| | Main Website >>Investment Management / Alternative Investment >>Blog
Email/Share:
 |
Too Many Useless ETFs
Wednesday, May 16 2012 | 04:14 PM
Bill Carrigan
Founder,
GETTINGTECHNICAL.COM | In order to be classed as a useless exchange traded fund (ETF) we need to satisfy two conditions. Let us refer to them as a UETF.
(1) A UETF has to be a thinly traded managed retail product: That means industry pros like portfolio managers and investment advisors (IAs) won’t go near these things and if they avoid them so should private investors. The big problem for the industry pros is they never know what the manager is doing with the assets inside the fund. In many cases the trading activity is almost silly.
(2) A UETF is usually so complex you figure out what it is. Is it a bond fund, an equity fund or some kind of a hybrid equity / bond / futures hedge fund?
Currently the industry leader for the production of UETFs is the folks at Horizon Exchange Traded Funds. Currently the investment industry’s most useless award goes to the Horizons Gartman ETF trading on the TSX under symbol (HAG). According the Horizons the HAG gives investors direct exposure to the investment strategies of The Gartman Letter. The ETF uses equity securities, futures contracts and exchange-traded funds to provide the ETF with long and short exposure to multiple asset classes which may include but are not limited to global equities, commodities, fixed income and currencies. It seems the fund does everything except provide positive returns – since inception from March 2009 this turkey has a negative annualized return of -6.6%. A buy and hold of the Dow Industrials over the same time period generated a positive annualized return of 9.2% - not including the dividend income! By the way at 3:20 pm Monday May 14, 2012 the HAG has traded a whopping 800 shares.
| 
0 Comment | Add Comment(s) |
|
A Growing Attraction to Municipal Bonds
Monday, May 14 2012 | 12:46 PM
Kevin D. Mahn
President and Chief Investment Officer,
HENNION & WALSH ASSET MANAGEMENT | Author: Kevin Mahn
We, at Hennion & Walsh, have long maintained that, for income oriented investors, bonds can provide for a dependable and consistent stream of income, and principal protection when held to maturity. Bonds, whether they are Municipal, Government or Corporate bonds, can also provide for compounded growth opportunities when the income received from the bonds is reinvested.
Additionally, for growth-oriented investors, fixed income securities can provide investors with downside protection and diversification within a growth portfolio especially in a highly volatile market where additional, measured, short-term flights to quality are likely.
While allocations to bonds may vary based upon market conditions and investor objectives and risk appetites, bonds (or other fixed income-oriented strategies) can typically find a home in most investment portfolios throughout most market cycles.
With respect to the current market outlook for the third quarter, it would appear as though there is a growing appetite and attraction to municipal bonds. I believe that this growing appetite is being fueled by the following factors:
1.Lack of Supply – new issuance of municipal bonds has slowed dramatically of late. While headline statistics will show that the total amount of municipal bonds issued through April 2012 is nearly twice what it was at this point in time last year, it should be noted that close to 70% of new deals were refinancing as opposed to brand new issuances. To this end, RBC Capital Markets, in an Investment News article on May 6, 2012 entitled, “Stage set for rally in municipal bonds” projects that municipalities will return approximately $140 billion to muni bond holders through distributions/returns of principal over the next 4 months while issuing only $140 billion in new muni bonds.
2.Potential for Higher Taxes Following Fall U.S. Presidential Election – if individual investors feel that the likelihood that their personal tax rates will go higher in the near future, their appetite for tax-advantaged products, including municipal bonds, will increase seeing that roughly 75% of the municipal bond market is owned by individual (i.e. retail) investors.
3.Aftermath of Muni Bond Fund Outflows following Meredith Whitney’s Default Predictions– It wasn’t that long ago that Meredith Whitney made her bold predictions on 60 minutes that there would be “hundreds of billions of dollars of municipal defaults” in 2011. The panic and concern that ensued drove retail investors out of municipal bond funds in record numbers. As it turned out, the forecasted onslaught of municipal defaults never occurred and municipal bonds still maintain a low cumulative default rate history when compared to other debt instruments as evidenced by the comparison to corporate bonds below.
Average Cumulative Default Rates
(1970 – 2011)
Rating
Municipal Bonds 10 Year Cumulative Default Rate
Corporate Bonds 10 Year Cumulative Default Rate
Aaa
0.00% Municipal Bonds 10 Year Cumulative Default Rate
0.48%Corporate Bonds 10 Year Cumulative Default Rate
Aa
0.01% Municipal Bonds 10 Year Cumulative Default Rate
0.86%Corporate Bonds 10 Year Cumulative Default Rate
A
0.04% Municipal Bonds 10 Year Cumulative Default Rate
2.22%Corporate Bonds 10 Year Cumulative Default Rate
Baa
0.37% Municipal Bonds 10 Year Cumulative Default Rate
4.71%Corporate Bonds 10 Year Cumulative Default Rate
Ba
3.92% Municipal Bonds 10 Year Cumulative Default Rate
19.54%Corporate Bonds 10 Year Cumulative Default Rate
B
21.85%Municipal Bonds 10 Year Cumulative Default Rate
43.00%Corporate Bonds 10 Year Cumulative Default Rate
Caa-C
23.68%Municipal Bonds 10 Year Cumulative Default Rate
70.24%Corporate Bonds 10 Year Cumulative Default Rate
Please Note: Data source is Wells Farg0 Advisors, Moody’s, Average Cumulative Default Rates, 1970 – 2011.
Once the default concerns waned in 2011, retail investors started to put money back into municipal bond funds which helped municipal bonds (along with the volatility that returned to the stock market following the downturn in equities during the 3rd quarter of 2011) turn in one the best annual performance results across all asset classes for 2011 as evidenced by the total return of 10.70% that the Barclays Capital Muni Bond Index posted for the calendar year – adding to an already impressive 10 year total return performance history for this index.
Barclays Capital Municipal Bond Index Historical Performance
(2000 – 2011)
Calendar Year
Calendar Year Total Return %
2000
11.68%
2001
5.13%
2002
9.60%
2003
5.31%
2004
4.48%
2005
3.51%
2006
4.84%
2007
3.36%
2008
-2.47%
2009
12.91%
2010
2.38%
2011
10.70%
Please Note: Data source is Wells Fargo Advisors, May 7, 2012. The Barclays Capital Municipal Bond Index is a broad measure of the municipal bond market with maturities of at least one year. Past performance is not indicative of future results. Investing in fixed income securities involves certain risks if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the Alternative Minimum Tax (AMT).
Another rally in municipal bonds could thus take place if more of the previously redeemed municipal bond fund money moves back into municipal bond funds or if new money is deposited in municipal bonds given the volatility that we are now starting to see again in the equity markets.
Hence, it would appear as though there is credence behind the growing attraction to municipal bonds on the part of investors given the lack of supply and increasing demand for tax-free bonds and this attraction is anticipated to last at least through the end of third quarter based upon current market information. However, with this said individual investors would be wise to educate themselves about the intricacies of municipal bonds, interest rates and the fixed income markets in general and consult with a professional who has expertise in this area. Part of this consultation should include a detailed review of financial goals and objectives (i.e. growth, income or a combination of both), investment timeframes, tax sensitivity and risk tolerance so that an appropriate, overall investment strategy, often incorporating a customized asset allocation framework, can be developed and implemented.
In this regard, and to provide for full disclosure, at Hennion & Walsh, we started out as specialists in tax-free municipal bonds and built our reputation by selling bank investment grade municipal bonds to conservative investors looking for safe, predictable income that's tax-free.
| |
0 Comment | Add Comment(s) |
|
How Bad Is Europe?
Thursday, May 10 2012 | 02:15 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | The chart tracks the S&P 500 SPDR (SPY) against what I believe are all of the Eurozone ETFs; iShares France (EWQ), iShares Spain (EWP), iShares Germany (EWG), iShares Italy (EWI), iShares Belgium, iShares Netherlands (EWN), iShares Finland (EFNL) and Global X Greece (GREK).
The YTD returns;
SPY +7.63%
EWQ +1.23%
EWP -18.50%
EWG +10.30%
EWI -7.67%
EWK +9.14%
EWN +1.57%
EFNL -7.76% (this fund started trading January 26)
GREK -10.15%
There really is a wide range of returns here. Germany and Belgium certainly are surprises as is Finland. Despite it going deathstar, Nokia (NOK) is still the largest holding in EFNL and no doubt contributes to that fund's poor showing (the next three largest holdings have all fared a little better than the fund).
For some reason Bob Pisani was on a jag yesterday about decoupling, saying no one likes it when he talks about decoupling but he said we're decoupling (except for Germany and The Netherlands). My thoughts on decoupling have been pretty consistent which is that any reasonable expectation should be for long term outperformance like Brazil being up 300% in the last decade versus a 24% decline for the S&P 500 (not including dividends). Over the course of a year anything can happen but expecting some equity market to go up 20% when the rest of the world is unraveling is not realistic.
The big macro for Europe has been the same for many years and will be the same into the future which is the demographics stink, the economic stats mostly stink, most countries are over indebted and desperate policy measures are not working as hoped for in terms of effect or time needed to have an impact. Over the years there have been comments generally disagreeing with my lumping Germany in with this avoid Europe theme although looking at a five year chart this has been correct more often than not.
Looking forward and thinking about Europe we will probably hear and read a lot of comments from various professionals about how they are investing in Europe. Some will be able to avoid but some cannot because of various mandates/constraints they must operate under. If you agree with the points made above about Europe, then how soon do you think any or all of them will change for the better? How you answer that question probably determines when you might want to get back into Europe. I don't think there is any visibility for meaningful improvement so we will continue to avoid the region.
| |
0 Comment | Add Comment(s) |
|
Jobless Claims Fall (Just Barely) Last Week
Thursday, May 10 2012 | 02:11 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | There’s good news and bad news in today’s weekly update of initial jobless claims. The good news is that new filings for jobless benefits fell last week, albeit by a slim 1,000 to a seasonally adjusted 367,000. That’s also the bad news. A more convincing drop--ideally to new post-recession lows--is what's needed to boost confidence. Instead, we seem to be stuck in neutral, and so there's no resolution yet for the main question weighing on the economic outlook: Are the last two months of weak growth in private payrolls signs of deeper troubles for the U.S. economy?
It’s surely encouraging that claims have remained relatively low in recent weeks. The outlook for the labor market would be considerably darker if new filings for unemployment had jumped sharply in the wake of the March and April slowdown in jobs creation. Actually, it was easy to think that the economy’s goose had been cooked when new claims surged to nearly 400,000 last month. But the danger quickly passed and claims have since fallen back to near four-year lows.
It’s also encouraging that the unadjusted year-over-year change in jobless claims continues to fall at a strong pace. Using last week’s numbers, claims are roughly 15% below the level from 12 months earlier. That’s near the biggest decline rate for the past year. The fact that the annual retreat continues at a robust pace implies that the labor market will continue to heal and so there's a case for arguing that the latest seasonally adjusted number can be dismissed as short-term noise.
“Part of the reason we’ve seen consumer spending hold up is because we’ve stopped seeing a large amount of layoffs,” Drew Matus, senior U.S. economist at UBS Securities, tells Bloomberg. “The general trend in jobless claims is lower.”
There's some reason to argue the point based on today's update, but the year-over-year decline rates largely trumps those worries. Nonetheless, the recent inability of the weekly seasonally adjusted numbers to poke down to new lows feeds concerns that the labor market's healing process is slowing.
Meanwhile, two large risk factors of late offer mixed messages these days as well. Oil (West Texas Intermediate) has fallen under $100 a barrel for the first time since February and that's helping to pull gasoline prices down. All things equal, lower fuel costs are always helpful for juicing the economy. The question is whether all things are equal these days. In particular, are the growth-boosting benefits of lower energy prices offset by the revival of euro risk.
One step forward, one step back.
“The initial-claims numbers are consistent with the notion that while the labor market is not as robust as December-February data suggested, neither does it appear to be in the process of falling apart,” says Joshua Shapiro, MFR's chief U.S. economist.
| |
0 Comment | Add Comment(s) |
|
How To Minimize Fixed Income Portfolio Risks
Wednesday, May 02 2012 | 03:14 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | A reader left the following questions;
At this point in the cycle, when everyone is hammering that bonds are expensive, if one's stock/bond allocation is tilted too highly towards stocks due to the recent uptrend, how should new money be allocated? Is holding cash appropriate?
The first thing to note is that this was an anonymous comment so obviously there is no way an RIA can give specific advice to an anonymous commenter on a website.
As for holding cash. If someone can afford it then I do believe in some sort of cash cushion as an emergency fund. Some would tell you this should be the priority over having an investment portfolio, some would suggest an emergency cash fund should be the secondary priority to an investment portfolio. I don't have one answer here which is why I say if you can afford it.
The other aspect to cash is holding some cash tactically in an investment portfolio which I think is fine and we often do have some cash in the portfolio. With where interest rates are, cash that is in an emergency fund will not grow, which is obviously a tradeoff for the peace of mind the someone might get from having a sum of money for the unexpected. Cash waiting to be deployed in an investment portfolio will also not grow which is a tradeoff for the ability to be opportunistic.
As far as bonds being expensive that is generically the case but not universally true and investors need to decide what it is they are trying to do with the bond portion of the portfolio. Longer term treasuries have been dangerously expensive for a while but have continued to climb in price. Why can't the ten year US treasury yield go down to 1.5%? Japan's did. If it does go to 1.5% then some people will have had a very good trade. There is obviously some percentage of the time where buying at the all time high (or close to it) works out to be a great trade.
Great trades are not the primary objective for how we manage fixed income portfolios for clients. The very low interest rates that exist in most segments of the bond market creates interest rate risk. As a general rule for each 100 basis point increase in the interest rate the price of a ten year bond will drop about 8%. The price drop for a longer dated bond under the same circumstance will drop even further in price. With an individual bond you will get your principal back (assumes no default) but waiting for eight or nine years while collecting below market interest is not ideal. Of course bond funds have no par value to revert back to. If/when interest rates normalize (think 5-6% for high quality ten year paper) there will be some bond funds (both indexed ETFs and actively managed funds) that will get decimated. A couple of Sundays ago I mentioned TLT dropping 6% when the ten year yield went up just a few basis points.
As disclosed in previous blog posts our path has been to minimize exposure to what appears to be the most obvious risk facing the bond market which is interest rate risk. We have a large portion of our fixed income exposure in short dated, investment grade corporates (individual issues). If rates skyrocket starting today the price of these short term issues will not tank because of how close they are to maturity. We might be collecting below market interest (that is if rates do go up a lot) for 18-24 months as opposed to eight or nine years as mentioned above.
We also have a large portion in individual foreign sovereign debt that is also short dated. In some cases the yield is pretty close to normal like Australia and in other cases the idea is owning very fiscally sound economies like with Norway. We also use an emerging market debt ETF to round out our foreign exposure.
