley Act started out as a way to protect agriculture, but swelled into a multi-industry tariff. Other nations retaliated with their own tariffs, essentially cutting off international trade. Not surprisingly, the economic conditions worsened worldwide and the U.S. economy sunk from a recession into a depression.

Although Roosevelt promised change when he came into office, he continued Hoover’s economic intervention, only on a bigger scale. He created the New Deal with the best intentions, but like Hoover’s wage controls, it backfired. With previous recession/depression cycles, the U.S. suffered one to three years of low wages and unemployment before the dropping prices led to a recovery. Responding to this historical trend of a few hard years followed by a recovery, American industrialist and philanthropist J.D. Rockefeller remarked, “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again.” By attempting to immediately recover without swallowing the bitter pill of two hard years, Hoover and Roosevelt may have actually prolonged the pain.

New Deal
The New Deal set lofty goals to maintain public works, full employment, and healthy wages through price, wage, and even production controls. The New Deal was loosely based on Keynesian economics, specifically on the idea that government works can stimulate the economy. Occasionally these projects were ideal, but there were just as many cases of mismanagement, political back-scratching and general waste that dogs government-run initiatives. (For related reading, see Can Keynesian Economics Reduce Boom-Bust Cycles?)

One of the most heartbreaking results of the New Deal was the destruction of excess crops to justify the artificially high prices, despite the need for cheap food. In fact, many of the agencies created by the New Deal broke up black markets selling cheap goods. This forced factory workers to stop working and generally halted the production that was needed for recovery. Even unemployment remained high because companies couldn’t afford to keep large payrolls at the rates set by the government.

Eventually, recovery came in the unappealing form of World War II. Although the notion that the war ended the Great Depression is a broken window fallacy, it did open up international trading channels and reverse price and wage controls. Suddenly, the government wanted lots of things made inexpensively, and pushed wages and prices below market levels. When the war finished, the trade routes remained open and the post-war era went from recovery to a bull run in a few short years.

The Bottom Line
The Great Depression was the result of an unlucky combination of factors – a reticent Fed, protectionist tariffs and a Keynesian, government-centered recovery plan. It could have been shortened or even avoided by a change in any one of these. Many supporters of the government’s intervention point out that the quick recovery from other depression/recession cycles may not have occurred as rapidly in 1929 because it was the first time that the general public, and not just the Wall Street elite, lost large amounts in the stock market. Similarly, the Fed can avoid fault because it didn’t know that the government would pass a trade-crushing tariff and take other questionable measures.

How The Federal Reserve Was Formed?

Posted on March 7, 2016 by Anthony Jerdine

How The Federal Reserve Was Formed
By Anthony Jerdine

The Federal Reserve is widely considered to be one of the most important financial institutions in the world. The Fed can either be your kindly grandmother or the mother-in-law from hell, and its character is usually a function of the Federal Reserve’s board of governors. Its monetary policy decisions can send waves through not only the U.S. markets, but also the world.

In this article we will look at the formation of the Federal Reserve and follows its history as it riles the market and then turns it around and sends it to new highs.

Life Before the Federal Reserve
The United States was considerably more unstable financially before the creation of the Federal Reserve. Panics, seasonal cash crunches and a high rate of bank failures made the U.S. economy a riskier place for international and domestic investors to place their capital. The lack of dependable credit stunted growth in many sectors, including agriculture and industry.

J.P. Morgan and the Panic of 1907
It was J.P. Morgan who forced the government into acting on the central banking plans it had been considering off and on for almost a century. During the Bank Panic of 1907, Wall Street turned to J.P. Morgan to steer the country through the crisis that was threatening to push the economy over the edge into a full crash and depression. Morgan was able to convene all the principal players at his mansion and command all their capital to flood the system, thus floating the banks that, in turn, helped to float the businesses until the panic passed.

The fact that the government owed its economic survival to a private banker forced the necessary legislation to create a central bank and the Federal Reserve.

