The Independent Investor: Cracks in the House of Saud
Over the weekend, the government of Saudi Arabia announced multiple arrests of royal family members as well as other governmental officials. The official explanation was a new campaign to root out corruption, but many believe the raid was a power grab by the reigning Crown Prince Mohammed bin Salman.
Corruption in Saudi Arabia is as common as sand. It is what makes the wheels run so global observers discounted that excuse. The assumptions ranged from a thwarted coup against the reigning family to a consolidation of power orchestrated by the heir apparent.
As a result, gold jumped over $10 an ounce, oil spiked 3 percent and investors held their breath expecting another shoe might fall in the days ahead. Police arrested 49 people, 11 princes, four ministers and dozens of former ministers in the pre-dawn hours of Sunday. There was a fatal shootout between police and one now-dead Saudi prince, while a mysterious helicopter crash killed several other ministers and a high-ranking member of the royal house.
As the smoke clears, it appears that the 32-year-old crown prince, Mohammed bin Salman, is cleaning house, consolidating power, and eliminating any real or imagined rivals within the country. One of those arrested, billionaire Alwaleed Bin Talal, is a well-known global investor with large holdings in American companies.
King Salman elevated Prince Mohammed to heir apparent over other, more senior, princes in the royal line of succession, less than three years ago. That didn't sit well among numerous cliques or factions within and outside of the family. The grumbling grew louder when the young prince announced his "Vision 2030." A far-reaching economic policy which is pushing the Kingdom to explore new business opportunities outside of the country while seeking economic diversification away from its decades-old reliance on oil.
The prince wants to modernize the country's institutions, re-train the work force, and revamp the country's antiquated culture and attitudes to reflect more western ideals. His recent drive to liberate Saudi women from centuries of, at best, second-class citizenship has heartened his supporters, but created consternation among some traditional Saudis.
In any other third world country, a weekend action to consolidate power would barely register among global financial markets, especially within the Middle East. What is so remarkable about the Saudi situation is that it happened at all. Saudi Arabia has long been a pillar of stability in a region where death, violence and political turmoil is an everyday occurrence.
For over 70 years, the U.S. and Saudi Arabia have had a workable agreement. In exchange for guarantees of security, the Kingdom made sure that there would always be a free-flow of oil to global markets. We believed (and still do) that the flow of oil is essential to the stability of the international economy. That pact has withstood the tests of time from the 1973 oil embargo through the attacks of 9/11, where 15 out of the 19 passenger jet hijackers turned out to be Saudi citizens. But times are changing.
The United States has relied on three assumptions in our dealings with Saudi Arabia: that the Kingdom would remain stable. This weekend's actions call that into question. Second: that despite the rampant corruption, atrocious human rights violations and its ongoing support of the war in Yemen, our government believes the House of Saud remains the optimal regime in relation to U.S. interests. Finally, the U.S. assumed that the royal family would continue to promote stability in the regime aligned with Western interests.
The emergence of Iran, its efforts to become the number one regional power in the Middle East, and the proliferation of various terrorists groups have altered the Saudi's response to regional geo-politics. The Saudi's new-found willingness to flex their diplomatic and military muscles in pursuit of a foreign policy that may no longer be aligned with ours has America on edge.
It is the risk that Saudi Arabia will not muddle through that has investors worried and global financial markets a bit tense this week. The sooner we know exactly what has transpired within the House of Saud, the better it will be for financial markets.
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@theMarket: Investors Underwhelmed by Tax Reform
With great fanfare, House Republicans rolled out a tax reform proposal that they promised would get this country going again and invigorate business, while creating jobs and huge savings for the middle class. What are they smoking?
Clearly, the entire reform package was simply a smoke screen to reduce taxes for American corporations with the majority of benefits directed at the country's largest companies. For the individual, depending on what you make and where you live, taxes will remain the same or go up.
Several legislators used a postcard as a prop claiming your individual tax return will be so simple it will fit on a postcard. The reason is simple. This plan will greatly reduce the few tax deductions we have left. State and local taxes will no longer be deductible, property taxes will be capped and a slew of other credits and deductions have been reduced or eliminated.
In my opinion what we have here is a classic distribution of wealth from the individual to the corporation. You may have noticed that while the GOP cut taxes on corporations permanently (from 35 percent to 20 percent); they did nothing to reduce or eliminate the mountains of tax credits, incentives and loopholes available to big business. If the truth be told, the effective tax rate of U.S. corporations, after taking advantage of these loopholes, is 12.6 percent. And that was before this proposed tax cut.
It doesn't take rocket science to figure out that if the Republican proposal passes, U.S. corporations could be effectively paying no taxes at all. The government may actually be paying them thanks to the various tax credits in place.