We take a little bit of interest rate risk with a couple of funds (one CEF and one traditional mutual fund). The yields are pretty good but they are funds so there would be no par value for them to return to. Another good source of yield are individual preferred stocks. We own one from a bank and one from a REIT. Again the yields are good; high fives, low sixes. I am not a fan of the preferred stock ETFs, all the ones I've ever looked at are heavy in financial companies that I want no part of.
The last segment we have exposure to is inflation protected. The percentage allocated depends on the age of the client. Someone who is 50 will generally have more exposure here than someone who is 70. I think ETFs can be used in this space. We own the iShares TIP ETF (TIP) and while it is not up as much as TLT since we bought TIP it has done well with very little relative volatility.
For a couple of the segments above, as noted, I prefer individual issues but that may not be ideal for individual investors managing their own portfolios but there are ETF solutions that I think can work. For corporate bonds I would look to the BulletShares product line from Guggenheim and I think iShares is on to something with the recently launched corporate sector ETFs.
You need to look under the hood of anything but with the BulletShares you have to know how they work. The 2016 fund, symbol BSCG, isn't really a 2016 fund. There are issues in there that start maturing in February of that year and the proceeds will be held as cash until the fund terminates. I didn't take a complete inventory but at some point in the middle of the year the fund might be 50% cash. Maybe it is better to think of the 2016 fund as more of a 2015 fund but either way I think they can be very useful for individual investors who have taken the time to look under the hood.
There is also utility with the foreign bond ETFs too. iShares and SPDR have some funds here but PIMCO and WisdomTree seem to be doing more interesting things here. The broader funds tend to be heavy in Japan and Europe which are not great places to be. Our emerging market bond fund is the PowerShares fund with symbol PCY--obviously we think that is good fund to hold.
This was a long post but hopefully creates some understanding of spreading things across many different segments of the bond market as a way to reduce certain types of risks. Risk can't be eliminated of course but the potential impact can be minimized somewhat. The other observation is that I am not a fan of broad based funds as a first choice for accounts large enough for it to make economic sense to have many exposures. A $100,000 account for a younger person with a 25% allocation bonds probably can't take on eight different fixed income positions so something like the iShares Aggregate (AGG) does make sense.
| |
0 Comment | Add Comment(s) |
|
The when-to-sell decision
Wednesday, May 02 2012 | 03:11 PM
Bill Carrigan
Founder,
GETTINGTECHNICAL.COM | The when-to-sell decision has always been more difficult than the when-to-buy decision because the decision to buy only needs two conditions. We need to have the free cash and we need to have a compelling story. The when-to-sell decision has always been a historical nightmare for both professional and private investors because there are too many moving parts to consider. We have the micro or bottom up worries such as the compelling storey that has suddenly gone sour. Perhaps some chart pattern has negative implications. We also have the emotional baggage that compels us to sell a winner too soon and to hold on to a loser too long.
We also have the macro or top down worries such as the current crisis be it the never ending Euro-Zone problems or the threat of a slowing Chinese economy. Now we have the mindless chirping of the seasonal “sell” crowd pressuring investors into switching a good portion of their equity portfolios to cash.
The root of the problem is the failure to have an exit strategy in place at the time of the decision to buy. The exit strategy or stop loss option should never be based on changing fundamentals, otherwise known as the “compelling story” because the price decline will often lead the deteriorating business model. I am sure long tem investors in the shares of Nortel Networks Corporation or Research In Motion Limited would agree with this observation
The Lowest 26-Week Low is a simple strategy with no math required. Set your stop at the lowest low of the past twenty six weeks. This is a moving 26-week window, so each week add the new week and drop the oldest week. Sell if the weekly price closes below the prior lowest 26-week low. Conversely, if the price is rising the lowest 26-week low will follow the stock upward which allows us to hold a rising stock in some cases for weeks, months or years.
| |
0 Comment | Add Comment(s) |
|
What are ETF and Mutual Fund flows telling us?
Thursday, April 26 2012 | 03:31 PM
Kevin D. Mahn
President and Chief Investment Officer,
HENNION & WALSH ASSET MANAGEMENT | Author: Kevin Mahn
Tags: Kevin Mahn, ETFs, Hennion & Walsh, mutual funds
inShare.To:From:Message: We often look to the ETF marketplace for clues into the sentiment of investors. A few of the key data points that we review are total assets and fund flows; creations and redemptions, each quarter. Below, as a point of reference, are the top largest ETFs, as measured by total assets, as of the end of the 1st quarter. The constituents of this list have not changed much in recent quarters.
Top 10 Largest ETFs (Assets) as of March 31, 2012
Ticker
Name
Morningstar Category
Assets ($M)
SPY
SPDR S&P 500
Large Blend
105,640.2
GLD
SPDR Gold Shares
Commodities Precious Metals
69,014.5
EEM
iShares MSCI Emerging Markets Index
Diversified Emerging Markets
39,597.4
EFA
iShares MSCI EAFE Index
Foreign Large Blend
38,104.6
QQQ
PowerShares QQQ
Large Growth
35,676.5
IVV
iShares S&P 500
Large Blend
29,978.9
TIP
iShares Barclays TIPS Bond
Inflation-Protected Bond
22,282.9
VTI
Vanguard Total Stock Market
Large Blend
21,470.3
LQD
iShares iBoxx $ Investment Grade Corporate Bond
Long-Term Bond
19,853.7
IWF
iShares Russell 1000 Growth
Large Growth
16,675.3
Source: State Street Global Advisors, ETF Industry Guide, as of March 31, 2012.
ETF flow information for the 1st quarter of 2012, however, tells a very intriguing story. The story for ETFs, in fact, appears to be slightly different than the 2012 YTD story for mutual fund flows. With respect to the latter, stock-based mutual fund outflows rose to $1.19 Billion in February (this marked the 10th month in a row of net outflows) as flows to bond-oriented mutual funds rose according to Investor’s Business Daily.
On the ETF front, while we did see some positive net flows into bond-oriented ETFs (notably High Yield Bonds), we also observed significant funds flowing into domestic and international – emerging market equity products. In terms of outflows, or redemptions in this case, funds were flowing out of a wide variety of Morningstar categories, albeit only slightly on the bond-oriented front.
Top 10 ETF Creations for Q1 2012
Ticker
Name
Morningstar Category
Net Flows ($mm)
VWO
Vanguard MSCI Emerging Markets
Diversified Emerging Markets
6,443.82
QQQ
PowerShares QQQ
Large Growth
4,224.53
HYG
iShares iBoxx $ High Yield Corporate Bond
High Yield Bond
3,485.85
JNK
SPDR Barclays Capital High Yield Bond
High Yield Bond
2,826.00
EEM
iShares MSCI Emerging Markets
Diversified Emerging Markets
2,694.26
LQD
iShares iBoxx $ Investment Grade Corporate Bond
Long-Term Bond
2,398.06
VXX
iPath S&P 500 VIX Short-Term Futures ETN
Volatility
1,998.35
GLD
SPDR Gold
Commodities Precious Metals
1,872.65
VIG
Vanguard Dividend Appreciation
Large Blend
1,296.71
VNQ
Vanguard REIT
Real Estate
1,238.03
Source: Index Universe, as of March 31, 2012
Top 10 ETF Redemptions for Q1 2012
Ticker
Name
Morningstar Category
Net Flows ($mm)
EFA
iShares MSCI EAFE
Foreign Large Blend
-2,428.28
EWZ
iShares MSCI Brazil
Latin America Stock
-1,354.61
XLU
Utilities Select SPDR
Utilities
-1,101.83
SPY
SPDR S&P 500
Large Blend
-942.06
IWM
iShares Russell 2000
Small Blend
-923.43
SHY
iShares Barclays 1-3 Year Treasury Bond
Short Government
-852.27
MDY
SPDR S&P MidCap 400
Mid-Cap Blend
-642.22
TNA
Direxion Daily Small Cap Bull 3x
Trading-Leveraged Equity
-614.50
BIL
SPDR Barclays Capital 1-3 Month T-Bill
Ultrashort Bond
-591.20
UUP
PowerShares DB US Dollar Index Bullish
Currency
-581.65
Source: Index Universe, as of March 31, 2012
Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed account program to LQD, EEM, EWZ, XLU and EFA.
I believe that the divergence in fund flow information for the first quarter of 2012 may primarily be related to the types of investors who generally invest in the products. Institutional investors continue to gravitate towards ETFs for a wide variety of reasons while retail investors, fueled in large part for 401(k)/Defined Contribution Plan investments, use a great deal of mutual funds for their own household portfolios.
It is our current contention at Hennion & Walsh that Main Street (i.e. retail investors) is not buying in right now to the overly bullish sentiment of the markets, but Wall Street (i.e. institutional investors) is seemingly full steam ahead. Hence, recent ETF and mutual fund flow information would seem to support our contention as individual investors seem to be pulling back on stock fund investments and reallocating to bond fund investments while institutional investors appear to be searching for areas of additional growth in emerging market and domestic equity ETFs as well as alternative ETFs (Ex. Gold and Real Estate).
We will continue to monitor the fund flows associated with these two popular security types and report back on any important trend changes as necessary.
| |
0 Comment | Add Comment(s) |
|
March Durable Goods Orders Drop Sharply
Wednesday, April 25 2012 | 10:19 AM
James Picerno
Editor,
CAPITALSPECTATOR.COM | The margin of safety for durable goods orders is wearing thin. This series isn't forecasting a recession, at least not yet, but it's now the closest to crossing the line since the U.S. slipped into macro darkness in 2008.
The Census Bureau reports that new orders for manufactured durable goods dropped 4.2% in March on a seasonally adjusted basis. That's the steepest monthly decline since the Great Recession was slicing into business activity in 2009. Business investment (new orders for nondefense capital goods ex-aircraft) fared better, dropping only 0.8% in March. But it's hard to ignore the overall trend of late, which looks increasingly bearish on a monthly basis.
Monthly numbers for new durable goods orders are a volatile lot, of course, and so it's crucial to cut through the short-term noise in search of the bigger picture for this series, which is widely considered one of several leading indicators of future economic activity. Unfortunately, there's not much cheer to report here either: New orders for both durable goods and business investment rose a slim 2.7% and 3.9%, respectively, on a year-over-year basis. Those are the lowest annual growth rates since 2009.
It's troubling that the year-over-year percentage change for both series now appears to be stuck in a persistent deceleration phase. The growth rate didn't sink this low, or slow this quickly, in the previous two spring soft patches of 2010 and 2011. Is this a sign that the economy is destined for a deeper slowdown this time? Short of a miraculous rebound in the next update on durable goods and other indicators, it's hard to look at the latest numbers as anything other than a considerably dark warning sign.
Even worse, the downshift in new orders on an annual basis joins a similar trend in disposable personal income, which has been in deceleration mode for months. Adding to the gloom is the dramatic slump in job growth in March.
"This adds to the evidence that momentum in the economy sort of fell flat in March," Ellen Zentner, a senior economist at Nomura Securities, tells Reuters in reference to today's durable goods report.
The question is whether the fall was temporary? Judging by the rise in the Conference Board's leading index for March, there's a case for optimism. Or does the durable goods news trump that view?
We'll know the answer soon enough as new data from other corners of the economy roll in for March. Next up is tomorrow's weekly update on jobless claims. Recent numbers have looked a bit weak, as I discussed last week. Suffice to say, the crowd's not likely to be forgiving if tomorrow's update brings decisively bad news. For the moment, however, the outlook is relatively sunny. The consensus forecast anticipates that new jobless claims dropped by a healthy 13,000, according to Briefing.com.
We'll also learn tomorrow how the overall economy fared last month by way of the Chicago Fed National Activity Index. The update for February looked encouraging. A repeat performance for March would go a long way in boosting sentiment. Today's durable goods news, however, suggests that we may be headed for a run of negative surprises.
| |
0 Comment | Add Comment(s) |
|
Is The Recent Rise In Jobless Claims Warning Of Another Spring Slowdown?
Thursday, April 19 2012 | 04:05 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | A week ago I wondered if the rise in jobless claims in the first week of the month was due to a seasonal factors, and the inquiry still stands. But as you’ll see, today’s update raises more questions than it answers, although the short list of potential culprits starts with the seasonal influence of Easter. As for the straight numbers, new filings for unemployment benefits last week fell slightly by 2,000 to a seasonally adjusted 386,000. Historical context is always crucial for evaluating the number du jour, and more so than usual with today’s news.
The latest drop doesn't mean much, however, given the revision to the previous report. With the fresh data in hand, it's clear that there's been a modest change in the trend--a change that may or may not be temporary. As the chart below reminds, jobless climbs jumped by an unusually large amount—unusual, that is, relative to history over the last 11 months. The revised data released today shows that new claims rose during the week through April 7—Easter week—by a seasonally adjusted 26,000. We haven’t seen a weekly increase of that magnitude since April 2011. That’s not an encouraging comparison. The surge in jobless claims a year ago foreshadowed a rough patch for the economy. The turbulence passed, but the question now is whether we’re headed for a new bout of trouble?
The optimistic view is that the jump in jobless claims is temporary, due to seasonal factors related to Easter. Maybe, although there’s reason for doubting that explanation when we look at the raw numbers on a year-over-year basis. As the second chart below shows, unadjusted claims fell a mere 3.7% vs. the same time a year ago. That’s a clear reversal of fortunes relative to the roughly 9%-16% decline range that’s prevailed for months.
Is this a warning of things to come? Possibly, although it’s still too early to say much of anything without more data. Jobless claims, to roll out the familiar caveat, are notoriously volatile in the short run. Meantime, if you look at the first chart above that tracks the seasonally adjusted weekly numbers, you’ll see that even with the rise in claims the absolute level of seasonally adjusted numbers is still quite low--near a four-year trough, in fact.
If there’s a genuine problem brewing here, which would cast a shadow over the outlook for the broader economy, we’ll know fairly soon. The worst case scenario would be a continued rise in the weekly seasonally adjusted numbers along with a confirming jump in the unadjusted year-over-year percentage change.
For now, there are only questions about what next week’s update will reveal. Economist Carl Riccadonna at Deutsche Bank is thinking positively: he tells AP that "what we're seeing in the numbers is not unusual at this time of year" and so more encouraging news is coming. But in the same article, Jennifer Lee of BMO Capital Markets advises that it's realistic to interpret the recent data on jobless claims as a sign that "job growth is slowing. Still growing, mind you, but at a slower pace."
"Bottom line," says Peter Boockvar of Miller Tabak via RTT News, "the last two weeks reflect a reversal of the slow but steady drop in the amount of those filing for unemployment insurance that we've been seeing since November." That's not enough to make convincing forecasts, but the change definitely frames how the crowd will be thinking in the near term. "It's only two weeks," Boockvar continues, "so way too early to declare a fresh deterioration, but it definitely bears watching because if the pace of firing's start to pick up again, it certainly says something about what the pace of hiring's will be."
| |
0 Comment | Add Comment(s) |
|
ETF Investors: What’s In Your Index?