Learning from Europe
In the years between 1907 and 1913, the top bankers and government officials in the U.S. formed the National Monetary Commission and traveled to Europe to see how the central banking was handled there. They came back with favorable impressions of the British and German systems, using them as the base and adding some improvements gleaned from other countries.

The Federal Reserve was given power over the money supply and, by extension, the economy. Although many forces within the public and government were calling for a central bank that printed money on demand, President Wilson was swayed by Wall Street arguments against a system that would cause rampant inflation. So the government created the Federal Reserve, but it was by no means under government control.

The Great Depression
The government soon came to regret the freedom it had granted the Federal Reserve as it stood by during the crash of 1929 and refused to prevent the Great Depression that followed.

Even now, it is hotly debated whether the Fed could have stopped the depression, but there is little doubt that it could have done more to soften and shorten it by providing lower interest rates to allow farmers to keep planting and businesses to keep producing. The high interest rates may even have been responsible for the unplanted fields that turned into dust bowls. By restricting the money supply at a bad time, the Fed starved out many individuals and businesses that might otherwise have survived.

The Recovery
It was World War II, not the Federal Reserve, that lifted the economy out of the depression. The war benefited the Federal Reserve as well by expanding its power and the amount of capital it was called on to control for the Allies. After the war, the Fed was able to erase some of the bad memories from the depression by keeping interest rates low as the U.S. economy went on a bull run that was virtually uninterrupted until the ’60s.

Inflation or Unemployment?
Stagflation and inflation hit the U.S. in the ’70s, slapping the economy across the face, but hurting the public far more than business. The Nixon administration ended the nation’s on and off again affair with the gold standard, making the Fed that much more important in controlling the value of the U.S. dollar. The big question for the Fed was whether the nation was better off with inflation or unemployment.

By controlling interest rates, the Fed can make corporate credit easy to obtain, thus encouraging business to expand and create jobs. Unfortunately, this increases inflation as well. On the flip side, the fed can slow inflation by raising interest rates and slowing down the economy, causing unemployment. The history of the Fed is simply each chairman’s answer to this central question.

The Greenspan Years
Alan Greenspan took over the Federal Reserve a year before the infamous crash of 1987. When we think of crashes, many people consider the crash of 1987 more of a glitch than a true crash – a non-event nearer to a panic. This is true only because of the actions of Alan Greenspan and the Federal Reserve. Much like J.P. Morgan in 1907, Alan Greenspan collected all the necessary chiefs and kept the economy afloat.

Through the Fed, however, Greenspan used the additional weapon of low interest rates to carry business through the crisis. This marked the first time that the Fed had operated as its creators first envisioned 80 years before.

The Bottom Line
Criticisms of the Federal Reserve continue. Boiled down, these arguments center on the image people have of the caretaker of the economy. You can either have a Fed that feeds the economy with ideal interest rates leading to low unemployment – possibly leading to future problems – or you can have a Fed that offers little help, ultimately forcing the economy to learn to help itself. The ideal Fed would be willing to do both. Although there have been calls for the elimination of the Federal Reserve as the U.S. economy matures, it is very likely that the Fed will continue to guide the economy for many years to come.
How The Federal Reserve Was Formed

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Mindset shift

Posted on March 6, 2016 by Anthony Jerdine

It’s controversial when I say that “Poverty is a state of mind” because people don’t think deeply through what I mean. Obviously being poor is real, not 100% mental. I have been broke before.

But what got me off that couch was a change in mindset. A shift.

Without that mental shift, no amount of handouts or well-meaning people’s help would have done me any good in the long run.

For today’s Book-of-the-Day, I was reading “Creating a Learning Society” by Joseph Stiglitz.

He says, “The transformation to ‘learning societies’ which occurred around 1800 for Western economies, and more recently for those in Asia, appears to have had a greater impact on human well-being than improvements in allocative efficiency or resource accumulation.”

