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No Sales, No Profits, No Bull: What Happens When Valuations And Central Banks Collide

Total business sales – sales by wholesalers, manufacturers and retailers – have fallen 5% from their July 2014 peak of $1.365 trillion. At $1.296 trillion for January 2016, total business sales have dropped back to where they were in January of 2013 ($1.293 trillion). In fact, the erosion of total sales by American businesses are even uglier when one takes inflation into account. Over the last 20 years, whenever total business sales continued on an upward trajectory, the U.S. economy steered clear of recession. The tech wreck of 2000 and the attacks in September of 2001 resulted in a downward move for business revenue; economic contraction was not far behind. The financial crisis slammed the brakes on business sales in 2008, ushering in The Great Recession; it ended around the same time that businesses began to increase their revenue streams. Might the year-and-a-half long downturn in revenue generation through January of 2016 be an anomaly? Yes and no. Yes, it is certainly possible that we did not hit “peak sales” in July of 2014; rather, the U.S. economy may still find solid footing in the months ahead. On the other hand, take a look what happened to the U.S. dollar via PowerShares DB Dollar Bullish (NYSEARCA: UUP ) beginning in July of 2014. After years of trading near decade lows, the greenback rocketed 25% against major world currencies. The result? U.S. exporters struggled to sell their wares, commodity prices collapsed and foreign stocks never quite recovered. The dollar’s vertical move adversely impacted earnings as well. Consider earnings-per-share (EPS) for the S&P 500. More than half of the profits at S&P 500 corporations emanate from overseas, where significantly devalued currencies hindered the proverbial “bottom line.” Specifically, earnings hit a high water mark in Q3 2014 (July-September). Earnings have been falling ever since. Everything comes back to the dollar’s epic ascent in the third quarter of 2014. Slumping sales. Slumping earnings. Even the top for non-U.S. equities. Take a look at Vanguard FTSE All World ex U.S. (NYSEARCA: VEU ). Between July 1, 2014 and May 21, 2015, the exchange-traded tracker plummeted and recovered. However, it was unable to claim higher ground. Worse yet, VEU has depreciated substantially since the S&P 500 set a record high in May of last year. The effect becomes even more noticeable when we isolate a region like Europe via Vanguard Europe (NYSEARCA: VGK ) or a sovereign like the United Kingdom via iShares United Kingdom (NYSEARCA: EWU ). Whereas U.S. market highs can be traced back to ten-and-a-half months ago (May 21), VGK and EWU have never recovered their July 2014 glory. A cynic might say, “Who cares if most of the world’s equities have been declining for 21 months?” After all, the S&P 500 is within a stone’s throw of recapturing its all-time record (2130) at 2060. Yet one of the reasons for the violent 14% correction of the S&P 500 in January through mid-February was the threat that the dollar would soar to new heights if the Federal Reserve kept its pledge to hike rates four times in 2016. It has since lowered the bar to two, and many believe they’d be lucky to get away with one. Unfortunately, the Fed may be caught in a pickle. Former Dallas Fed president Richard Fisher acknowledges that the institution deliberately created a wealth effect by front-loading a rally in stocks and real estate. The problem with doing so? Wealth effects eventually reverse themselves on the back-end, and the back-end typically begins at valuation extremes. Make no mistake about it. We are sitting on valuation extremes. Based on estimates of as-reported earnings for the S&P 500’s first quarter of 2016 ($89.4), the current price-to-earnings ratio is at 23. Even the non-GAAP, adjusted operating earnings ($100.6) is a lofty 20.5. And low interest rates alone are not a panacea for exorbitant valuation levels. Business sales stagnation. Prolonged profit weakness. And an economy that has been growing at a much slower pace over the last six months (1% or less) – far more lethargic than the 2% growth since the end of the Great Recession? Central banks have the power to prop up asset prices. Nevertheless, asset price reflation can quickly shift to deflation, particularly when revenue and earnings subside. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Tap Water With These Stocks And ETFs