Tuesday, April 17 2012 | 10:03 AM
Michael Johnston
Managing Director,
ETF DATABASE | It wasn’t that long ago that indexes were used almost exclusively as performance benchmarks and barometers for stock market performance, most visible as a summary of recent activity on the evening news on in the business section of the morning paper. But over the past several years, the rise of indexing strategies and ETFs has transformed indexes into investable assets with hundreds of billions of dollars seeking to replicate these strategies.
As indexes have become more widely replicated, the indexing industry has evolved rapidly. Gone are the days when there were only a handful of benchmarks; there are now hundreds of thousands of indexes that slice and dice global stock markets in almost every conceivable way. Indexes that employ unique weighting methodologies as alternatives to market cap weighting have garnered significant attention in recent years, emerging as new tools for tapping into traditional asset classes. Meanwhile, index providers have also been busy fine tuning the rules behind indexes in an attempt to enhance the experience of investors with positions in products linked to these benchmarks [see also The Truth About Alternative Weighting Methodologies (And ETFs)].
While the details and complexities of the index construction process might not make for thrilling conversation, it is obviously an extremely important topic for investors who utilize index-based products such as ETFs. As is often the case, the details matter.
Under The Hood Of Indexes
To understand how the nuances of an index methodology can translate into significant differences in a portfolio, consider two ETFs that offer exposure to Russian stocks: the iShares MSCI Russia Capped Index Fund (ERUS) and Market Vectors Russia ETF (RSX). ERUS seeks to replicate an MSCI benchmark that is designed to include the top 85% of Russian stocks by market capitalization. RSX is linked to a Market Vectors benchmark [see also Seven Factors Every Investor Needs To Know About Emerging Market ETF Investing].
Though these two ETFs have considerable overlap, there are some meaningful differences in the portfolios as well that result from the features of the underlying benchmarks:
1. Single Stock Caps
Many benchmarks to which ETFs are linked now implement caps on single stocks, in part to force compliance with diversification requirements of ETFs that prevent a single stock from making up a substantial portion of the portfolio. In international markets, where a handful of companies may account for a huge portion of the total economy, that feature can help to balance out a portfolio. The indexes underlying ERUS and RSX both feature single stock caps, but at very different thresholds.
The MSCI Russia 25/50 Index to which ERUS is linked caps the weighting to any one stock at 25%; in RSX, a company is limited to about 8% of the total portfolio. As a result, ERUS is considerably more “top heavy” than RSX; Gazprom (22%), Lukoil (12%), and Sberbank (11%) combine to make up about 45% of total assets in ERUS. The top three positions in RSX make up only about 22% of assets [see also BRIC ETFs And Missed Opportunity].
The top ten holdings of RSX make up about 57% of the total portfolio; the top ten of ERUS make up close to 75% of total assets. So the methodology behind RSX results in a more balanced portfolio of Russian stocks, while ERUS is more likely to deliver a concentrated position dominated by a handful of securities.
2. Large Cap / Sector Bias
The cap on individual stocks can impact other areas of the portfolio as well, such as the sector biases and the allocations to smaller companies. Generally, higher single stock caps (or absence of a single stock cap) will result in a portfolio with greater tilts towards a single sector and higher concentration in mega cap stocks.
That’s the case with the two Russia ETFs; while both are dominated by energy stocks, the allocation to this sector is significantly higher in ERUS. That is partially the result of the lack of a cap on Gazprom and Lukoil; those two companies make up about a third of ERUS, but only about 15% of RSX. The lower single company cap in place in the index underlying RSX results in a much lower allocation to the energy sector, as well as a smaller weighting afforded to giant cap stocks. Though RSX is comprised almost entirely of mega cap and large cap securities, there is a slightly bigger weighting given to mid caps:
ERUS RSX
% Mega Cap Stocks 60% 39%
% Energy Sector 52% 35%
3. Depth Of Exposure
The depth of exposure offered by an index can obviously be another factor that determines the composition of any ETFs linked to that benchmark. And in many cases, the depth of an index can vary dramatically from index to index. ERUS, for example, holds only about 25 stocks since that is the extent of the underlying index. RSX has almost twice as many holdings, which results in a deeper and more balanced portfolio (and also contributes to the more significant allocation to mid cap stocks) [see also Ten Commandments Of ETF Investing].
4. Who’s In / Who’s Out
The indexes on which ERUS and RSX are based have quite a bit in common; both include many of the largest Russian companies. But there are a few differences in the underlying portfolios that result from nuances in the construction methodologies. Vimpelcom, one of Russia’s largest cell phone companies with a market cap of about $18 billion, isn’t included in ERUS. The company derives most of its revenues from Russia, but has its primary listing in Frankfurt (it’s also traded on the NYSE under the ticker VIP).
Verdict
There is, of course, no universally superior indexing methodology; different approaches to creating a benchmark will perform better in different environments. For example, when the energy sector is surging and oil and gas prices are climbing, ERUS might be expected to outperform RSX thanks to the large allocation to this sector of the market [see also 3 ETFs For The End Of Operation Twist].
But it’s also clear that these finer points of the index construction process translate into differences in realized returns and volatility; ERUS and RSX are clearly not identical in terms of performance.
| |
0 Comment | Add Comment(s) |
|
Withdrawal Rates--It's About More Than The Math
Monday, April 16 2012 | 12:27 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | Over the weekend readers left links to two different articles about withdrawal rates:
Here: http://wpfau.blogspot.com/2012/04/withdrawing-constant-percentage-of.html
And Here: http://assetbuilder.com/blogs/scott_burns/archive/2012/04/06/life-how-much-will-you-leave-on-the-table.aspx
Zooming out a little bit there seems to be a theme popping up about the 4% rule being too conservative. The second link laid out where a 6% withdrawal rate resulted in a likely outcome of being out of money for the last 7.5% of your expected retirement years.
That will make more sense if you read it but if your retirement is 30 years then the last two years and three months you'd only have social security, no real investment portfolio. Maybe this is when you'd call Robert Wagner for a reverse mortgage.
Obviously I believe in the 4% (or less) rule but I concede that I am very conservative and this is something that people with investment portfolios need to figure out for themselves. I will continue to make the case for 4%, depending on your interest level you may read other articles that compel you to be comfortable with some other number--6% represents a 50% raise after all.
If the 6% scenario above played out exactly as the numbers indicate then you'd better hope that social security is still there and paying what you need it to pay. When I wrote about social security a few days ago one reader seemed to be saying the social security is just fine. I'm sure that is the conclusion he draws and I am sure we all draw our own conclusions about the likelihood of getting all or some of our social security.
I assume I will get nothing. Some may assume they will get the entire payout (this is certainly reasonable for people above a certain age) and some might assume some reduced portion. Whatever you believe you will get from social security would play into whether a 6% withdrawal rate makes sense for you. If you are expecting any number greater than zero, then you need to figure a confidence level in that assumption.
I'm pretty confident about zero.
A personal concern I have with most of these articles is the assumption of linear returns combined with one-off expenses. For someone with a $600,000 portfolio the combination of a year like 2008 and needing to replace the roof could be devastating. Let's say these people take out their 4% plus another $20,000 for a roof (does that number make sense?) and the $360,000 in equities (so a 60/40 portfolio) went down by 25% (a pretty good result by 2008 standards). So what started the year as a $600,000 portfolio is now down to $476,000 to start 2009.
I would submit that many people will have more than one really expensive one-off during their retirement. What if the next really expensive one-off comes during the next bear market? This sort of stuff contributes to my being very conservative on these issues. Obviously you reading this must decide for yourself and then own the success or failure of your decision.
| |
0 Comment | Add Comment(s) |
|
Another Strong Month For Retail Sales In March
Monday, April 16 2012 | 12:24 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | If you’re not impressed by the ongoing strength in retail sales, you should be. Or maybe you're just perplexed. In any case, consumption rose a strong 0.8% in March on a seasonally adjusted basis, the Census Bureau reports. Although that’s down a bit from February’s 1.0% jump, there’s nary a sign in the latest numbers that the consumer is stressed or poised to give up shopping any time soon.
In fact, retail sales for the first three months of this year have delivered a strong run, given what we know about the continued deceleration in disposable personal income (DPI). Either DPI is misleading us about the future or consumption is. Only time will tell, although based on today’s news it’s clear that consumption has yet to give way this year to the darker side of expectations.
Is the story materially different if we ignore the short-term data? Nope, not at all. Looking at retail sales on a year-over-year basis also shows that consumption’s pace is holding steady at roughly 6.5% a year. That's down a bit from the highest levels in recent years, but no one will confuse it with sluggish growth. If the business cycle is poised to bite, the message has yet to reach Joe Sixpack.
Is this an artifact of higher gasoline prices? There's no smoking gun here either. Retail sales less spending at gasoline stations rose about 0.7% last month, or up slightly from February’s pace. Meanwhile, retail sales-ex gasoline continued to rise at a bit more than 6% on an annual basis through March, which is in line with the trend for much of the past year.
In short, retail sales continue to chug along at a robust pace, even after ignoring the volatile auto sector.
“There is no sign that higher fuel prices have damaged consumer sentiment and spending,” Jeremy Lawson, a senior U.S. economist at BNP Paribas, tells Bloomberg. “This is enough to generate solid economic growth. We’ve seen the job market improve and that’s boosting consumption.”
Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, finds nothing in today’s numbers to suggest otherwise. "It's a clear sign that U.S. consumer spending remains strong,” he notes via Reuters. “On balance I think it's the latest sign here that the U.S. economy is outpacing a lot of its major counterparts in recovery.”
If you're inclined to argue differently, you won't find any statistical support in today's retail sales update.
| |
0 Comment | Add Comment(s) |
|
Opportunity in the trashed gassy producers
Friday, April 13 2012 | 11:37 AM
Bill Carrigan
Founder,
GETTINGTECHNICAL.COM | It has been difficult not to notice the bearish stampede out of the natural gas producers, the uranium miners and the gold miners. The perception among investors was that if the related commodity prices in natural gas, uranium and bullion were to continue to fall, there was no point owning the related producers.
The price of natural gas has been in free-fall for months triggering a bearish stampede out of the natural gas producers. Some producers have had their prices driven down to historical negative price deviations from their long term moving averages – see the example list with the name, symbol and the per cent negative distance below the 40-week moving average – the bigger the number the more likely a recovery
Advantage Oil & Gas Ltd. AAV -27.33
Birchcliff Energy Ltd. BIR -45.78
Celtic Exploration Ltd CLT -34.79
Delphi Energy Corp. DEE -34.52
Fairborne Energy Ltd FEL -33.79
Progress Energy Resources PRQ -16.44
Tourmaline Oil Corp TOU -20.93
These oversold gassy producers will eventually ignore the current reality and anticipate the eventual return to higher gas prices. I do recall the many of todays mid cap gold producers trading for pennies in 2001.
| |
0 Comment | Add Comment(s) |
|
Could One Bad Jobs Report Derail this Bull Market?
Friday, April 13 2012 | 11:19 AM
Kevin D. Mahn
President and Chief Investment Officer,
HENNION & WALSH ASSET MANAGEMENT | On Friday, April 6, 2012, when U.S. markets were closed for the Good Friday holiday, the Department of Labor released a report indicating that U.S. companies added 120,000 new jobs in the prior month. While this would seem like positive news on the surface, it represented the first time in the last five months that less than 200,000 new jobs were created and fell significantly below the expectations of most economists who were expecting another increase of 200,000 + new jobs. U.S. markets thus opened decidedly lower on the following Monday after having time to digest the disappointing report and perhaps fearing that this report could be a sign of the underlying weakness in both the job market and the overall economic recovery.
One should remember that the report is just one report and, in and of itself, does not make a turning or lasting trend. However, the fact the U.S. economy is having a difficult time creating new jobs consistently should not come as a surprise to anyone.
To understand our sentiment in this regard, one should remember that the United States economy is now more service oriented than manufacturing driven and service oriented economies, which thrive on technological innovation, do not tend to have the capacity to produce large numbers of new jobs. Further, it remains to be seen if the majority of new job creations will go to existing displaced U.S. workers. Hence, it is difficult for us to imagine an economic scenario that would allow for a large number of new jobs to be created for existing unemployed U.S. workers.
While we, at Hennion & Walsh, still do not believe that unemployment will move significantly lower in 2012, we also do not believe that the unemployment rate will not move higher in 2012 and, perhaps, experience some minor improvements along the way leading into the Presidential election in the fall.
As a point of reference, the three key labor market statistics that we generally refer to in order to assess the current state of employment in the United States are as follows (although we also look at private sector job creations as well as previously indicated):
1.U3 Unemployment Rate – the most commonly referred to “official” rate of unemployment, the U3 unemployment rate measures the proportion of the civilian labor force that is unemployed but actively seeking employment.
2.U6 Unemployment Rate – the U6 unemployment rate counts not only people without work seeking full-time employment (the more quoted U-3 rate), but also counts marginally attached workers and those working part-time for economic reasons.
3.Initial Jobless Claims – a weekly measure by the U.S. Department of Labor that shows the number of initial jobless claims filed by individuals seeking to receive jobless benefits.
As of March 2012, the U3 (i.e. the “official”) unemployment rate stands at 8.2%, which is the lowest that this rate has been since February of 2009. The official unemployment rate has been falling gradually since August of 2011 although it is still above the highest level it has been since November of 1983. Following a similar path, the more encompassing U-6 unemployment rate has been falling since September of 2011 and currently stands at 14.5% as of March 2012. To put these numbers in perspective, the U6 and U3 unemployment rates stood at just 8.2% and 4.4% respectively as recently as May of 2007 – the latter near the 4% rate that many academics claim is the approximate level of full employment in the U.S. While the overall unemployment trends are both positive and promising, clearly, there still remains much work to be done to get America back to work again.
Aside from the jobs market, we are anxiously awaiting Q1 quarterly earnings reports to gain a better glimpse into the balance sheet health of U.S. companies but also into the spending health of U.S. consumers. The latter remains critical as consumer spending still accounts for over 70% of Gross Domestic Product (GDP) in the United States.
| |
0 Comment | Add Comment(s) |
|
They Said What About Asset Allocation?!
Thursday, April 12 2012 | 11:55 AM
James Picerno
Editor,
CAPITALSPECTATOR.COM | Asset Allocation Can't Save Us, But It's Still Crucial For Portfolio Results
Is asset allocation unimportant after all in the grand scheme of managing wealth? Yes, according to a new study the Center for Retirement Research at Boston College. "The focus on asset allocation is misplaced," advises "How Important Is Asset Allocation To Financial Security In Retirement?" On first glance this finding sounds like a knock-out blow to all the studies through the years that tell us that asset allocation is a critical variable for portfolio management. Should we now abandon the idea? In a word, no.