Joseph Stiglitz won a Nobel Prize as an economist and his scientific research confirmed that what actually keeps nations, communities, and individuals poor is not primarily a lack of capital or opportunities (what most people think).

Instead, Stiglitz found the root is a lack of knowledge, and more specifically a lack of knowledge on how to gain more knowledge.

The inability to learn quickly and efficiently…

What his research found was, “What separates developed from less-developed countries is not just a gap in resources but a gap in knowledge.”

Like the Chinese saying goes, “Give a man a fish, feed him for a day. Teach a man to fish, feed him for a lifetime.”

You must learn how to learn.

It’s an art and a skill.

Most people are too slow of learners due to their fixed mindset that won’t adapt to feedback analysis because of their simple stubbornness and delusion (wishing the world was like their fantasies instead of having the courage to seek truth).

Learn how to learn more quickly and you will live a very rich life (not just financially).

P.S. Joseph Stiglitz said knowledge is one of the central features of a learning society. Most new entrepreneurs fail because they make decisions without enough knowledge.

Mindset shift is key

Wall Street Week

Posted on March 6, 2016 by Anthony Jerdine

March 7, 2016

Good news is good news
Don’t look now, but the U.S. economy is actually doing pretty well. Even more significant, though, is the fact markets are treating the good news as, er, good news!

First, the data. This week February auto sales volume reached its highest level since 2001, the U.S. manufacturing sector contracted more slowly, the Fed Beige Book showed evidence of upward wage pressures and a better-than-expected monthly jobs report highlighted the health of the U.S. labor market.

The big one, Friday’s non-farm payrolls report, revealed the U.S. economy created 242,000 jobs in February (versus expectations of around 190,000) while an increase in labor force participation caused the unemployment rate to hold firm at 4.9%. The only negative aspect of the report was wage growth, which declined year-over-year.

There were even more bullish details hidden deeper in the report, like the household survey showing employment gains of 530,000 and the construction unemployment rate falling to its lowest seasonally-adjusted level since 2006. The economy has now recorded positive job gains for a record 65 straight months (the previous record was 48). The raft of strong data prompted the Atlanta Fed to revise its Q1 GDPNow forecast up three basis points to 2.2%.

What does it all mean? After the financial crisis the Federal Reserve reflated asset prices by moving interest rates to zero and introducing quantitative easing. It worked, but also conditioned markets to look at every piece of economic data through the prism of what it meant for monetary policy. Good data was bad for the market because it meant the Fed might take away the “punch bowl.” Stocks rallied on bad data because it meant QE might grow or last longer.

Investors held a deep-seated anxiety about what would happen when the Fed exited the market, like agoraphobics scared to leave the house without benzodiazepines. Chairman Ben Bernanke increased the Fed’s communication to help wean stocks off the drugs, and the Federal Open Market Committee (FOMC) made a largely symbolic rate hike in December 2015 to expedite the normalization process.

Heading into 2016, the consensus among economists was that risks of recession over the next 12-18 months were low. The Fed’s dot plot even forecast four interest rate hikes in 2016. However, a flight to safe-haven bonds indicated financial markets weren’t buying into the rosy outlook. Over the past few weeks, though, that trend has changed as the spread between economist and market views has started to tighten.

The fact markets are responding more rationally to fundamentals is a positive development. The fact good news is good news is good news. Part of it boils down to the eroding credibility of central banks, but perhaps that shift was necessary to force local governments into fiscal stimulus and structural reforms.

This week’s data moved up the timetable for a 2016 rate hike, but the market didn’t seem to care. Investors have been yearning for a market where things make sense, and at least in the U.S. we have taken the first steps in that transition – for better or worse.

