The latest Boeckh Investment Letter is out, and editors Tony and Rob Boeckh take the reader on an insightful trip through the current investment landscape. Among the many topics they discuss, I found these four interesting: i) how the end of QE2 will impact interest rates, ii) the coming slowdown in earnings growth, iii) recommendation to hedge against oil price spikes, and iv) coming sovereign debt defaults in the eurozone.
What the end of QE2 means
There are enough signs of economic recovery to expect the Federal Reserve to end its second round of quantitative easing (QE2) in June as targeted. The Fed will phase out its purchases of government bonds in a gradual manner so that the rise in interest rates will be measured and modest – and pose little risk to derailing the recovery. Foreign purchases of U.S. government bonds are currently sufficient to support this disengagement process.
Slowdown in earnings growth
Earnings growth has been exceptional over the past two years as companies held off on hiring new staff and investing in equipment and plant. But CEO surveys now indicate a strong consensus for boosting spending on both hiring and capital expenditures. Along with rising commodity prices, this likely means corporate earnings growth will be slowing in quarters ahead.
Hedging the risk of an oil price spike
“Hedging against a sudden surge in oil prices is a must in this environment, as oil
in the $140-150 range would short-circuit the recovery … we recommend that investors at a minimum maintain a large overweight equity position in oil production, reserves and exploration, particularly in stable countries like Canada.”
Defaults coming on eurozone sovereign debt
With their bond yields at new highs relative to German bunds, Greece, Portugal and Ireland are all but certain to default. Markets could shrug it off if IMF gets involved and creates credible restructuring packages like it did for Latin America in the 1980s. European banks will take a big hit but EU governments will bail them out. At least there would be a realistic hope of recovery for problem countries Greece, Portugal and Ireland.
More details and topics are in The Boeckh Investment Letter
Interesting chart of the day (from the The Boeckh Investment Letter):
“Recent flow of funds data show the U.S. household sector has a negative home equity position of nearly $4 trillion!”