The paper appears to offer radical advice by way of a shocking disclosure. In fact, the study's not telling us anything that wasn't already obvious. The authors demonstrate that a number of tools and techniques beyond asset allocation are of greater influence on the outcome of financial planning decisions over long periods of time—particularly for investors with relatively small portfolios. The message is that investing results alone may not suffice for most folks in the all-important task of saving for retirement. How you manage assets is important, but that can can pale next to how much you earn over the course of a lifetime, and how much you save along the way.
This isn't terribly surprising, and it certainly doesn't change what we know about asset allocation and its relationship with risk and return over the long haul. Nonetheless, you still can't get blood out of a stone and asset allocation won't help all that much if your portfolio is small relative to what's needed to engineer a secure retirement. As the authors explain,
Strikingly, the typical 401(k)/IRA balance of households approaching retirement is less than $100,000, which suggests that the net benefits of portfolio reallocation have to be modest for the typical household. Although it is possible that higher income households have more to gain.
A simple Excel exercise aimed at determining the required saving rates for individuals with different starting ages, ending ages, and asset returns showed that the difference between earning a real return of 2 percent instead of 6 percent could be offset by working five years longer. This finding suggests a minor role for asset allocation in creating a secure retirement.
The paper concludes: "Given the relative unimportance of asset allocations, financial advisers will be of greater help to their clients if they focus on a broad array of tools – including working longer, controlling spending, and taking out a reverse mortgage."
Agreed. But this is hardly a smoking gun that invalidates asset allocation. True, designing and managing the portfolio mix through time can't overcome the headwinds of, say, not saving enough assets to properly fund retirement. Asset allocation won't make you any taller or smarter either. But within the realm of the portfolio, asset allocation and rebalancing remain the primary factors driving the risk/return profile. That hasn't changed, nor will it. The fundamental laws of finance are written in stone.
Meantime, there is a risk of trying to be too clever with asset allocation. It's hard to beat a broadly diversified, unmanaged multi-asset class portfolio in the long run without taking big risks--risks that may or may not pay off. For instance, the Global Market Index—a passive, unmanaged mix of the major asset classes weighted by market values—outperformed nearly 90% of 1,200-plus multi-asset class mutual funds for the 10 years through the end of 2011.
But if we're talking about the broader array of influences on an individual's wealth, it's necessary to look beyond money management. To note the obvious, or what should be obvious: your career is likely to have a bigger impact on your retirement than your decision on how much to hold in stocks vs. bonds vs. REITs vs.commodities. Even the greatest portfolio strategy in the world won't do much to help you reach financial goals if your investment assets are minimal, or if you lose your high-paying job and have to settle for flipping hamburgers. At the opposite extreme, it's no great revelation to discover that a CEO with a multi-million-dollar salary can ignore asset allocation—and investing in general—and still do quite well for himself.
None of this alters the reality that asset allocation and rebalancing are the key variables that govern results through time for most portfolios. That may not be terribly relevant for your financial health in general. But if we're talking about managing portfolios, asset allocation is still on the short list of key factors.
| |
0 Comment | Add Comment(s) |
|
BOOM! Goes the Social Security Assumptions
Thursday, April 12 2012 | 11:49 AM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | There was an article in the WSJ yesterday about the IMF warning anyone who will listen that models for life expectancy currently being used by pensions and government entitlement programs underestimate how long people will live. The conclusion was that this adds about $7 trillion to what most studies believe to be the totality of the social security and medicare future shortfalls.
Over the years the articles I've read about life expectancy seem to believe that expectancies will increase at an accelerating rate due to medical innovation. When I've mentioned this in the past there have been comments about not wanting to last for years in a frail state needing to be cared for down to the most personal of daily tasks. That is not the context of the work being done in the field.
Obviously it will be a couple of decades or longer before we know whether this holds water and if it does, how much water it holds but we know that people generally are living longer and we know that there will continue to be medical advancement and we will learn more about nutrition and other lifestyle habits that offer the plausible outcome of living well for a longer period of time.
Where this possibility exists it drew one very funny comment about encouraging smoking and repealing motorcycle helmet laws (amusingly helmets are not required in Arizona).
Perhaps with a bit of confirmation bias I believe this supports the idea of social security and medicare looking much different in some number of years (ten? 20?). For many years I have been saying that the programs as we know them are not sustainable. I think that whenever things actually hit the fan we will look back and unsustainability will have been obvious like the way we look back on the tech wreck and the financial crisis (hindsight bias).
Not being an actuary or demographer I certainly have no idea how far down the net worth/income scale that benefit cuts will come but a lot of people relying on social security will have a serious and unfortunate situation befall them which of course is not only a micro problem but will also be a big macro problem.
I tend to believe that plenty of people will figure ways to get by without being homeless even if it is difficult, involves a lot of sacrifice and taking some sort of job that they view as undesirable. There will still be a lot of problems on the personal economic front but individual problem solving is worth something.
Individual problem solving is what living below your means (something I've written about almost obsessively) is all about. Spending less allows for saving more which hopefully results on less reliance on a social program that may not be there for you. This does not mean live like a monk in a cardboard box but presumably as you get a little further along in your profession and start to make a little more money you could increase your personal savings rate.
Also if the scenario of making more plays out for you for a while but then derails (through no fault of your own--I hate that saying) then you obviously have an easier time covering your monthly expenses either through savings or getting a job at Home Depot or the like. You can cover a decent portion of a $2000-$3000 monthly nut compared to $8000 in expenses with a $10/hour job until the career gets back on track. I speak from experience here. During the year before I started at Your Source I helped put a roof on a garage, helped build a rock well and did some logging among other things to supplement the income that went with only having a couple investment management clients.
| |
0 Comment | Add Comment(s) |
|
The Big Picture For The Week of April 1, 2012
Monday, April 02 2012 | 11:22 AM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | The other day I was reading an article at Seeking Alpha about Annaly Capital (NLY). The author seemed to draw a negative conclusion and he got ripped pretty good in the comments. I would note that the author seemed to misread a couple of metrics and seemed to not fully understand a few others (for example traditional PE ratio isn't terribly useful in studying a REIT).
As a mortgage REIT, NLY takes on a lot of leverage and the job of the company is to manage leverage correctly. This takes in all manner of variables that I think bulls would concede is complicated. Obviously anyone bullish on the name would believe that the management is capable of managing those variables.
The big draw to the name is the dividend yield which is currently around 14%--that is the trailing yield and it is important to note that it is a trailing number. Looking back Google Finance for five years it looks like it has made all of its scheduled dividend payments but the amount of each dividend has a history of big swings in both directions. Foreign companies seem to put less weight on keeping a steady dividend, they pay out on business conditions and it would appear NLY does the same which is of course logical (and required) and not a knock on the stock.
For me the stock ticks off all of the negative buzz words; financial, mortgages, real estate, leverage, interest rate spreads so we don't own it but in looking at the chart it has been remarkably resilient. For five years the stock is up 6.6%, plus all the dividends, while the S&P 500 is down 2% and the Financial Sector SPDR (XLF) is down 55%.
I would also note that for the most part the ride has been much smoother than for the SPX of XLF but not 100% of the time. There was a two or three week stretch in early 2008 where it fell 28% and going back a little further it fell 40% in the second half of 2005.
It is unlikely that I am going to buy the stock, I can't get comfortable with the entire picture that I think I see and I tend to believe that yields that high belie some sort of risk regardless of whether I know what that risk might be but I may have been too negative on it before (although technically there is no way to know)--certainly I am surprised how well it has held up.
Reading all the comments on the above post got me to thinking about how popular the stock is. it seems like I see at least one article about it on Seeking Alpha every day. If you click through to that page you will see that many of the articles have dozens of comments, some even in the hundreds. I don't know if there is a search function on Seeking Alpha to count comments but excluding Apple (AAPL) there can't be too many other stocks that are this popular (as measured by number articles and number of comments).
As noted above other than a few spasms here and there the stock has been relatively even keel as opposed to going up several hundred percent so the interest is no doubt attributable to the dividend. Still the tone of the comments seems to imply a loyalty to the stock that is uncommon and combining that with a yield that is uncomfortably high leaves me continuing to avoid the stock. Candidly I don't understand the emotion that appears to be embedded into the loyalty but if there is an emotion tied in that is a negative for me.
The high yield might be a reason for people to be cautious but my lack of understanding of the sentiment is not a reason for anyone else to be cautious. For me this is just a head scratcher
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
The Role of Ethics in Portfolio Construction
Monday, March 05 2012 | 05:05 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | As a follow up to something he read about New Zealand a reader asks;
"How do you factor in ethics when evaluating portfolio choices?"
Things like ethics or anything that might fall even remotely under the header of socially responsible investing should be a personal decision based on priorities of the investor. In my opinion there is no single right answer; one person cannot say what is right for another.
My own view on this must be from where I sit as a portfolio manager. I perceive my job as trying to clients the best chance they can get of having enough when they need it and also to try to protect assets when that appears to be warranted.
Very anecdotally speaking it seems as though most socially responsible funds lag the market pretty consistently. I'm sure there are exceptions. While I can't be certain as to why this might be I do know that the tobacco stock and liquor stock we use in "large" client portfolios have done pretty well over the long term. The nature of the demand for the product makes them steady performers and future prospects look good in my opinion. I'm pretty sure tobacco and booze are no-nos in SRI funds.
If a portfolio manager makes the decision to omit a tobacco stock because of his beliefs about the tobacco industry then he is projecting his beliefs onto his clients and very subjectively speaking I don't think that is right. If a client tells us no tobacco, that is his belief not mine and we can accommodate that type of request with the proper paperwork.
I've read some literature on smoking and it turns out it is a very unhealthy habit (old joke of mine), I will never be a smoker and I wish everyone I know who does smoke would quit but my view on the demand for the product makes me think they are a must own. Likewise booze and weapons. We don't have gambling exposure, not because I am not a gambler (I don't even like March Madness pools) but because I view the volatility characteristics of the stocks as being relatively unfavorable for now--we did own IGT for a short time many years ago.
I'm not sure whether my view here is unique (although I doubt it) but this was a good question because the topic doesn't come up often except from people who run SRI funds.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
How much Higher Can/Will Gasoline Prices Go?
Thursday, March 01 2012 | 04:24 PM
Kevin D. Mahn
President and Chief Investment Officer,
HENNION & WALSH ASSET MANAGEMENT | Author: Kevin Mahn
Thus far this year, during the first two months of 2012, according to Bloomberg, we have witnessed an 18% increase in the price of crude oil based on the ICE Brent Crude Oil Active Month Index and a 16% increase in the price of gasoline based on the Nymex Gasoline Active Month Index. With respect to the latter, with gasoline prices now averaging $3.74 per gallon for regular grade gasoline across the United States and some experts calling for prices to exceed the peak observed in July of 2008, many are now wondering how high gasoline prices will go (especially during the upcoming summer driving season) and what can be down to counteract these rising prices.
Time Period National Average Price for a Gallon of Regular Gasoline
Current Average $3.738
Week Ago Average $3.612
Month Ago Average $3.443
Year Ago Average $3.387
Highest Recorded Average Price (7/17/08) $4.114
Source: AAA Fuel Gauge Report, March 1, 2012
From our perspective at Hennion & Walsh, retail gasoline prices are a factor of worldwide demand for crude oil (which is refined into gasoline), worldwide supply of crude oil and the market’s perception of geopolitical events that could impact the demand or supply of crude oil. At present, the supply side of the equation is being impacted by fears that Iran may cut back as a supplier of crude oil due to ongoing tensions with Israel and the West. On the demand side, as the U.S. and global economic recoveries continue to inch along, the demand for crude oil, and by extension gasoline, has also increased in many different areas of the world – led primarily by China.
As I have often stated before, market perception and market reality are often two entirely different things. For example, as oil prices rally, traders believe that retail gas prices will eventually follow suit. Given the nature of the futures markets and the need for many industrial companies to lock-in intermediate-long term fuel costs, this type of market perception can play a great role in current prices based on the speculation regarding future prices. With this said, investors should appreciate that there is generally a lag time associated between increasing oil prices, the process of refining crude oil into gasoline and its delivery to stations across the country.
One way to address the increasing cost of oil, and gasoline, is to tap into the nation’s strategic petroleum reserve (SPR). However, this is an option, in our opinion, that should be considered as a last resort as the reserve can provide some protection in the event of a worldwide catastrophic event and affords us some level of energy independence from some of the larger, oil producing countries. Other counteracting options could include the continued exploration for alternative sources of energy or researching of ways to reduce our reliance on crude oil. Neither of these potential solutions, however, is likely to occur, in a significant fashion, in the short term so oil (and gas prices) will continue to be driven by worldwide supply and demand pressures for the much desired commodity for years to come.
From an investment perspective, this equation can make energy oriented commodity investments such as Exchange Traded Products (ETPs) worthy of consideration for most growth investment strategies. Some energy oriented ETPs currently on the market include the following:
ETP Ticker ETP Name
USO United States Oil Fund, LP
UNG United States Natural Gas Fund, LP
DBO PowerShares DB Oil Fund
OIL iPath Exchange Traded Notes S&P GSCI Crude Oil Total Return Index Medium-Term Notes Series A
DBE PowerShares DB Energy Fund
USL United States 12 Month Oil Fund, LP
UGA United States Gasoline Fund, LP
RJN Elements Exchange Traded Notes Rogers International Commodity Index - Energy Total Return
BNO United States Brent Oil Fund
GAZ Dow Jones-UBS Natural Gas Sub-index Total Return
UNL United States 12 Month Natural Gas Fund
JJE iPath Exchange Traded Notes Dow Jones - AIG Energy Total Return Sub-Index ETN Series A
OLO PowerShares DB Crude Oil Long ETN
GASZ ETRACS Natural Gas Futures Contango ETN
UHN United States Heating Oil Fund
OILZ ETRACS Oil Futures Contango ETN
CRUD The Teucrium WTI Crude Oil Fund
UBN UBS E-TRACS CMCI Energy Total Return ETN
FUE ELEMENTS Exchange Traded Notes MLCX Biofuels Index (Exchange Series)-Total Return
OLEM iPath Pure Beta Crude Oil
DCNG iPath Seasonal Natural Gas
ONG iPath Pure Beta Energy
NAGS Teucrium Natural Gas Fund
TWTI RBS Oil Trendpilot Exchange Traded Notes
USO United States Oil Fund, LP
UNG United States Natural Gas Fund, LP
DBO PowerShares DB Oil Fund
Source: ETF Database, March 1, 2012.
Please note: Investors should conduct their own due diligence before considering an investment in these exchange traded products (ETPs). Hennion & Walsh Asset Management currently does not have any direct investments in any of the ETPs listed above as of March 1, 2012.
Another positive factor that could lead to pressure to reduce gasoline prices this year is that 2012 coincides with a presidential election year. Certainly high gas prices are not favorable to the incumbent administration as they can hinder economic growth and aggravate the voting populace based upon the direct impact of increased fuel costs on their day-to-day lives of most Americans. As a result, President Obama recently announced/reiterated his energy policies, which focus on increased levels of U.S. production and further promotion of alternative energy research. Whether these policies are adopted or successful remain to be seen.