Industrial evolution

The narrative goes that ‘China is killing us on trade.’ But the same forces of globalization that led to the decline of North American industry are actually starting to reverse with a vengeance due to currency fluctuations. Chinese manufacturers are moving factories to Mexico and South Carolina, which more than any other state has experienced the pain and gain of globalization. As Donald Trump wrote on his Trump University blog, outsourcing jobs is not always a terrible thing in the long run.

Overall global trade, though, has grown at a lackluster pace for five straight years, a trend not seen since the 1970s. Much of the blame has been assigned to slowing demand from China, but a growing number of economists are researching the correlation between the growth of the digital economy and the slowdown in global trade. As automation like 3-D printing continues to disrupt traditional labor-intensive manufacturing, the trend could accelerate.

The flow of digital information around the world more than doubled between 2013 and 2015. Companies have begun bringing production closer to home or concentrating it in bigger markets. Digital transfer of information is replacing cargo ships. While the developed world will be forced to adapt to the structural decline of industrial jobs, the diversity of the U.S. economy means the current manufacturing recession isn’t really a big deal in the grand scheme of things.

China

Chinese markets got in on the act this week, recording their biggest weekly gain of 2016 in spite of an unconvincing performance at the G20 summit, a credit outlook cut from Moody’s (its first negative action on China’s credit rating since 1998) and large-scale public sector layoffs. Maybe it helped that the government reportedly intervened in the stock market Friday.

The worst kept secret in the world is that the Chinese banking system has a lot of bad debt on its hands. But that isn’t stopping bankers from packaging those loans into securitized products. Smell like subprime? Sort’ve, but in this case there are no illusions about these assets being AAA-rated.

China’s bid to restore confidence also rumbles on, with the government this week muzzling an outspoken business man on social media and seeking to humanize President Xi Jinping by highlighting the four known times he cried.

Sweet oil

With oil languishing in the $30s, a wave of bankruptcies in the energy sector is inevitable, with well-capitalized firms waiting in the wings to scoop up distressed assets. This week, Exxon said I’ll see your $450 million IPO and raise you a $12 billion bond offering. Amid the looming threat of a credit downgrade, the oil giant decided to go ahead and start building its war-chest.

Meanwhile, the U.S. shale industry tells OPEC: if oil gets back above $40, we’re coming back. While shale producers at one time had break-evens of around $60-70/barrel, technological advancements have continued to drive down production costs. Saudi-led OPEC has been attempting to drive “uneconomic producers” out of business before agreeing to any production cuts, but has, more than anything, just shot itself in the foot. Exhibit A: Saudi foreign exchange reserves are tanking. When oil prices do rise, those West Texas shale wells will just come back online under new ownership, anyway.

Argentina!

They did it. Argentina reached a deal with its remaining holdout creditors, who will receive 75% of their claims and enjoy handsome returns on their 15 year-old investment. The deal is contingent on the Argentine congress repealing legislation blocking the government from paying late holdouts better terms than those in earlier restructurings, but that is expected to be a formality.

To pay for the deal, Argentina will raise the $15 billion in overseas bond markets, to which it will have access for the first time since 2001. After 15 years of bad-faith negotiations, though, the holdouts are still skeptical of Argentina and will push for the payments to take place before the injunction preventing Argentina from issuing bonds is lifted.

It’s been emotional, but this is a win for everyone, including new Argentine President Mauricio Macri, who has targeted a series of structural reforms to boost the nation’s moribund economy. The fate of his administration’s business-friendly approach could have major implications throughout the region.

Indexing vs the Yale (Endowment) Model

If you have a truly long-term investment horizon, you can outperform liquid index funds by investing in a portfolio of mostly private, levered, illiquid securities. That is the belief underlying the Yale (Endowment) Model pioneered by David Swensen in the late 1980s.

The problem is that after two decades of outperformance (which ended spectacularly in 2009), the institutional investing world caught on, piled into private equity and eliminated much of the illiquidity premium. The Yale Model is flawed and unsustainable according to the former and current CIOs of Hewlett-Packard (HP).