Water plays a major role in the evolution of the economy and, of course, human life. Though water accounts for three-fourths of the total earth surface, fresh water accounts for a meager 3% of the total. As a result, about 650 million people across the globe do not have access to fresh drinking water putting them at risk of infectious diseases and premature death, according to United Nations’ estimates . This is primarily thanks to limited supply, an ever-expanding population, poor sanitation, and growing demand for consumption. Notably, about 70% of the total demand comes from irrigation whereas demand from industrial applications and domestic households account for about 22% and 8%, respectively. Given the scarcity of drinking water, companies and governments are coming up with new ways to recycle, manage, and desalinate water resources. Utility operators have already started to invest in their aging infrastructure and President Barack Obama is seeking an 18% increase in federal spending next year for safe drinking water. As per the Environmental Protection Agency (EPA), U.S. water infrastructure needs more than $384 billion over the next two decades to ensure safe drinking water to Americans. Further, about $271 billion is needed to upgrade the treatment of plants’ storage tanks and water distribution systems over the next five years. Given this, water could be an important growth industry and an excellent investing area as utility operators start putting their money into this corner to meet growing global demand for fresh water. Further, our Zacks Industry Rank confirms the upside to this industry as water utility has a solid rank in the top 9% at the time of writing. And investors’ thirst could easily be quenched by tapping this growing opportunity with our chosen stocks and ETFs. Stocks in Focus We have used our Zacks stock screener to find out the best stocks in this space. The parameters include Zacks Rank #1 (Strong Buy) or #2 (Buy), positive current-year earnings estimate revisions over the past 30 days and positive current-year EPS growth. Connecticut Water Service, Inc. (NASDAQ: CTWS ) This Connecticut-based company is a regulated water operator providing water service to people throughout towns in Connecticut and Massachusetts. The company has seen estimates rising by a couple of cents over the past 30 days for this year with an expected earnings growth rate of 2.78%. The stock has a Zacks Rank #2 with a solid Momentum Style Score of A and is up 13.3% so far this year. Middlesex Water Co. (NASDAQ: MSEX ) This New Jersey-based company provides quality water and wastewater service to residents in parts of New Jersey and Delaware, and beyond. It has seen solid earnings estimate revision of four cents over the past 30 days for this year to $1.30, representing substantial growth of 6.56% year over year. The stock has a Zacks Rank #2 with a solid Momentum Style Score of A and Growth Style Score of B. MSEX has gained 15.3% in the year-to-date timeframe. The York Water Company (NASDAQ: YORW ) This Pennsylvania-based company impounds, purifies and distributes drinking water. The Zacks Consensus Estimate for 2016 has been revised up from $0.99 to $1.00 over the past 30 days reflecting year-over-year growth of 3.61%. The stock has a Zacks Rank #2 with a Momentum Style Score of B. It has returned 20.1% so far this year. ETFs in Focus While there are four water ETFs available in the market, we have highlighted three funds that are in the green in the year-to-date timeframe. PowerShares Water Resources Portfolio (NYSEARCA: PHO ) This fund provides exposure to the U.S. water utility stocks that create products to conserve and purify water for homes, businesses and industries. It tracks the Nasdaq OMX US Water index and holds 32 securities in the basket with nearly double-digit allocation to the top firm. Other firms hold less than 7.8% share. The fund has amassed $642.8 million in AUM and is considered liquid when compared to the other choices in the space. It charges investors 61 basis points a year in fees and has added 0.4% in the year-to-date timeframe. Guggenheim S&P Global Water Fund (NYSEARCA: CGW ) This ETF provides global exposure by tracking the S&P Global Water Index. It holds 53 stocks in its basket with the largest allocation of over 7% to the top two firms while other firms hold less than 5.6% share. The fund has managed assets of nearly $358.1 million and trades in volume of 52,000 shares per day on average. It charges 64 bps in fees and expenses from investors. In terms of country exposure, American stocks make up for nearly 39% of assets closely followed by United Kingdom with nearly 17.6% share. CGW is up 2.5% so far this year. First Trust ISE Water ETF (NYSEARCA: FIW ) This ETF follows the ISE Water Index, which is a benchmark of firms that derive a substantial portion of their revenues from the potable and wastewater industries. Holding 35 stocks, it is pretty well spread out across components with each holding not more than 5.10% of assets. The fund has amassed $105.1 million in its asset base while charging investors 59 bps in annual fees. Volume is light at nearly 13,000 shares a day on average. The fund has delivered impressive returns of over 9% in the year-to-date timeframe. Original Post

FXF Hedge To Assuage ‘Brexit’ Fears

By Max Chen and Todd Lydon Market observers are growing anxious as the United Kingdom contemplates breaking away from the European Union. However, traders may hedge the so-called Brexit risk through the Swiss franc and currency-related exchange traded fund, according to industry analyst ETF Trends . The CurrencyShares Swiss Franc Trust (NYSEArca: FXF ) , which tracks the currency movement of the Swiss franc against the U.S. dollar, has been a traditional safe-haven play in times of volatility. FXF has gained 1.3% year-to-date as global volatility pressured riskier assets. On the backdrop of greater uncertainty down the road, HSBC argues that the Swiss currency could strongly rally on the a Brexit but would not weaken if the U.K. decided to remain in the 28-country bloc, reports Katy Barnato for CNBC . The U.K. is set to hold a referendum on June 23 where the electorate will vote on whether the country should remain with the European Union. “The CHF would likely rally on Brexit, given the political and European-centric nature of the crisis ,” HSBC currency strategists, David Bloom, Daragh Maher and Mark McDonald, said in a report. “The Swiss National Bank may intervene, but we believe it would only, at best, be able to slow the move rather than reverse it.” The HSBC strategists argue that while Brexit fears have been gaining momentum, there has been little evidence that the franc has priced in Brexit risks. “This asymmetry makes the CHF the best choice as a hedge,” HSBC Strategists added. Unlike the U.K., Switzerland has never been a part of the European Union. During times of duress among Eurozone members, the Swiss franc has acted as a safe-haven hedge. For instance, during the height of the Eurozone financial crisis, the franc currency rallied against the euro. The U.S. dollar weakened against the franc currency Wednesday, trading around CHF0.9765 Wednesday. The Swiss franc appreciated against the USD Wednesday after the Federal Reserve held interest rates steady while lowering expectation for the number of hikes this year to two from a planned four rate hike. CurrencyShares Swiss Franc Trust Click to enlarge Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.