Incidentally, if you are wondering which states have the highest and lowest gasoline prices, according again to the 3/1/12 AAA Fuel Gauge Report, California has the highest average price at $4.334 per gallon of regular grade gasoline while Wyoming has the lowest average price at $3.174 per gallon of regular grade gasoline.
----------------------------------------------------------
http://www.hennionandwalsh.com/blogs/blog.html?id=149
| |
0 Comment | Add Comment(s) |
|
The Big Picture for the Week of February 19, 2012
Tuesday, February 21 2012 | 04:54 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | Fitch Ratings upgraded Iceland's sovereign debt to investment grade which serves as a milestone in the country's journey back from the abyss. The short version of the story is fishing wealth funneled into creating a booming financial industry with a sizable global footprint that then went on to be mismanaged and over-levered with far too much risk, to financial Armageddon and now a recovery. Somewhere in there probably needs to have a mention of as yet unfulfilled potential of geothermal power.
I clued into to Iceland as a possible investment destination a couple of years before it exploded, had some luck trading Kaupthing Bank before it went bust and although the last trade in it was a loss we were out long before zero.
Iceland took a different path, it did not bail out the banks it let them fail and, depending on how you look at it, stiffed foreign depositors in the Icesave program from Landsbanki which you may recall was very controversial. Whether saying no to Icesave participants was right or not, the thought process behind it was a tearing off of the band aid that would enable a faster recovery. I don't recall where I first read the idea of letting banks fail, allowing the share holders and bond holders eat it while protecting the depositors but it resonated with me as being a better path than what was done here.
There would have been consequences of course but I believe we would be able at this point to see when we get out of the wake of the crisis. But with the path taken here I do not believe we do know how we get out of this. Yes the stock market is having a good run and some data points have improved but we are a long way from normal, a very long way.
Back to Iceland, at some point it will become an investable destination again, maybe it is now. I think the fishing industry could be a way to go as part of the Malthusian theme but the accessible publicly traded fisheries are difficult to own, they swing violently from feast to famine. It also seems like a logical long term theme to invest in geothermal but as readers have pointed out the distance makes it very difficult to harness on a global scale and not every company is willing to build there the way Alcan (now owned by Rio Tinto) did.
Investment destinations come in and out of favor on varying cycles and Iceland is no different. I continue to believe in it as a long term idea but we have been out of it for years now and may not ever go back in but it is worth keeping tabs on. This is similar to New Zealand, it has a lot of offer but we have been out for six years. I continue to pay attention and expect to go back in but that remains to be seen.
To the extent you invest at the country level, occasionally you will need to sell a country you otherwise like. This does not mean you should forever turn your back on that country.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
Understand the Moment
Wednesday, February 08 2012 | 05:10 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | We all have our own philosophies on how we deal with life or our process for making decisions including investment decisions. Part of my make up is to try to live in the moment or realize that life is about the journey more so than the destination. Another aspect to living in the moment is understanding the moment.
As some readers may recall I am a huge sports fan and I am from Boston. By the time the Red Sox had won their first world series of the decade in 2004 the Patriots were already the Patriots and I commented to my brother (more of a sports fan than I am) the extent to which we were having a great run. Obviously the run continued for Red Sox, Celtics and Bruins, even the Boston Cannons won a Major League Lacrosse championship, and the Patriots are still the Patriots.
While this has been great it used to not be this way for Boston teams other than the Celtics and it is unlikely that the championships will continue at this rate. To me this makes it all the more emotionally satisfying to realize this is a heyday for the teams I have always rooted for.
This relates to investing and actively managing a portfolio. For the average portfolio manager (this applies to do it yourselfers) there will be periods where he has a heyday of being right about several things for some length of time and then other periods where little to nothing goes right.
When things are going especially well it is important to understand the moment and remember that we are not all of a sudden a lot smarter than we were last year. Likewise we are not all of a sudden a lot dumber than we were last year or six months ago. This speaks to understanding that "being correct" will ebb and flow and anyone who is at least average will go through more ups and downs like this in the future in their investment careers. It is good to not get too full of self when things are going well because that will turn and no one wants to be depressed during a rough run. I think the best is an even keel through all market conditions and personal periods of outperformance and lagging.
I think there will be at least one reader who might comment along the lines of how the above makes the case for index investing. Not quite. It may make the case for index investing for some people but others not. Like a personal philosophy on how to live life, how to invest is based on personal beliefs. Some people should index but it is not right for everyone.
| |
0 Comment | Add Comment(s) |
|
Strong January, Strong 2012?
Friday, February 03 2012 | 09:51 AM
Kevin D. Mahn
President and Chief Investment Officer,
HENNION & WALSH ASSET MANAGEMENT | Author: Kevin Mahn
The S&P 500 index posted a total return of 4.48% for the month of January. This marked the best performance for the U.S. stock market in the month of January in more than a decade. Additionally, the Dow Jones Industrial Average itself rose 3.55% for the first month of the year. It is fair to surmise that we are certainly off to a good start in 2012.
Some interesting historical observations based on this data are as follows:
„X According to the ¡§January Barometer Effect¡¨, which was created by the Stock Trader¡¦s Almanac in 1972, as the S&P 500 index goes in January, so goes the year. This purported stock market effect has been correct 89% of the time since 1950. Further, stocks have finished lower for the year only 3 times after posting positive gains in January since 1950 (i.e. 60 + years).
„X According to the Stock Trader¡¦s Almanac, the stock market has posted double-digit annual gains all 18 times that it has increased by 4% or more in January.
„X According to our own bullish/bearish market sentiment indicator at Hennion & Walsh, if the S&P 500 index holds above 1,325 today, it will have crossed its 200 day moving average + 5% (our self-imposed margin of error for more accurate readings). According to our research, and data provided by Yahoo Finance, since 1950, every time that the S&P 500 has crossed its 200 day moving average + 5% (i.e. a ¡§Buy¡¨ signal) , the S&P 500 increased afterwards. When we measured the cycle beginning with each buy signal and ending with each subsequent sell signal, according to our criteria, the average increase in the S&P 500 over each ¡§buy¡¨ to ¡§sell¡¨ cycle was approximately 42.7%.
We are encouraged by the strong start to the New Year and some of the recent economic data reports. Yet, with all of this mounting optimism, we are mindful that the first half of 2012, at a minimum, is still likely to be volatile as headwinds still persist in our view. Some of these headwinds include:
„X The European debt situation not being resolved to a level that the market is comfortable accepting
„X U.S. political uncertainty leading up to this Fall¡¦s Presidential election
„X Potential escalation of ongoing Middle East (Ex. Iran, Israel, Syria) and Far East (Ex. North Korea) tensions
„X Skepticism around sustainability of needed U.S. economic recovery growth rates
For these reasons, we believe that it is imperative that individual investors take this opportunity to sit down with their financial advisors to re-visit, and update as necessary, their asset allocation strategies in light of the outlook for the market and economy in 2012. At Hennion & Walsh, we are anxious to implement the changes to our target-risk model portfolios associated with our proprietary annual reconstitution process so that we can better position our clients to withstand volatility when it returns to the market and to benefit from the modest growth and mounting optimism that we expect to continue throughout 2012.
Visit My Website
| |
0 Comment | Add Comment(s) |
|
2012 Economic and Market Outlook
Tuesday, January 31 2012 | 03:38 PM
Kevin D. Mahn
President and Chief Investment Officer,
HENNION & WALSH ASSET MANAGEMENT | 2012 Economic and Market Outlook
Author: Kevin Mahn
Following a year of heightened stock market volatility marked by global political uncertainty, here is our current outlook for the economy and markets in 2012, where more volatility and political uncertainty is expected:
1) Expected continuation of slow, but steady, growth for the U.S. economy – call it an extended “U-shaped” economic recovery.
2) Consumer sentiment continues to rise but then stagnates as we get closer to the presidential election cycle – leading to a lack of substantial consumer spending necessary to build a sustainable economic recovery in the U.S.
3) Consumers, as well as state/local governments and businesses, continue to deleverage while refraining from taking on new debt, which furthers constrains spending growth.
4) Larger companies with strong dividend histories within traditionally defensive sectors (such as Utilities, Health Care and Telecommunications, etc…) should fare well given the expected slow growth environment. Should economic growth exceed expectations (i.e. GDP annualized growth of > 3.0%), depressed cyclical sectors such as Basic Materials and Energy should perform well.
5) Expectation for consistent, but not staggering, earnings growth by U.S. companies, many of whom possess exceptionally strong balance sheets with overall record cash balances now exceeding $2 Billion. Positive earnings surprises, in areas such as Autos where there is pent-up consumer demand, could provide sparks for short-term market rallies.
6) Bond yields, while edging higher, likely to remain at historic lows – at least through the end of the year – perhaps being maintained by intermittent flights to quality spurred by market volatility in addition to the previously telegraphed liquidity intentions of the Federal Reserve.
7) Growth investors may continue to turn to Gold, and perhaps Silver, as an alternative to U.S. Treasuries, for “flights to quality/safe haven” trading opportunities during periods of heightened volatility throughout the year.
8) More noise to come from the European debt markets, potentially leading to a further tightening of the credit markets and concerns over the future of the EURO currency.
9) Demographic trends place continued pricing pressures on certain commodity types (examples include agriculture, energy and industrial metals) despite a lackluster economy and elevated prices that exist for specific commodities – which could be offset to a degree by weakened demand/slower growth in China.
10) Real growth takes place away from developed markets in well positioned emerging markets such as Brazil and Colombia in Latin America, Turkey and Egypt in the Middle East and Indonesia and China – yes, China - in Asia.
11) Slight improvements on the jobs front (primarily in a further reduction of initial jobless claims as opposed to a significant reduction in the unemployment rate) and gradual, yet no material, improvements in the real estate market on a national basis.
12) Despite a non-robust economy, an unclear domestic political picture and lingering European debt risks, the stock market can, and should, still do well in 2012 and growth investors can benefit from a well diversified portfolio built to withstand the many fits and starts that are expected throughout the year.
Given the many moving pieces in the complex, global investment puzzle, we, at Hennion & Walsh, believe that investors would be wise to re-visit their asset allocation strategies at the beginning of this year to help ensure that they have the diversification in place to withstand potential periods of heightened volatility as well as the breadth of asset classes and sectors to help deliver risk adjusted growth opportunities.
Visit My Website
| |
0 Comment | Add Comment(s) |
|
An Optimist's Optimist On The Economy
Wednesday, January 18 2012 | 05:17 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | If you’re looking for a cheerleader on the outlook for the U.S. economy, Ed Yardeni’s your man. "The US economy may be on the verge of a big comeback," this economist and founder of Yardeni Research predicts. "It could experience an unusual second recovery over the next three years following the weak initial recovery of the past three years. In the past, recessions were followed by one broad-based recovery in economic activity. The Naysayers have been predicting a 'double dip' recession for the US economy since it started to recover in 2009. I’m suggesting that a more likely scenario might be a double back-to-back recovery."
The foundation for his optimism is an expectation that employment growth will accelerate. He reasons that the rebound in corporate profits since the Great Recession ended has been "unusually strong" and that "profitable companies expand." As everyone knows, of course, companies have been reluctant to hire. "That could change now that they don't have as much room to expand by stretching the workweek and boosting productivity." In sum, Yardeni thinks that the pace of hiring will improve in the coming months.
The statistical evidence that his forecast is on track will find confirmation in initial jobless claims in the year ahead. He sees new weekly filings for jobless benefits dropping to around 300,000 over the next 12 to 18 months, down sharply from the latest four-week average of 381,750 through January 7.
If Yardeni's outlook is accurate, we should also see a convincing increase in consumer confidence. In fact, that's already underway, he points out. "In this scenario, consumer spending would grow at a faster clip, leading the second recovery," he opines. "It too has been subpar so far compared to the previous seven cyclical upturns."
One potential wrench in this machine is the recent weakness in the growth of personal disposable income (DPI), as I discussed last month. If the consumer is set to up his game on spending, eventually we'll see more encouraging numbers on DPI. For now, however, the jury's still out. Meantime, there are several influential analysts warning that the business cycle will turn darker before we see the dawn.
But perhaps the revival in consumer confidence of late heralds better days and so the recession forecasts are in need of an update. The latest reading on consumer sentiment reflects the highest reading in eight months with January's pop. Consumer Reports also notes that its benchmark on sentiment is looking up these days too. Yardeni puts the resurgence in consumer sentiment into historical perspective with this graph:
Should we take the rebound in consumer confidence surveys seriously for evaluating the business cycle? Yes, according to a 2011 study from the European Central Bank ("Consumer Confidence as a Predictor of Consumption Spending: Evidence for the United States and the Euro Area"):
Overall, the results show that the consumer confidence index can be in certain circumstances a good predictor of consumption. In particular, out-of-sample evidence shows that the contribution of confidence in explaining consumption expenditures increases when household survey indicators feature large changes, so that confidence indicators can have some increasing predictive power during such episodes.
But like everything else in macro, there's always room for doubt. "The idea that changes in consumer and business confidence can be important business cycle drivers is an old but controversial idea in macroeconomics," Sylvain Leduc, a researcher at the San Francisco Fed, reminds.
The role of confidence as a source of business cycle fluctuations remains controversial partly because it is difficult to measure its importance empirically. Clearly, confidence reacts to a host of economic developments. Identifying a causal link between confidence and economic performance is therefore challenging. Is confidence higher because the economy is booming or vice versa?
Nonetheless, it's premature to dismiss the link between consumer sentiment and economic activity. "Recent empirical work indicates that these sentiments contribute significantly to economic ups and downs," Leduc concludes.
By that standard, the latest rise in consumer confidence is encouraging, if only marginally. If there's a crack in this source of optimism, Yardeni writes, we'll likely see signs of trouble with rising jobless claims data in the weeks and months ahead. For the moment, the claims numbers still look good, although the latest report was a bit shaky.
Was that just the usual short-term volatility? Yes, according to the consensus forecast for the next update. New jobless claims are expected to fall slightly in this Thursday's release, according to Briefing.com. And not a moment too soon, assuming the prediction holds. With last week's claims total at just under the psychologically perilous 400,000 mark, the margin for optimism is uncomfortably tight at the moment for this series.
Visit My Website!!
| |
0 Comment | Add Comment(s) |
|
Apples to Apples
Wednesday, January 11 2012 | 10:24 AM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | A reader at Seeking Alpha left a comment on my "Revisiting Yield Products" post from the other day noting that ETFs have recovered much better than CEFs, aka closed end funds. Generically speaking this is probably true but not the best way to look at it.
I mentioned in the post the amounts a few products were down but noted that I had not factored in the yields but that I thought it was still an apples to apples because I did not include the dividends for any of them. In that context, within the same group it gives some idea of relative return but does not give an idea of relative return compared to other segments as implied by the comment comparing ETFs and CEFs.