Failure to see the big picture

Two weeks ago we talked about Neel Kashkari’s well-marketed, misguided plan to regulate Wall Street banks like nuclear reactors. This week, the Wall Street Journal’s Greg Ip wrote ‘too big to fail’ critics go too far on banks. “In their zeal to stamp out any possibility of future government bailouts, policy makers risk creating new vulnerabilities that could undermine the economy and make the next crisis worse.”

Especially if those policies are crowdsourced.
The idea that stringent regulation would solve the financial industry’s ills has been put to the test this year as big bank stocks have been pummeled under pressure from slow growth and negative interest rates. Bill Gross thinks Wall Street should just start getting used to a new, lower-margin normal.

Emerging opportunity

Last week we talked about PIMCO’s view that emerging markets could be the “trade of the decade.” This week, investors continued to make the case that emerging markets (EM) have gotten “so bad they’re good.” The best time to diversify into an asset class is after an extreme period of underperformance, not outperformance, wrote Charlie Bilello, making EM an attractive play right now. EM Looks Terrible—Time To Buy, wrote Larry Swedroe.

Perhaps the most troubled emerging market of the bunch, Brazil, found out this week that its economy shrank by 3.8% last year – its steepest contraction in 25 years. The International Monetary Fund (IMF) predicts a further 3.5% decline for the Brazilian economy in 2016, which would mark the country’s worst recession since 1901.

However, Brazil’s Ibovespa benchmark index rallied an eye-popping 20% this week amid news the crackdown on systemic government corruption is gaining steam. Former President Luiz Inacio Lula da Silva was detained and questioned, increasing pressure on his hand-picked successor President Dilma Rousseff, whose defiance in impeachment proceedings has prevented the implementation of structural reforms needed to resuscitate the Brazilian economy.

The complicated legacy of Aubrey McClendon

One day after being charged with conspiracy to suppress prices for oil and natural gas leases, former Chesapeake Energy CEO Aubrey McClendon died in a fiery single car crash in Oklahoma City. Although his career was somewhat tainted by his 2013 ouster from Chesapeake and the recent conspiracy charges, in his heyday McClendon was known as a charismatic, swashbuckling innovator who spearheaded the U.S. shale revolution.
In other news

Bloomberg’s Luke Kawa kindly created a user guide for Warren Buffett’s annual Berkshire Hathaway shareholder letter.

JP Morgan GEO Jamie Dimon conducted a rare, wide-ranging interview with Bloomberg News editor-in-chief John Micklethwait in which he gave a frank assessment of the future of finance.

For the first time, Google accepted blame for an accident involving one of its self-driving cars.

Nobody is eating at steakhouses in New York’s Financial District anymore because Wall Street has moved north to Midtown.

Meet the $18 million Yahoo exec you’ve never heard of. Yahoo! might be hemorrhaging money, but at least its executives are making out well.

In case we need another reminder about the no-brainer case for infrastructure investment, Mark Thoma laid it out very eloquently.

Robots are coming for Wall Street: The New York Times put together an insightful series on how technology is reshaping the workplace.

Weekly Roundup
Markets rally on oil, financials
Global stocks rallied for the third straight week amid signs of a strengthening U.S. economy and waning fears over China’s economic slowdown. The small-cap Russell 2000 led the way with a 4.3% gain, followed by the Nasdaq (2.8%), S&P 500 (2.7%) and Dow (2.2%). After a three-week rally totaling 7.4%, the S&P is now down only 2.2% year-to-date.

As risk appetite flooded back into the market, U.S. treasurys sold off ten basis points to 1.86% while junk bonds capped off their largest seven-day inflow since such record-keeping began in 2002. Oil certainly played its part in the equity and junk bond rally, with West Texas Intermediate (WTI) crude rallying nearly 11% for the week to $36.33/barrel. Equity and credit in beaten-down energy names enjoyed large rallies from depressed prices, an example being Chesapeake Energy (CHK), which spiked more than 40%.