On another subject, a new Federal Reserve chairman has been selected. President Trump has bypassed Janet Yellen, a Democrat, for a second term. Instead, he has named Jerome Powell, a Republican and a "dove," who is not expected to rock the boat. He is reputed to be a "boring, predictable, Steady Eddie" who will maintain and continue existing monetary policy. This nomination was expected and telegraphed to the Street earlier in the week.
Friday's unemployment numbers (261,000 actual jobs created versus 310,000 expected) was a non-event since three hurricanes (Florida, Puerto Rico, Houston) will have skewed the numbers enough that the data cannot be relied upon to discern any kind of trend. What can be said is that the headline number on the unemployment rate is now down to 4.1 percent.
That historically low unemployment rate makes me wonder just who is going to fill all these new jobs that Republican politicians claim will be forthcoming as a result of their tax reform bill. As it stands, an increasing number of job vacancies around the nation can't be filled because the country lacks the skilled labor force that can qualify for these high-paying jobs.
Most of what I have seen thus far in new job growth coming out of the U.S. corporate sector is minimum wage jobs in the service industry. This week's data showed additional gains in the food service industry (think waiters and waitresses) and drinking places (bartenders). Wage growth was flat.
Like most market participants, the news out of Washington seems to be nothing more than a feeble attempt by the House to resuscitate the "Trickle Down" economic fairy tale of yester year. This tired myth has been soundly discredited over the last four decades.
Most corporations will simply pass on these new tax savings to shareholders or buy up assets rather than invest in their companies or employees. As for the markets, the S&P 500 Index has been trapped in a trading range for almost two weeks now. Look for the index to attempt a breakout soon to 2,600 or more.
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The Independent Investor: Are You Ready for a Down Market?
It has been some time since we have had even a tiny decline in the stock market. Human behavior is such that we expect what has come before to continue into the future. When it doesn't, a whole host of emotions arise and most of them will be detrimental to your financial health.
A new survey by E-trade Financial, a discount broker dealer, reveals that well-heeled investors (those with $1 million or more in equity investments) are as bullish as they have been all year. Almost 75 percent of million dollar players are now bullish as we enter this final quarter of the year. Most of these investors are 55 or older and are significantly more optimistic than younger investors.
Some of that bullishness is understandable given the fundamentals of the economy. Gross domestic product continues to grow slowly and some estimates (such as the most recent survey from the Atlanta Fed) indicate that we could see a greater than 4 percent growth rate in the fourth quarter. Couple that with a fairly consistent improvement in corporate earnings and we have an almost Goldilocks environment for stocks.
This is especially telling since many of the upside earnings surprises are coming from cyclical companies, which really do measure the pulse of the overall economy. The same sort of economic results can be found overseas to a varying degree, which works to improve the outlook for the world's economy in general.
The fact that we are entering the historically best period for the stock market all year has also fueled bullish sentiment. This rosy scenario has resulted in fewer and fewer investors (only 9 percent) who believe that the market will see a down quarter between now and the end of the year, while more than 17 percent believe the markets will gain 10 percent or more by New Year's Day.
But what if all this hype turns out to be wrong? How will you handle it if, instead, markets decline? What if all the great gains we have experienced since the beginning of the year are erased in a month or two? You can bet on one thing: the investments which have gained the most will be those with the most downside. It is not a reason to sell them necessarily, but it is a time to recognize how much loss you are willing to accept.
The range of emotions most of us will feel in a sell-off will range from panic, anger, dismay and the overwhelming need to escape (sell). Well, you might think, I will just sell out now and capture my gains before the decline. When the market declines far enough, I will simply buy back in. That's called timing and we all know that doesn't work. Usually, we sell too early and then buy back too late; resulting in more losses than if you had simply held on through the decline.
I know I can tell my clients until I am blue in the face that the markets will come back given enough time. I can remind them that stocks are much higher today even though the markets dropped 50 percent in 2008-2009, 20 percent in 2011, had a 12 percent sell-off in 2015 and an additional 10 percent decline in 2016. But it is little comfort when they are facing not only a loss of gains, but an actual loss to their portfolios.
One strategy you might want to think about is to reduce the risk in your portfolio. As I have written countless times in the past, markets usually decline 2-3 times a year with each decline averaging between 5-7 percent. We are overdue for a decline. No one knows when it will occur but it will. If you are an aggressive investor, and shouldn't be, maybe drop the risk down a notch or two. You can even raise some cash if you want. It depends on your risk tolerance.
How much risk you should take is directly correlated with how much loss you can bear. As an example, if you can't stomach a 20 percent decline in your overall portfolio, you have no business being an aggressive investor. A moderate investor should not even care if he or she experiences a 10 percent decline. There is an old saying, "if you can't stand the heat, you should get out of the kitchen." That's good advice. If you feel you have become too aggressive over the past year, the time to adjust the temperature is now, not when the markets are in the middle of a free-fall.
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