One of the call writing/put selling CEFs I looked at was NFJ Dividend and Premium Fund (NFJ). For the last five years the price is down 33%. Compare that to another call writing fund and you might be able to make a comparison but comparing it to something like the SPDR S&P 500 ETF (SPY) probably does not deliver an accurate comparison.
Five years ago NFJ was at $24.79 and it closed Friday at $16.61. But in the interim it made 20 "dividend" payments totaling $7.12 per Google Finance. I put the word dividend in quotes in that last sentence because I do not know what portion, if any were capital gains or returns of capital. Adding the payouts back in leaves the fund down 4.2% for five years which although lags the S&P 500, once dividends are added back in, does paint a different long term picture.
For me this does not change the short term picture. For calendar year 2008 NFJ was down 45% and although the payout had not yet been cut I would not say the fund offered much shelter which is not to pick on the fund because most of them did not offer any shelter, actually I don't know of any call writing CEFs that did.
ETFs on the other hand are the market, the broad ETFs anyway. If the SPX were back at 1565 then SPY would be back at its high (or thereabouts). The managers of the CEFs may have done a good job or a bad job in the face of the crisis but they are actively managed funds and even if they made good decisions during the crisis they could have made bad decisions in subsequent years. There are a lot of variables to this including portfolio decisions and factoring in the payouts.
CEFs can be complicated products as outlined and we've made no mention yet of premiums or discounts to NAV which is yet another layer of complication.
I've always limited our exposure to these as there is value in tweaking up the yield (this can apply to equity or fixed income) but they can and occasionally do blow up in spectacular fashion. Things may go smoothly for them collectively for years with people getting more and more comfortable with holding increasingly more of them and then whammy (Ron Burgundy reference) they come unglued. This was the case in 2008. This will happen again at some point and the impact it might have on a portfolio will depend on the amount of exposure in that portfolio.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
Looking Back At Our ETF Ideas For 2011
Tuesday, December 20 2011 | 09:32 AM
Michael Johnston
Managing Director,
ETF DATABASE | With snow now blanketing a big part of the country and 2012 just a few weeks away, looking back at the past year becomes a popular activity. For many portfolios, 2011 has been marked by big swings that seem to be leaving investors right about where they started; there has been plenty of activity over the last 11 months, but little to show for it in way of returns.
Like many others, we put forth a list of actionable ETF ideas that we believed were positioned to perform well in 2011 at the end of last year, laying out the investment thesis behind 11 exchange-traded products that we thought would thrive this year. With 2011 coming to a close, it’s time to take a look back at our predictions for this year, noting some big wins and lamenting a few calls [see 11 Rapid Fire ETF Ideas For 2011]:
“Rapid Fire” ETF Ideas
Ticker YTD*
PSP -25.2%
XOP -7.2%
CHIX -25.0%
IAU +11.8%
EUO -0.6%
HYD +10.3%
INXX -44.7%
XLK -0.7%
REMX -35.5%
EIS -32.4%
CEW -8.6%
*Thru 12/19/2011
1. PowerShares Listed Private Equity (PSP)
Idea Recap: The return of the IPO market this year was supposed to be a boon to private equity firms that were still reeling from the recent recession. PSP opened the year well below its pre-downturn highs, indicating plenty of potential on the upside.
How It Played Out: PSP endured a rocky 2011, as ongoing risk aversion and liquidity concerns provided headwinds. PSP is down about 25% so far on the year.
Revised Outlook: The further declines make an even more attractive entry point for an asset class that maintains tremendous long term potential.
2. SPDR S&P Oil & Gas Exploration & Production (XOP)
Idea Recap: With spending on exploration expected to climb to new highs in 2011, XOP seemed like a logical way to capture the rebound of the industry.
How It Played Out: With up-and-down energy prices, XOP has largely moved sideways as well. More recently, declines in energy ETFs have hurt XOP; this ETF is down about 7% so far on the year.
Revised Outlook: Big Oil is expected to continue to spend to find new deposits, but any success in development of clean energy alternatives could pose a major risk.
3. Global X China Financials ETF (CHIX)
Idea Recap: China banks were poised to benefit from a steady wave of new customers, and the interest rate environment was not much of a threat heading into this year.
How It Played Out: Not well at all. Chinese banks have been hammered as growth has slowed and concerns about inflation have intensified. CHIX is down about 25% on the year.
Revised Outlook: China’s long-term growth projections are still promising, even if there are short-term obstacles. Additional volatility is likely ahead, but the decline put CHIX at an attractive entry point for those in it for the long haul.
4. iShares COMEX Gold Trust (IAU)
Idea Recap: Gold’s safe haven appeal was expected to push the metal higher this year with a number of concerns over the health of the global economy hovering as 2011 kicked off.
How It Played Out: Gold has indeed performed well–despite some big fluctuations in recent months. IAU is up about 12% on the year.
Revised Outlook: It’s hard to exclude gold from any portfolio, even if the allocation is minor. Prices are subject to the whims of the market, but the lingering uncertainty makes the precious metal appealing.
5. ProShares UltraShort Euro (EUO)
Idea Recap: At the beginning of the year Europe was in serious trouble, and the unsustainable debt situations were expected to weigh on the currency.
How It Played Out: The crisis in Europe has only intensified, and the euro has indeed been pummeled. The daily reset feature of EUO has caused this fund to be down slightly on the year, but this ETF has certainly delivered some impressive gains during stretches.
Revised Outlook: This ETF probably isn’t appropriate with buy-and-hold strategies, but can be a powerful tool for betting on what we believe will be additional bumps in the road.
6. Market Vectors High Yield Municipal Bond ETF (HYD)
Idea Recap: The yield on HYD was simply too juicy to ignore–even with all the challenges facing municipal debt.
How It Played Out: This fund has returned about 10% in 2011, slightly higher than the yield at the beginning of the year. For yield-hungry investors, HYD has been a hit.
Revised Outlook: The yield on HYD is still pretty attractive; the tax equivalent 30-Day SEC yield on this fund sits at a healthy 7.7% for those in the 25% tax bracket. Those paying even higher rates might find even more value in this ETF.
7. India Infrastructure Index Fund (INXX)
Idea Recap: Infrastructure has emerged as a major obstacle to India’s long-term growth, and we suspected that the government would move aggressively to address this issue.
How It Played Out: Indian stocks have been hammered in 2011, as one of the best performers of the past few years has slumped horribly amidst slowing growth and inflationary pressures. INXX was our biggest miss for this year; the fund is down about 45%.
Revised Outlook: This ETF looks like a great bargain at the current price; India still plans to spend massive amounts of money to update an outdated infrastructure, and many of the components of INXX are positioned to benefit.
8. Technology SPDR (XLK)
Idea Recap: Companies that put off the “tech refresh cycle” during the downturn were expected to loosen the purse strings in 2011, a trend that we thought would benefit XLK.
How It Played Out: Tech has been one of the relatively pleasant surprises in 2011; XLK is down only about 1%, while the S&P 500 is down about 3%.
Revised Outlook: There is still room for tech to run, especially with the consumer-discretionary part of this sector showing strength.
9. Market Vector Rare Earth/Strategic Metals ETF (REMX)
Idea Recap: Wild card China was expected to slash exports of rare earth metals, driving up prices for the critical raw materials around the globe.
How It Played Out: China has indeed lowered exports, but REMX hasn’t benefited as we thought it might. This ETF is down about 35% on the year, the result of general risk aversion and sagging demand.
Revised Outlook: The rare earth metals space is all but guaranteed to grow in coming years, as the importance of these resources expands. REMX maintains promising long-term potential, though this fund will probably continue to be quite volatile.
10. iShares MSCI Israel Index Fund (EIS)
Idea Recap: Israel seemed to be positioned to benefit from a newfound energy wealth, and we thought the country could turn a massive natural gas discovery into a boost for the entire economy.
How It Played Out: Israel’s economy buckled under geopolitical tensions in the region, and this fund lost close to a third of its value so far in 2011.
Revised Outlook: The Middle East is certainly a risky bet in the current environment; there is tremendous geopolitical risk, but also opportunities for some nice returns.
11. WisdomTree Dreyfus Emerging Currency Fund (CEW)
Idea Recap: CEW offers dollar diversification, allowing investors to profit from high yields available in emerging markets and to benefit from movements away from the greenback.
How It Played Out: CEW made some nice distributions, but the flight towards the safety of the dollar eroded the value of this fund. So far, CEW is down about 8% in 2011.
Revised Outlook: Again, the long term potential seems to be promising; emerging markets currencies should appreciate in coming years, and CEW is a unique tool for playing that trend while also generating some nice yield.
Visit my website
| |
0 Comment | Add Comment(s) |
|
Another Partial Solution: Conditional Sharpe Ratio
Tuesday, December 13 2011 | 05:48 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | “What this country needs is a good five-cent cigar,” Thomas Marshall (Woodrow Wilson's vice president) once remarked. Updating the quip for 21st century finance might run as follows: Investors need a good risk metric. Alas, what's needed and what's available isn't usually, if ever, one and the same in the money game. The next best thing is tapping several flawed metrics that are flawed in different ways.
Last week I discussed one "partial solution" in the search for an upgrade to the nearly 50-year-old Sharpe ratio, the widely used but flawed measure of quoting risk premiums (return less a risk-free rate) per unit of performance volatility (standard deviation). As many critics have charged over the years, standard deviation falls well short of the ideal definition of investment risk. So, too, does everything else.
One big challenge is modeling what's known as tail risk, or the possibility—the virtual inevitability—that investment losses will exceed expectations implied by a normal distribution. Last week's look at one attempt at trying to anticipate non-normality was the modified Sharpe ratio, which incorporates skewness and kurtosis into the calculation. Another possibility is the so-called conditional Sharpe ratio (CSR), which attempts to quantify the risk that an asset or portfolio will experience extreme losses.
To understand CSR it's necessary to start with so-called value at risk (VaR), the much maligned metric that was (and still is) widely used and widely abused. At its core, VaR tries to tell us what the possibility of loss is up to some confidence level, usually 95%. So, for instance, one might say that a certain portfolio is at risk of losing X% for 95% of the time. What about the remaining 5%? That's where the trouble lies, of course, and trying to model the last 5% (or 1% for a 99% confidence level) is devilishly hard. Some analysts say it's simply impossible. Misinformed or not, conditional VaR, or CVaR, dares to tread into this black hole of fat taildom. For the conditional Sharpe ratio, CVaR replaces standard deviation in the metric's denominator.
As a recent research paper from Ibbotson Associates explains,
"CVaR is a comprehensive measure of the entire part of the tail that is being observed, and for many, the preferred measurement of downside risk. In contrast with CVaR, VaR is only a statement about one particular point on the distribution. Intuitively, CVaR is a more complete measure of risk relative to VaR and previous studies have shown that CVaR has more attractive properties (see for example, Rockafellar and Uryasev (2000) and Pflug (2000))."
The main question with CVaR is one of choosing a methodology for calculation. The standard approach—the parametric method—is to assume a normal distribution, in which case CVaR can be estimated with only three inputs: average (or expected) return, volatility, and a conventional assumption about distributions. Easy but fraught with caveats.
Fortunately, there are several alternative approaches for estimating CVaR. One is using Monte Carlo simulations, which come in a variety of flavors and assumptions. The basic version can be easily run in Excel. You can also estimate CVaR based on an historical sample. If, for instance, you were calculating tail risk for the S&P 500 through a CVaR prism, you would identify the extreme return outliers in the past and factor the data into your CVaR modeling. WIth a little bit of work in a spreadsheet, you can come up with a rough estimate fairly easily. More sophisticated analytics require programming in Matlab or R.
Readers at this point are probably wondering how much insight is offered in CVaR, and by extension the conditional Sharpe ratio. Probably less than its strongest advocates argue. The basic message in conditional Sharpe ratio, like that of its modified counterpart, is that investors underestimate risk by roughly a third (or more?) when looking only at standard deviation and related metrics. That's a critical message. The details get fuzzy once you move beyond that reasonable conclusion. One reason is that quantifying expected risk in the tail is a serious challenge and open to a fair amount of debate.
Indeed, you can't model uncertainty per se. Even when it comes to modeling the known unknowns it's still best to regularly repeat the following: no one risk measure can profile the true nature of risk in all its fury and variation. But we can try, if only to develop a deeper understanding of risk analytics' strengths and weaknesses. At some point, however, you're still flying blind.
Visit My Website!
|
0 Comment | Add Comment(s) |  Risk, Benchmarks, Tail_Risk, |
|
The Slog Continues
Monday, December 05 2011 | 05:01 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | By now you've read a dozen articles ripping into the Friday's jobs data. The big bone of contention of course was the extent to which the decline in the headline rate dropped to 8.6% due to a large contraction in the labor force.
Whether you call it new normal or something else this is the middling, sluggish US economy continuing to unfold. A few years ago there was a mix of complacency that the then credit crunch wouldn't be that big of a deal which then gave way to serious fear, maybe even terror, that this was the end times in terms of the social fabric of the society.
Sluggish and/or middling has been my base case the whole time for several reasons and I expect that will continue. Obviously I am biased to seeing my thesis as playing out over the last few years and continuing to play out. If this turns out to be the case that does not mean some equities won't still do well.
If there is an economic condition where GDP growth is sluggish or perpetually teetering into a recession we know that certain defensive stocks tend to do well; usually staples, healthcare, utilities and ma bell telecom (with those last two be careful when interest rates are going up).
Year to date the S&P 500 is down a little over 1% while long time client holding Philip Morris International (PM) is up about 30%. Going a little broader the Staples Sector SPDR (XLP) is up a little over 8% which combined with XLP's yield is close to an 11% return--pretty good for soda and diapers. The Utility Sector SPDR (XLU) is up almost 11% on a price basis plus then it's 3.8% yield. The Healthcare Sector SPDR (XLV) is only up 6% but 7% ahead of the benchmark is noteworthy and XLV kicks in a little yield too.
Obviously the albatross around the market's neck has been and I believe will continue to be the financial sector. At this point the Financial Sector SPDR (XLF) is down 19% for the year and while I don't think it can drop 20-30% every year forever, I think it will be a long time before there is sustained price appreciation which contributes to the top down idea that the SPX will have a hard time making meaningful progress without the financial sector.
One of the reason's I prefer top down is that I think it makes the job much easier to do. If the above scenario is right then that means finding a domestic financial stock that skyrockets becomes much harder to do than in a year where XLF goes up by 25%.
Sectors like staples and the others mentioned above can be populated in the portfolio with domestic stocks in this scenario. The other sectors, like financials, would be a good place to look for foreign exposure either with individual stocks or ETFs. For example I am favorably disposed to quite a few countries for the long term like Australia (out temporarily as I have been disclosing for months), Chile and Norway.
There are individual stocks from these countries in the sectors that I think should be avoided in the US, like financials, and the ETFs for these countries have decent weighting in financials as a way in.