Economic Data

Friday’s jobs report capped off a week of strong economic data (more on that above). The U.S. economy added 242,000 non-farm jobs in February (versus expectations for 190,000) with upward revisions to January and December. The bad news was wage growth declined 0.1% year over year. By Friday, Fed Funds Futures markets were predicting around a 50% chance of a September rate hike, whereas expectations at the beginning of the week favored a December hike. The raft of strong data prompted the Atlanta Fed to revise its Q1 GDPNow forecast up three basis points to 2.2%.

Asia

Asian markets also enjoyed impressive gains for the third straight week.

Japan’s Nikkei 225 rallied 5.2% and is now more than 12% off its recent lows, although still down around 10% in 2016. For the first time ever, the Japanese government sold 10-year notes at negative interest rates – and the $19 billion auction was three times oversubscribed! Japanese officials touted the merits of negative interest rate policy (NIRP) while leaders at the G20 summit pledged to pursue more structural and fiscal reforms in place of unconventional monetary policy.

China’s Shanghai Composite rallied 3.9% while Hong Kong’s Hang Seng Index gained 4.2%. After assuring global finance chiefs at the G20 summit it had the tools to cope with slowing growth, China eased pressure on its banking system by cutting its reserve requirement ratio to 17% from 17.5%, a move expected to free up more than $100 billion.

Europe

Europe’s Stoxx 600 Index rallied 4.4% as pressure on bank shares subsided. While U.S. markets rallied on strong data, European markets are being boosted by expectations for further stimulus from the European Central Bank (ECB) next week. Eurozone consumer prices fell at an annualized rate of 0.2% in February, doing nothing to change the ECB’s thinking.

Emerging Markets

Former Brazilian President Luiz Inácio Lula da Silva (“Lula”) was detained by federal authorities in connection with the corruption and fraud scandal that has ravaged the country’s economy. Current President Dilma Rousseff, the Workers Party’s handpicked successor to Lula, faces the increasing likelihood of impeachment, a fact cheered by Brazilian markets eager to put the catastrophic era behind them. In fact, the benchmark Ibovespa index finished the week up around 20% despite news the country’s economy contracted by the widest margin in 25 years.

After 15 years of negotiations, Argentina reached a deal with holdout creditors over defaulted debt pending approval from the Argentine congress. President Mauricio Macri’s new government moved swiftly to resolve the quarrel only three months into his term, allowing Argentina to once again tap global credit markets.

Corporate News

U.S. exchanges, Intercontentintal Exchange Group (ICE) and CME Group, are reportedly considering bids for the London Stock Exchange (LSE) to rival its advanced merger talks with the Deutsche Boerse.

Wall Street Week

Chart Advisor

Posted on March 6, 2016 by Anthony Jerdine

Chart Advisor for March 7, 2016 (SPY, DIA)
Anthony Jerdine | March 07, 2016

The U.S. markets moved higher over the past week, as of Thursday’s close, led by small-cap stocks in the Russell 2000. While consumer spending rose and labor markets improved, the manufacturing and energy sectors continued to show weakness. Wage growth also varied considerably throughout the nation and consumer prices remained stubbornly flat. That said, some experts believe that a rate hike or two may be back on the table for 2016.

International markets also moved mostly higher over the past week, as of Thursday’s U.S. close. Japan’s Nikkei 225 rose 4.02%; Germany’s DAX 30 rose 2.51%; and, Britain’s FTSE 100 fell 0.37%. In Europe, a series of economic reports suggested that growth was continuing to slow ahead of the ECB’s rate decision next week. In Asia, China’s President Xi Jinping announced a series of economic measures that sounded a lot closer to Reagan than Mao.

