U.S. Outstanding Student Loan Debt Mountain Reached $1.5 Trillion

Student loan debt is the largest debt in the US after mortgages. According to the Federal Reserve, the outstanding US student loan debt reached an astonishing $1.5 Trillion at the end of first quarter, 2018. This debt mountain is so huge that it is bigger than even outstanding credit card loans and auto loans.

From an investment impact perspective, investors need not fear a student loan debt crisis. This is because unlike mortgages most of the student loans is held by Uncle Sam and there are always ways the state can help students if they fail to replay. Outright cancellations of debt, debt forgiveness for students working in the civil service, postponement of debt repayments, etc. are some of the options. So though $1.5 Trillions for most investors it simply means nothing.

Click to enlarge

Source: Texas Gold Investors Just Got Their Own Fort Knox by Frank Holmes, U.S. Global Investors

Earlier:

MSCI Emerging Markets Index Country Weights Jan 1988 vs. March 2018: Chart

The MSCI Emerging Markets Index is the most popular index that tracks the performance of emerging market equities. The composition of the index has changed dramatically over the years.

The following chart shows the composition of the index by country weights at inception in 1988 vs. the composition in March, 2018:

Click to enlarge

Source: The Evolution of The Chinese Equity Market (Part 1), MorningStar Malaysia

When MSCI created the index in January 1988, China was not included in the index. Finally when it was added to the index September 1996, China accounted for a tiny 0.46% of the total. China has steadily growth since then and as of March the weightage has soared to nearly 30%. In addition while Malaysia was the largest constituent at inception, today China is top constituent.

China’s weight in the index has increased so much that it is higher than the weights of the next three countries of South Korea, Taiwan and India.

Related ETFs:

  • Vanguard MSCI Emerging Markets ETF (VWO)
  • iShares MSCI Emerging Markets ETF (EEM)

Disclosure: No Positions

Aerospace and Defense Stocks Have Outperformed The S&P 500 Based On Total Returns

The Aerospace and Defense sector is one of the hottest sectors in the US equity market. Stocks in this sector have rewarded investors with stable and consistent growth in the past few years. A basket of stocks in the S&P index for this sector has outperformed the S&P in terms of total returns (capital returns+dividend returns) from 2009 thru May 2018 as shown in the chart below:

Click to enlarge

Source: S&P Indices

In the past 10 years the annualized returns for the index is an excellent 13.85%. The 5-year annualized return is even better at 21%.

It is not possible to directly invest in an index. So how can an investor gain exposure to the Aerospace and Defense sector?

A simple and easy way to own stocks in the sector is via an ETF such as the SPDR® S&P® Aerospace & Defense ETF(XAR). This ETF aims to track the performance of the underlying S&P sector index. With total holdings of 35 companies the fund has a market cap of over $24 billion and an expense ratio of 0.35%.

Why are defense stocks an attractive investment for the long-term?

Some of the reasons that make the defense sector attractive for long-term investment are listed below:

  • As the world’s only super-power the US needs plenty of weapons and related resources to maintain the edge over other countries including the perennial enemy Russia.
  • Similar to consumer staples sector in the civilian world, defense and aerospace is a staple sector for the state. Billions of dollars allocated each year in the budget have to find a place somewhere and defense manufacturers are the top beneficiaries of the allocations.
  • Due to ongoing military and war operations and to defend against future threats, defense companies always have a solid backlog of projects to execute.
  • Unlike other countries, profit margins in the sector are extremely high due to the technology involved in the production of various defense systems.
  • The US is one of the top global exporter of weapons. Increasing demand for sophisticated weapon systems from allies tend to keep American arms makers in growth mode.

Some of the companies operating in the sector include:

  • Lockheed Martin Corporation (LMT)
  • Boeing Co (BA)
  • Raytheon Company (RTN)
  • Northrop Grumman Corporation (NOC)
  • General Dynamics Corporation (GD)
  • United Technologies Corporation (UTX)
  • Level 3 Communications, Inc (LVLT)

Download Docs:

Disclosure: No Positions

Comparing Valuations of Eurozone and US Stocks

Eurozone stocks are not expensive relative to their US peers based on Cyclically Adjusted Price to Earnings ratio according to an article by John Oliver at AMP Capital, Australia. He discussed four reasons on why Eurozone stocks are attractive at current levels. From the article:

Eurozone shares remain attractive

While question marks remain over Italy and this will weigh on the Euro, there is good reason to be optimistic regarding Eurozone shares. First, Eurozone shares are not expensive. They are trading on a price to forward earnings multiple of 14 times which is around its long-term average. And their cyclically adjusted price to earnings ratio which compares share prices to a ten-year moving average of earnings (often called a Shiller PE) is around 17 times compared to 32 times in the US. This is largely because Eurozone shares underperformed US shares in the post GFC period. Adjusting for relatively lower bond yields in Europe makes Eurozone shares even more attractive.

Source: Global Financial Data, AMP Capital

Second, the European Central Bank is still pumping cash into the economy and is a long way from rate hikes. Italian risk may keep it easier for longer. This contrasts to the Fed which is engaging in quantitative tightening and raising interest rates.

Third, the Euro is now falling. A rise in the Euro through last year – as Eurozone growth surprise on the upside relative to the US and political risk declined in the Eurozone relative to the US – harmed Eurozone shares. This is now reversing as US growth has started to accelerate relative to the Eurozone.

Finally, while Eurozone growth has slowed a bit it’s still good and thanks to ongoing monetary stimulus and a now falling Euro is likely to remain so. In turn this is good for profit growth.

Source: Italy is a worry – but 3 reasons not to be concerned about an Itexit, AMP Capital

Below are three points to remember before jumping into Eurozone equities:

  • US stocks have always commanded a premium relative to European stocks as American firms’ growth potential is usually higher.
  • Though Eurozone stocks are lagging in recent years they have beaten US stocks in the past in some years.
  • Eurozone stocks tend to have higher dividend yields than their American peers but for US investors dividend withholding taxes can take a substantial bite out of the yields.

Share Classes, Currencies and Exchanges of China Stock Market 2018: Chart

The equity market of China is complex to say the least. Due to capital flow restrictions, there are many different share classes and currencies that they can be traded with. There are seven different types of share classes. A-Shares are allowed for trading only for domestic investors and foreigners are not allowed to own those.

The table below shows the various share classes, currencies and the exchanges they are listed:

Click to enlarge

Source: Chinese Equities: Market Access, Equity Benchmarks & A-Shares, WisdomTree