Going the individual stock route requires bottoms up research and monitoring of course and going the ETF route requires looking under the hood to understand what is in the fund and taking time to monitor the countries themselves and that is a lot of work. However if the US turns in another sub par decade (new decade to date the SPX is up 10.46% so you be the judge) and some of these other markets can again muster close to normal returns then the effort put in will not only have been worth it but could be (financial) life changing or better yet; (financial) life sustaining.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
It's Not an Apocalypse, But In Case It Is...
Tuesday, November 29 2011 | 05:09 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | Yesterday I stumbled across a couple of articles each pointed to how to invest into an economic apocalypse. This is an interesting exercise in terms of how to use volatility in constructing a portfolio. Before jumping into this let me say that economic apocalypse is not my base case. For many years I have thought that this decade will be less growth in the US than people have been accustomed to necessitating more exposure to select foreign markets ex-Western Europe and ex-Japan.
One article highlighted five stocks that per the title can survive an apocalypse with the other making a case for going heavy on dividend paying stocks at the expense of bonds. The first article was simply bad (which is why I'm not linking to it) and the second article seemed aver a strategy that I don't think is right for anyone expecting a "great deleveraging."
To the first article one of the stock picks was a heavy cyclical stock from the industrial sector that I am very fond of although we don't own the name currently. If we are to take the title literally about surviving then yes the company and its stock will survive but if we have an economic apocalypse then the stock will get crushed and contrary to the author's assertion, the 2% yield won't matter. If you really think there will be an apocalypse then you don't want to own volatile industrial stocks (see below).
To the second article it seems like we have had some measure of deleveraging already. If there is more to come (I think the author was implying it would be worse from here) then we have something of a litmus test about how to invest into this deleveraging and it seems to me that treasuries and sovereigns from select other countries are exactly what you want to own. Lower quality paper seems likely to take it on the chin. In the last two years JNK is down 4% on a price basis while TLT is up 27% and ZROZ is up 47%. YTD the respective returns are down 8%, up 28% and up 54%. The numbers for TLT and ZROZ trounce the numbers for SPY and SDY (proxies for equities and dividend paying equities respectively). And of course there have been and will be some stocks that do indeed thrive somehow in an apocalypse.
While I continue to believe buying TLT, ZROZ or individual US treasuries is buying high, I think it is reasonable to conclude that treasuries will continue to go up if the deleveraging worsens and causes or contributes to an apocalypse. Inflation is bad for bonds, deflation is not so bad (for the right type of bonds).
In building a portfolio for the apocalypse the first thing I would not do is completely ignore an asset class; what if there is no apocalypse? It might make sense to be very underweight equities versus a target weighting. If 60-65% is normal then maybe 25-35% for the person worried about an economic apocalypse makes more sense. In the equity portion it also makes to increase the yield versus the benchmark index and take a defensive tilt or own countries that you think might carry on even if there is a US economic apocalypse.
In enhancing yield, yes there would be some DZ stocks but there should always be some. It would also make sense to have a little exposure to industrial stocks like the one mentioned above, not as a way to ride out the apocalypse but in case there is no apocalypse.
In terms of countries, perhaps a small exposure to some place like Mongolia, Market Vectors should have a fund out soon, and maybe countries known for yield and low volatility.
In terms of fixed income I'll repeat that some treasury exposure makes sense if there is a dire outcome. I would also want to own foreign sovereigns from certain countries and this is become easier to do as WisdomTree came out with AUNZ and PIMCO came out with AUD and CAD. I think there will be more of these to come.
I think preferred stocks could be owned in moderation, all the better if you can find one outside the financial sector. These often have yields in the sixes and while a financial preferred might cut in half in an apocalypse a preferred from a non-financial probably will not.
The Barron's article about finding yield from a couple of weeks ago talked a lot about closed end funds. I would suggest going very small and find one that tends not to get pulverized during a crisis; many do but some do not. We have one of these that we are favorable disposed to in this light but there are several that exist.
There can also be room for some sort of product that has a high yield but again, go small. The context could be a BDC, an infrastructure trust, floating rate fund, mortgage REIT an MLP or the like but I would keep these on a short leash. Personally, we are not going to own a BDC or a mortgage REIT but I may be overly conservative on this point and this does not mean that you should not explore these spaces and decide for yourself.
Keep in mind that although I grouped these as an other category they are essentially equities and to be clear I would not own one of each, maybe one name from at most two categories. These things are unlikely to blow up but it is in the realm of possibility.
Unrelated; Bob Costas had an unusually useful nugget in his rant at halftime of the Steelers/Chiefs game. Apparently Homer Jones, who played for the Giants in the late 1960s, is the guy who came up with spiking the football after scoring a touchdown.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
Higher Retails Sales Inspire Cautious Optimism
Thursday, November 17 2011 | 12:33 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | The September surge in retail sales slowed in October, but there's still no sign of recession in U.S. consumer spending. Total retail spending rose 0.5% last month on a seasonally adjusted basis. That's a substantial deceleration from September's 1.1% pop. But ignoring September's unusual and unsustainable gain, October retail sales continue growing at a respectable clip. You can't read too much into any one data point (or data series), but if you're looking for clear-and-present signs of trouble for the business cycle you won't find it here, at least not today.
Consumption decelerated in October, but it was the second-best month for growth since March. Even better, most corners of retail posted gains last month. That includes the cyclically sensitive realm of auto sales, which managed to rise 0.5%.
The annual pace of retail sales softened slightly last month to roughly 7.1%. Nonetheless, that's still comfortably in territory that's historically linked with economic expansions.
"The data are uniformly positive," says Eric Green, chief U.S. economist at TD Securities. Today's update on consumer spending "is more than enough to keep the economy going. They continue to push back the recession fears that began this summer."
With the holiday shopping season here, there's reason to think that consumption can continue to push higher. But if there's a glitch in this happy scenario, it's the recognition that October's economic data doesn't fully reflect the latest round of trouble in Europe via the deepening euro crisis.
The hope is that Europe's troubles won't infect the modest recovery in the U.S. Today's retail sales report bolsters the case for this outlook. There's certainly a tailwind in consumption in recent months, which will come in handy if the ill winds from Europe blow harder across these United States.
Dallas Fed President Richard Fisher sounds as if he's discounting the possibility that Europe represents a new hurdle for the U.S. "We’re poised for growth,” he tells Bloomberg, opining that the odds of a new recession are "negligible." He predicts GDP will rise 2.5% to 3% in the fourth quarter and "gradually" rise from there.
Was the late-September recession call by the Economic Cycle Research Institute premature? The latest data from ECRI seems to be leaning in that direction, although the consultancy hasn't officially changed its forecast.
Reasonable minds can still differ on what comes next. As the San Francisco Fed warns, it's still too early to dismiss the recession risk if you consider the worst-case scenario:
Gathering storms across the Atlantic threaten a U.S. economy not yet recovered from the last recession… Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession. However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.
So, yes, there's some good news in today's retail sales figures. But optimism still has a short shelf life these days as we remain dependent on the kindness of the next update.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
The One Missing ETF
Wednesday, November 09 2011 | 05:02 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | For ages I have wondered why there is no ETF or ETN for publicly traded exchanges. Occasionally I bend an ear or two from this blog and maybe that can be repeated by laying out what such a fund could look like.
Some of the names will be obvious and chances are there will be a couple that you did not know traded publicly. Not all of them have pink sheet ticker symbols for US trading.
Chicago Mercantile Exchange (CME)
NYSE Euronext (NYX)
Intercontinental Exchange (ICE)
CBOE Holdings (CBOE)
NASDAQ (NDAQ)
Deutsche Boerse (DBOEY)
Bolsa Mexicana (BOMXF)
TMX Group (TMXGF) Toronto
London Stock Exchange (LDNFX)
NZX Limited (NZSTF) New Zealand
ASX Limited (ASXFY) Australia
Singapore Exchange (SPXCF)
JSE Limited (JSEJF) South Africa
BM&F Bovespa no US symbol Brazil
Osaka Securities Exchange (OSCUF) Tokyo is not public
Hong Kong Exchanges & Clearing (HKXCY)
Bursa Malaysia Berhad (BSAMF)
Oslo Bors (OSBHF)
Bolsas y Mercados Espanoles (BOLYY) Spain
Warsaw Stock Exchange no US symbol
Bulgarian Stock Exchange no US symbol
Mercado de Valores de Buenos Aires no US symbol
The soon to be merged markets of Peru, Chile and Colombia which for now all trade on their own.
There are others. One word of caution, just because some of the stocks have five letter designators for US trading does not mean they are easily traded. This listing is reasonably diverse from the country level, and for certain countries they obviously play into the ascending middle class and I would contend are a form of financial infrastructure.
This seems fairly obvious to me but it hasn't happened and so maybe it won't but I believe this line of business is on firmer ground than banks in many countries.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
25 Things Every Financial Advisor Should Know About ETFs
Wednesday, November 02 2011 | 12:41 PM
Michael Johnston
Managing Director,
ETF DATABASE | The rapid expansion of the ETF industry has been one of the most important developments of the last several decades to financial professionals; as the lineup of exchange-traded products has surged past 1,300, financial advisors now have more tools in their toolkits than ever before to help construct client portfolios. With these new financial products comes a responsibility to understand the various risk factors and nuances of exchange-traded products, and as the industry has expanded rapidly the amount of information to digest has swelled as well. While ETF education must be an ongoing process, there are a number of basics that can enhance overall understanding, identify opportunities and limitations, and generally promote a better experience with ETFs:
1. Volume ¡ÙLiquidity
Many advisors and investors like to implement what can best be described as ¡°liquidity screens,¡± refusing to consider products that don¡¯t have a certain average daily trading volume (25,000 shares daily is a common rule of thumb). That could be a big mistake, as this approach results in overlooking hundreds of smaller products that may offer compelling investment theses and unique exposure.
The historical volume of an ETF tells very little about how liquid a fund is, because ETFs are capable of something called ¡°spontaneous liquidity.¡± Because there is a mechanism in place that allows for the creation of new shares almost immediately, it is possible to execute large trades in thinly-traded funds without moving the price by a meaningful amount [sign up for the free ETFdb newsletter].
It¡¯s been noted that ETFs trade like stocks¨Cwhich is part of the appeal of the exchange-traded structure. But there are limits to that comparison; if you know what you¡¯re doing (more on this below), it¡¯s possible to buy 1 million shares of an ETF that trades 10,000 shares daily within a few basis points of NAV. That might sound hard to believe, but it¡¯s absolutely true¨Cand part of the beauty of ETFs.
A quick call to any ETF issuer will get you speedy assistance on the execution side; alternatively, there are firms such as Street One Financial and WallachBeth that can provide smooth execution of block trades for a minimal fee.
2. Market Orders Just Might Burn You
It should be noted, however, that achieving a desired level of liquidity in an ETF often requires a bit of work and diligence. Advisors accustomed to the execution of positions in mutual funds should be aware that ETFs work in an entirely different manner. Instead of buying from and selling directly to the fund company, ETFs are often sold between market participants. And there is no guarantee that trades will be executed at or near NAV; rather, shares change hands at whatever price clears the markets.
Low volume ETFs should not be avoided due to liquidity-related fears. But low average daily trading volumes should result in additional caution being paid when buying or selling a fund for a client portfolio. Wide bid-ask spreads can result in additional fees incurred, and put clients in an early hole.
Fortunately, the tools for avoiding such pitfalls are both cheap and easy to use; limit orders can be tremendously powerful mechanisms for investors.
3. Not All ETF Expense Ratios Are Created Equal
Some advisors making the switch from mutual funds to ETFs have a tendency to pat themselves on the back for embracing low cost strategies that will make their clients money over the long run. The assumption that all ETFs are created equal, however, is utterly false. The reality is that the gaps between funds offering similar (or nearly identical) exposure can be drastically different.
The best example is probably a comparison of the iShares MSCI Emerging Markets Index Fund (EEM) and the Vanguard MSCI Emerging Markets ETF (VWO). Both funds are linked to the MSCI Emerging Markets Index, yet EEM (0.69%) costs nearly 50 basis points more than VWO (just 0.22%). There are a number of other examples of similar product with huge gaps in expenses, and the impact over the long run can be significant.
If you¡¯re serious about minimizing fees, it pays to shop around: not all ETFs are created equal in terms of cost efficiency.
4. Bigger Does Not Equal Better
When evaluating potential ETF options, there is a tendency among some advisors to gravitate towards the products that have the largest asset base and most substantial average daily volume, or to pick out only funds from well-known issuers such as iShares and Vanguard. Many of the largest exchange-traded products are popular for a reason; they offer cheap, efficient access to desirable asset classes. But in many instances, the size of an ETF is more indicative of the length of its operating history than the attractiveness of the underlying portfolio and methodology to long-term investors. Innovation in the ETF space has gradually refined the type of exposure offered, and many of the newer, smaller products solve some of the issues that plagued the first generation of ETFs.
The FTSE China 25 Index Fund (FXI) is a great example. That fund is by far the most popular China ETF on the market with more than $6 billion in assets. But for investors seeking long-term exposure to the Chinese economy, it¡¯s pretty safe to say that there are better choices available. FXI¡¯s portfolio is both shallow (25 stocks in total) and extremely unbalanced; financials account for the majority of exposure, while consumer, tech, and health care stocks get little or no weighting.
Don¡¯t assume that a hefty asset base is the only indication of the efficiency of an ETF. More often than not, digging beyond the most popular product in a category will uncover some hidden gems in the space.
5. There¡¯s More To ETF Expenses Than Expense Ratios
It should also be noted that expense ratios do not tell the entire story when it comes to ETF expenses; there are other components that must be considered when determining the total cost of an ETF investment.
Commissions are one area in which a little effort can go a long way; in recent years various brokerages have rolled out programs that include commission free trading on popular funds in an effort to attract investors who value and use ETFs frequently. Paying $7 or $10 to execute a trade perhaps doesn¡¯t seem like much, and for larger portfolios with minimal turnover the impact of trading commissions may be minimal. But for smaller accounts, fees can add up quickly, potentially equaling the basis point contribution of expense ratios.
Bid-ask spreads should also be considered when evaluating an ETF; buying at a premium or selling at a discount has the same impact on bottom line returns as a higher expense ratio [see The Total Cost Of ETF Investing].
6. Structure Matters
The term ¡°ETF¡± is often used incorrectly to include products that are not technically exchange-traded funds. More accurately, the ETP umbrella can be described as covering a number of types of exchange-traded products, including ETFs, exchange-traded notes (ETNs), unit investment trusts (UITs), grantor trusts, and others. From the perspective of most investors, these slightly different structures are generally similar; each offers transparent, liquid access to an underlying basket of securities.
In some instances, however, structure matters. ETFs and ETNs may be similar in many respects, but they are very different in others. And the differences are not limited to credit risk and tracking error; in certain asset classes, such as commodities or MLPs, the choice of structure can end up having a huge impact on tax consequences and bottom line returns and volatility. Using the head-to-head ETF comparison tool to analyze AMLP and MLPI illustrates this point quite nicely. Though AMLP (an ETF) and MLPI (an ETN) are linked to the same index, the performances are clearly not identical [see When ETNs Are Better Than ETFs].