The S&P 500 SPDR (ARCA: SPY) rose 2.39% over the past week, as of Thursday’s close. After breaking through its 50-day moving average at 193.78, the index reached its R1 resistance at 199.80. Traders should watch for a breakout toward its 200-day moving average at 201.01 or a move lower to its 50-day moving average. Looking at technical indicators, the RSI appears a bit lofty at 62.90, while the MACD remains in a bullish uptrend since its crossover back in mid-February.

SPY Chart

The Dow Jones Industrial Average SPDR (ARCA: DIA) rose 1.85% over the past week, as of Thursday’s close. After breaking out from its 50-day moving average at 169.35, the index reached its 200-day moving average at 170.00. Traders should watch for a breakout to R2 resistance at 175.80 or a move lower to its 50-day moving average. Looking at technical indicators, the RSI appears a bit lofty at 61.60, while the MACD remains in a bullish uptrend.

DIA Chart

The PowerShares QQQ Trust (NASDAQ: QQQ) rose 2.12% over the past week, as of Thursday’s close. After moving higher from its pivot point at 100.71, the index moved towards its R1 resistance at 106.59. Traders should watch for a move higher to its 200-day moving average at 107.64 or a move lower back toward its pivot point. Looking at technical indicators, the RSI appears modestly overbought at 59.05, while the MACD remains in a bullish uptrend.

QQQ Chart

The iShares Russell 2000 Index ETF (ARCA: IWM) rose 3.81% over the past week, as of Thursday’s close. After breaking out from its 50-day moving average at 103.39, the index reached its upper trend line resistance. Traders should watch for a breakout toward its R2 resistance at 110.52 or a move back down to its 50-day moving average. Looking at technical indicators, the RSI appears lofty at 66.25, while the MACD remains in a bullish uptrend.

IWM Chart

The Bottom Line
The major indexes moved higher over the past week, as of Thursday’s close, although the small-cap Russell 2000 appears a bit lofty. Next week, traders will be watching a number of key economic indicators, including crude oil inventories on March 9, unemployment claims on March 10, and consumer sentiment data on March 11. The ECB is also due to make a decision on whether or not to introduce new stimulus measures to bolster the regional economy.

Charts courtesy of StockCharts.com.

Amortization

Posted on March 5, 2016 by Anthony Jerdine

What is ‘Amortization’
Amortization is the paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or car loan.

2. The spreading out of capital expenses for intangible assets over a specific period of time (usually over the asset’s useful life) for accounting and tax purposes. Amortization is similar to depreciation, which is used for tangible assets, and to depletion, which is used with natural resources. Amortization roughly matches an asset’s expense with the revenue it generates.

Amortization
BREAKING DOWN ‘Amortization’
1. With auto loan and home loan payments, at the beginning of the loan term, most of the monthly payment goes toward interest. With each subsequent payment, a greater percentage of the payment goes toward principal. For example, on a 5-year, $20,000 auto loan at 6% interest, the first monthly payment of $386.66 would be allocated as $286.66 to principal and $100 to interest. The last monthly payment would be allocated as $384.73 to principal and $1.92 to interest. At the end of the loan term, all principal and all interest will be repaid.

2. Suppose XYZ Biotech spent $30 million dollars on a patent with a useful life of 15 years. XYZ Biotech would record $2 million each year as an amortization expense.

The IRS allows taxpayers to take a deduction for the following amortized expenses: geological and geophysical expenses incurred in oil and natural gas exploration, atmospheric pollution control facilities, bond premiums, research and development, lease acquisition, forestation and reforestation, and certain intangibles such as goodwill, patents, copyrights and trademarks. Amortization can be calculated easily using most modern financial calculators, spreadsheet software packages such as Microsoft Excel or amortization charts and tables.

