All Talk, No Action!
This week in Europe, the European Central bank kept talking about action but failed to implement any new policies to fix the lingering debt crisis. Meanwhile the U.S. economy continues to weaken while the Fed maintains its position on the sidelines.
All Eyes Still On Europe
Looking at Europe, we had a major confidence boost last week when the ECB suggested that eurozone bankers were ready to lend support to Spain and Italy with bond purchases. However this week, the optimism quickly faded as no new steps were taken.
The ECB met this week to discuss the Euro concerns and stability. They indicated they may purchase bonds, but there with no follow-through, no and no specifics, investors got spooked. German opposition to ECB’s plans is quite strong saying the ECB’s intended policy is “problematic” and “not the most sensible” instrument for overcoming the debt crisis. ECB bond buys won’t get to the root of what is ailing the Eurozone. This strategy will not provide any long-term fix for banking problems in Spain or the debt crisis in Italy or Greece. Politicians have failed to understand how severe this debt crisis has become and the European bond markets are reacting accordingly.
Spanish bond yields have been soaring and reaching a new level of crisis (above 7%). If Spain needs a bailout, Italy could be the next domino to fall. If the ECB does not step in as a last stand lender, the Eurozone could break up sooner rather than later. As progress continues to grind to a halt in Europe, a major shift in policy is needed to avoid the constant up and down yo-yoing we have come to expect.
Is the Fed Out of Ammo or Merely Stock Piling?
There was nothing new from the Fed meeting on Wednesday. They did not announce any new bond purchases and no insight on any interest rate changes. They did however continue to indicate that the Fed will take action. It seems they are getting closer toward new measures, but no hints on what this may look like.
The Fed acknowledged “economic activity decelerated somewhat over the first half of this year.” The trouble is the data is weak but not so weak to justify immediate action. If a full-blown Eurozone crisis unfolds the Fed is ready to act. It is still my belief that unless the economic data shifts significantly worse or Europe becomes more of a problem, the Fed will not intervene.
How Healthy is the U.S, Economy?
In the U.S., economic data continues to give mixed readings. The U.S. is still growing but not fast enough to continue the recovery:
- Employment/ADP: ADP reported that private-sector employment growth fell from 172,000 in June to 163,000 in July. The ADP has topped the government’s report for four consecutive months, which is a good sign. The Fed, the markets, economists, analysts, and politicians all pay more attention to nonfarm payrolls.
- Manufacturing: The ISM Manufacturing Index held below 50 for the second month in a row. Any reading under 50 signifies danger. The ISM inched up from 49.7 in June to 49.8 in July but maintained its reading below 50. The closely watched new orders ticked up 0.2 point to 48.0. Then there was a disappointing 0.5% decline in June factory orders.
- Housing prices spike higher. Home prices jumped 2.2% in May, according to the Case Shiller Home Price Index. The National Associations of Realtors recently complained about dwindling inventory. Limited options among buyers may support prices, but it has the potential to cap sales amid a lack of quality inventory for potential showings.
- Weekly jobless claims: Weekly claims increased 8,000 to 365,000 in the latest week. Auto layoffs this time of year can skew claims as it can be difficult to capture seasonality. One positive: weekly claims are no longer rising, and the four-week moving average has settled down.
Earnings are Mixed as Well
We have seen 67% or 321 of the S&P 500 companies have topped reduced profit expectations through July 31. However S&P estimates that EPS will rise just 1.8% from a year ago, and revenues are down 1.3% from a year ago.
Companies can cut corners and delay projects, but it’s tougher to manage a stronger dollar and sluggish sales.
IDEA OF THE WEEK:
Collect an Easy 8% Per Year with this Company Poised to Soar with Corn Prices
Grain and corn prices are surging and the party’s not over just yet. Grab a solid dividend with a pure-play nitrogen fertilizer. This year the U.S. Midwest is seeing the worst drought since 1956, sending corn prices soaring. In late June, I loaded up on the Teucrium Corn ETF (Nasdaq: CORN). Since then prices are up over 20%.
The severe weather conditions are wreaking havoc on corn crops. As a result, corn futures are trading near all-time highs and relief doesn’t seem close by. There’s little in the forecasts for rain in the Midwest, and the crisis seems to be spreading to the Northwest as well. This should further escalate corn and feed prices. But you as an investor can still get in on one of the best trading ideas of the year and collect a steady 8% dividend along the way.
There is a company that markets to the states of Illinois, Iowa and Wisconsin, which is one of the most attractive nitrogen fertilizer markets with strong and growing demand. In this market, ammonia usage has increased by 18% over the last five years alone. To meet demand, this market must rely on imports from other regions in the United States or from foreign countries. Best yet, the competition is very limited in this area with only two key players. The high barriers for the construction of new nitrogen fertilizer facilities should also provide future protection. Record-low natural gas prices are a key reason why I like fertilizer stocks, because low prices have a positive effect on supply.
Firms with the highest nitrogen and potash exposure stand to reap the largest reward as corn yields fall. Investors looking to take advantage of low natural gas prices in the fertilizer sector should look for a company such as Rentech Nitrogen Partners (NYSE: RNF), which stand to see profit margins expand as natural gas prices are suppressed.
Risks to Consider: If natural gas prices rise, it could impact profitability. Additionally, materials/commodity based stocks like Rentech can see higher amounts of volatility and price sensitivity. Because Rentech serves such a focused niche, it is exposed to the ups and downs of the local economy and market.
Take action: Buy Rentech up to $32 a share. The current dividend is 8.4% and this dividend could soar. As Rentech is a natural gas-based nitrogen fertilizer. They just announced its first cash distribution of $1.06 per share exceeding the prediction of $0.90-$1.00. Rentech Nitrogen is well positioned to exceed its forecast of cash available for distribution, of $2.34 per common unit. This stock could easily soar into the $40s.
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Disclaimer: This information is for informational purpose. This is not a solicitation to buy or sell securities. Please do your own homework before purchasing any securities. Faith-Based Investor is long RNF in its P.A.C.E. Portfolio and Tomorrow’s Treasures Portfolio.