Anthony Jerdine

4 ETFs to Trade the Euro

Posted on March 5, 2016 by Anthony Jerdine

4 ETFs To Trade the Euro (FXE, ULE)
By Anthony Jerdine March 03, 2016

In December 2015, the U.S. dollar reached its highest close since 2003, and the euro its lowest close since 2003. These could be significant highs and lows, and many investors may be entering currency trading hoping to avoid the carnage in stocks, junk bonds and commodities from over the previous few months. Making money in currencies is not an investment layup in any sense, but currency exchange-traded funds (ETF) provide a convenient way to become involved in currency trading without the requirement of a separate forex account. Traders interested in the euro’s next move, for example, have a number of ETFs that allow them to test their hunches.

CurrencyShares Euro ETF
For currency ETFs, managers attempt to hit their benchmark objectives by utilizing currency futures, forward contracts and various derivative products. The granddaddy of long euro currency ETFs is the CurrencyShares Euro ETF (NYSEARCA: FXE). It is sponsored by Guggenheim Specialized Products, LLC and first appeared in December 2005. This unlevered ETF should be the first choice for investors who want to go long the euro. Net assets total $275 million, and liquidity is excellent with an average of 393,000 shares traded daily. Expenses are also low at 0.4%, and bid/ask spreads are tight. Similar to other currency ETFs, FXE trades only during regular stock market hours and is not actively managed. Its objective is to track as closely as possible the performance of the EUR/USD cross rate, and it does a good job in accomplishing this task. The year-to-date (YTD) return of FXE was 3.5% at the close on Feb. 12, 2016. In comparison, the TradeStation forex platform shows the EUR/USD returned 3.7%. The tracking is not perfect but it is probably close enough for most traders.

ProShares Ultra Euro ETF
ProShares offers a long euro ETF, the ProShares Ultra Euro ETF (NYSEARCA: ULE), designed to provide a leveraged return equal to twice the daily return of the dollar versus the euro. It does not offer an unleveraged option. The problem with leveraged products is the effects of compounding over more than a one-day period often produce slippage, and tracking the benchmark becomes more difficult. ULE’s YTD return of 6.8%, while double the return of the EUR/USD currency pair, equates to 7.4%. Another issue is the high expense ratio of almost 1% compared to FXE’s 0.4%. Total assets are $12 million, and average volume is 3,600 shares per day. Liquidity and bid-ask spreads are poor in comparison to FXE.

ProShares Short Euro ETF
To go short the euro, investors can consider the ProShares Short Euro ETF (NYSEARCA: EUFX). This ETF is unlevered and aims for daily investment results that correspond to opposite the performance of the EUR/USD cross. EUFX began trading in 2012, and it has not been a roaring success. Expenses are high at nearly 1%, and assets total $17 million. Benchmark tracking is good, however, showing a return of -3.5% at the close on Feb. 12, 2016. The reason for the lack of activity in EUFX is traders have flocked to the leveraged version of this ETF. A consideration for investors who resist leveraged ETFs is to short-sell FXE if the shares can be borrowed from the broker. This is an option for more sophisticated people familiar with the potential downside of short positions.

ProShares UltraShort Euro ETF
The ProShares UltraShort Euro ETF (NYSEARCA: EUO) is by far the most frequently used ETF to short the euro. It is leveraged and attempts to double the opposite return of the EUR/USD cross rate. The expense ratio of almost 1% is high, but that comes with the leveraged ETF territory. Total assets clock in at $420 million with average daily volume of over 400,000 shares. In terms of hitting its benchmark, it has performed admirably thus far in 2016. The opposite return is -7.1% compared to the 7.4% of the EUR/USD cross rate. In fact, it has done a better job than the ProShares Ultra Euro ETF, slipping only 300 basis points from the benchmark versus a drop of 600 basis points for ULE. This difference may be attributable only to random noise in the short term, but ProShares measured the correlation to the benchmark as -0.99 during the fourth quarter of 2015, which is a very high inverse correlation.

The Bottom Line
There are several ETF choices for investors who have the inclination to trade the euro and want to avoid the complications of a separate forex account. Investors should understand the performance characteristics of these ETFs before making any decisions.