There are a number of other examples of structure impacting the risk/return profile achieved by an exchange-traded product. SPY, a UIT, will perform differently than IVV, which is also linked to the S&P 500 but structured as an ETF. The three ETPs that offer exposure to the USD / EUR exchange rate maintain unique tax consequences and counterparty risk, and annual performance can vary by more than 100 basis points depending on the environment.
7. Commodity ETFs Get A Bad Rap
Commodity ETFs have been dragged through the mud repeatedly over the last several years, the result primarily of misunderstandings (or perhaps outright ignorance) over the true objectives and limitations of these products. Specifically, the ¡°tracking error¡± between the returns generated by commodity ETPs and the change in the spot price of the related resource. While it¡¯s true that most commodity ETFs deliver returns that differ from a hypothetical return on spot prices¨Csometimes by a significant margin¨Cthat deviation isn¡¯t the result of a flaw in these products. Rather, it reflects confusion over exactly what these products seek to achieve and the methods they use to achieve their results.
It¡¯s important to exercise caution when investing in commodity ETPs; if you don¡¯t have a firm grasp on the nuances of a futures-based strategy, you probably have no business putting these products in your clients¡¯ portfolios. But for those who understand what¡¯s under the hood of these funds and the potential limitations associated with the methodology used to achieve exposure, commodity ETFs can be very powerful tools that can bring both return enhancement and diversification benefits to traditional stock-and-bond portfolios [see What BusinessWeek Didn't Tell You About Commodity ETFs].
Commodity ETPs aren¡¯t for everyone. But they certainly aren¡¯t the flawed, return-eroding vehicles that some have made them out to be. [Pro members can see Special Report: Finding The Right Commodity ETF ; sign up for a free 7-day trial to get full access].
8. Diversification Should Not Be An Assumption
ETFs, like mutual funds before them, have become popular among investors with a long-term focus because they can be used to achieve cheap and easy diversification. Many ETFs include hundreds or even thousands of individual securities, allowing for broad-based exposure that would be prohibitively expensive and time consuming to establish otherwise.
But not all ETFs offer tremendous diversification. Some, in fact, are quite concentrated in a small number of individual stocks or in a few select sectors. It isn¡¯t all that uncommon for a product to allocate 20% or more to a single holding, or for a single sector (often financials) to make up 50% of a fund¡¯s portfolio. Diversification across companies and sectors is generally the rule, but there are plenty of exceptions.
One of the oft-cited advantages of ETFs is the transparency; investors can see exactly what a fund holds in close to real time. Take advantage of that feature; be sure to know what a product holds before establishing a position.
9. ETFs Can Close¡
The ETF industry can be described as both extremely deep and extremely top-heavy. There are more than 1,300 products out there, but about 25 of those account for nearly half of total assets. Close to half of the funds now trading have less than $25 million in AUM¨Ca rule of thumb for the level of assets required to break even. The economics of an industry built around bargain basement expense ratios can be challenging to issuers. It costs money to run an ETF, and a significant portion of the products out there now are losing money. Many of those cash drains are young products that are still establishing a track record and attracting assets. Some will grow into products with hundreds of millions in assets that generate profits for the issuers while still offering low expenses to investors.
But some will not, and they will ultimately be shut down. There are three certainties in life: death, taxes, and the fact that several ETFs will close down in coming years. That¡¯s something that advisors should acknowledge, but it shouldn¡¯t necessarily scare you off. An ETF closing is not cause for panic; you¡¯ll have the opportunity to either sell your shares prior to the delisting or to receive your share of cash proceeds. That may be less than optimal; the sale may trigger some tax liabilities, and there are costs associated with redeploying capital. But overall, an ETF closure isn¡¯t really a big deal; your clients will get their capital back, and the hunt for a suitable alternative will begin [see How To Deal With ETF Closures].
10. ¡And ETNs Can Fail
ETNs have become popular tools for accessing certain asset classes; this structure has several potential tax advantages as a way to access commodities, MLPs, and other strategies. The ETN structure allows for the avoidance of tracking error, a deviation from the performance of an index that can erode returns¨Cespecially to futures-based strategies. But there are some risks to ETNs as well. These securities are senior, unsecured debt instruments issued by financial institutions, and as such are subject to the same risk factors as more traditional forms of debt. If an ETF issuer goes out of business, investors in that company¡¯s funds will have their capital returned. If an ETN issuer goes under, the consequences can be much more severe; investors in those products are creditors to the bank, and as such will likely find themselves in line with other counterparties owed money by a bankrupt institution.
The risk of an ETN leaving investors holding the bag may seem pretty remote; the issuers of these notes are often large, well capitalized banks such as Credit Suisse, UBS, and Barclays. And even in a less-than-stellar economic environment, the possibility of one of these firms going belly up is minimal. But the collapse of an ETN issuer wouldn¡¯t be without precedent; Lehman Brothers offered a lineup of exchange-traded notes prior to its sudden bankruptcy [see ETF Hall Of Shame].
11. There¡¯s An ETF For That
The first generation of exchange-traded products were generally ¡°plain vanilla¡± funds linked to well-known stock and bond indexes, such as the S&P 500 or Russell 2000. But over the last several years, an impressive string of innovation in the industry has resulted in a product lineup full of very specialized and targeted products. Just about every major global economy is now covered by an exchange-traded fund¨Cand in many cases there are multiple options available. Targeted sector funds are becoming increasingly common; from the smartphone ETF to business development company ETNs to funds focused on the automotive industry, getting granular is not a problem.
The ETF boom has democratized entire asset classes¨Cthe surge in usage of commodity ETFs and volatility ETPs is perhaps the best example of that phenomenon. Growth in the space has also opened up opportunities to achieve quick, easy exposure to an investment strategy; the investment discipline ETFs from Russell offer exposure to techniques such as aggressive growth, contrarian investing, and low P/E stock selection.
Whatever investment strategy or asset class you have in mind, chances are there¡¯s an ETF that lines up quite nicely. ETFs aren¡¯t just for buy-and-holders seeking plain vanilla exposure; they offer the ability to become extremely specialized and fine tune exposure desired.
12. Keep It Simple¡
There are now more than 1,300 exchange-traded products, and the lineup is growing rapidly. While many of the most popular funds offer exposure to straightforward strategies covering key asset classes, there are hundreds of ETFs that utilize leverage, derivatives, and sophisticated techniques to tap into sophisticated strategies. A lot of the ETFs on the market have little or no use to the vast majority of investors; those looking to build a balanced, long-term, buy-and-hold portfolio realistically only care about a small fraction of the ETF universe.
Think of the ETF universe as a toolkit, and individual ETFs as the tools. The more tools at your disposal, the better. But certain tools are useful for some tasks and wildly inappropriate for others. A chainsaw is pretty darn useful if you¡¯re looking to cut down a tree. But when you¡¯re slicing a loaf of bread, that same tool can produce disastrous results.
The point is this: most ETFs out there are not useful for your clients¡¯ objectives. And that¡¯s just fine; just because a product is out there doesn¡¯t mean that it needs to be included in your portfolio. Here¡¯s a simple piece of advice when determining the suitability of a potential ETF investment: if you can¡¯t understand the components, strategy, and risk factors in five minutes, walk away.
13. ¡But Not Too Simple
One interesting development in the ETF industry includes ¡°target retirement date¡± products that are designed to ¡°glide¡± towards a retirement date in the future by gradually shifting towards bonds and away from stocks as clients are and presumably the risk / return profile shifts. For those looking to minimize complexity and maintenance requirements, target retirement date ETFs are about as simple as it gets. Theoretically, a client could hold a single ticker that automatically adjusts allocations to key asset classes as they age.
We suppose target retirement date ETFs might be useful for some. But the limitations and potential drawbacks of these products are numerous. First, there is the obvious point that time to retirement is only one factor that shapes a client¡¯s asset allocation process. Overall wealth, risk tolerance, and presence of income streams should also be considered.
Second, the allocations in some of these products seem to be disconnected from reality. Consider the iShares S&P Target Data 2050 Index Fund (TZY), presumably designed for investors with a fairly long time until retirement. Emerging markets, as represented through EEM, account for about 4.2% of total assets. Even acknowledging that U.S. investors tend to maintain a ¡°home country bias¡± that results in underweighting emerging markets, that allocation seems woefully low.
Finally, there is the issue of expenses. Because target retirement date ETFs are structured as ETFs-of-ETFs, there are two layers of fees. In addition to the management fee on the fund (TZY charges 0.25%), each of the component products incurs expenses that push up the effective cost to your clients. For those in it for the long haul, the compounding of costs can eat into returns.
Odds are, it¡¯s best to stay away from target retirement date ETFs; take the time co customize exposure to your clients¡¯ portfolios, and they¡¯ll thank you later.
14. Watch Your Weight
When considering potential ETF investments for accessing domestic or international stock markets, most advisors probably give little or no thought to the weighting methodology employed by the underlying index. While that might seem like a minor impact that is unlikely to have much of an impact on returns, the reality is that the manner in which weightings are assigned to component stocks can translate into huge differentials in performance.
The majority of stock ETF assets are in products linked to market capitalization weighted indexes, based on a methodology that gives bigger weightings to more valuable companies. But in recent years the potential drawbacks of cap-weighting strategies have become more obvious, and the alternatives more readily available. There are now ETFs that assign weights to component stocks based on various ¡°fundamental¡± factors, including sales, earnings, dividend, cash flow, estimated earnings, and even book value.
The impact of this seemingly minor nuance can be significant. The performance of the Rydex S&P Equal Weight ETF (RSP) and S&P 500 SPDR (SPY) in 2010 highlights this point nicely. The components of these two stocks are identical; both hold the 500 or so equities that make up the S&P 500. But RSP, which gives an equal weight to each, outperformed SPY in 2010 by about 600 basis points. For two products that have identical portfolios, that¡¯s a pretty significant gap [see RSP Just Keeps Chugging Along].
If you¡¯ve historically relied on cap-weighted products, there¡¯s a lot to learn about the alternatives. But it¡¯s a lesson well worth the effort; the result could be a relatively easy way to improve your clients¡¯ bottom line returns.
15. Contango Can Be A Killer (And Backwardation Can Be A Blessing)
A recurring theme here has been the importance of looking under the hood and knowing exactly what you are buying for your clients. That is particularly true in the commodity ETF space, a corner of the market that has exploded in recent years as investors have embraced the exchange-traded structure as a way to tap into an asset class with tremendous return enhancement and diversification potential.
It is important to understand that the vast majority of exchange-traded commodity products do not seek to deliver returns that correspond to movements in the price of the spot commodity. In most cases, that simply is not possible; the logistics of owning livestock or natural gas are obviously challenging. Rather, these funds offer access to a futures-based strategy that invests in securities linked to underlying commodities. While the correlation is strong, the performances are in no way identical; often, the gap between a futures-based product and the hypothetical return on spot is significant.
Commodity ETFs can be very powerful tools. But it¡¯s important to recognize their limitations. If you¡¯re expecting access to spot natural resources, you haven¡¯t done your homework, and could be setting clients up for a big disappointment [see How Contango Impacts ETFs].
16. There¡¯s More To ETFs Than Low Fees
When asked to explain the undeniable shift in the investing landscape from mutual funds to ETFs, most investors, journalists, and analysts will jump to one issue: expenses¨Cor the lack thereof. The average expense ratio in the ETF universe comes in at about 59 basis points, and the weighted average is considerably lower than that (in the neighborhood of 0.33%). Some ETFs charge as little as five basis points, a fraction of the 1.4% or so that is the average among mutual funds.
So it¡¯s easy to see why expenses stand out as the primary driver of the river of cash flowing from mutual funds to ETFs. But it¡¯s worth noting that the lower expenses are just one of the value adds that the exchange-traded structure can bring to client portfolios. Relative to their mutual fund counterparts, exchange-traded products have a number of other advantages:
Liquidity: ETFs can be traded like stocks, throughout the course of the day. That flexibility can come in handy when you¡¯re looking to be nimble and move a client quickly out of or in to a position. Instead of waiting until the end of the day, ETFs allow advisors to execute trades in a matter of seconds¨Ca period of time that can translate into significant dollars in some cases.
Transparency: The transparency of ETFs allows advisors to know what they hold in close to real time, instead of waiting for quarterly disclosure statements to see how significant your client¡¯s exposure to a particular security is. When stocks are tanking, it can help to know exactly what you hold¨Cas anyone who has been forced to speculate on the degree of exposure to BAC or NFLX can attest.
Tax Efficiency: The nuances of the creation / redemption mechanism generally result in superior tax efficiencies for ETFs, essentially allowing investors to control the timing of their obligations. For those who have become accustomed to being impacted by the redemptions of other fund investors, this efficiency might be a welcome change.
The low cost feature is just the tip of the iceberg; there are plenty of other reasons to make the switch from ETFs to mutual funds.
17. ETFs Are Not An Acceptance Of Mediocrity
Some skeptics view ETFs as an acceptance of mediocrity, tools for simply running with the pack and giving up on any chance to generate alpha through stock picking or other active techniques. But that argument falls apart under even the most cursory of examinations. First, there is a boatload of academic evidence suggesting that active managers, on the whole, fail to beat their benchmarks after fees are considered. Sure, there are some superstars who top their index year in and year out. But unless you¡¯ve found the next Peter Lynch, an attempt to generate alpha is more likely to destroy value than it is to create it.
Regardless of where you stand on the value of active management, it should be abundantly clear that ¡°beta instruments¡± such as ETFs can most certainly be used in the pursuit of alpha. Again, the research suggests that asset allocation is responsible for a significant portion of portfolio returns. And ETFs are the perfect tool for tilting exposure towards certain assets and away from others without diving in to the weeds and racking up the fees to choose between various stocks.
If you¡¯re looking to actively manage a client portfolio, there¡¯s no reason that ETFs can¡¯t be an integral, cost efficient part of that strategy.
18. ETFs Did Not Cause The Flash Crash
Another myth about ETFs is that these securities were the primary culprits behind the ¡°Flash Crash,¡± a chaotic day of trading that saw several securities¨Cincluding a number of ETFs¨Close and then recover billions of dollars in a matter of seconds. Because a disproportionate number of the securities impacted on that day were ETFs, rumors began to spread that these vehicles were somehow responsible. In reality, ETFs were simply swept up in the chaos, and were impacted heavily because of the breakdown in the creation/redemption mechanism that generally keeps prices and NAV closely aligned.
The details behind that day and the role that ETFs played in the chaos is enough to fill a novel; for those who want to dig a bit deeper into the weeds, there is plenty of well-reasoned analysis of exactly what happened that day, and the role ETFs played.
19. An ETF Cannot Collapse
To continue the myth-busting portion of this article, let¡¯s move on to another misconception that gained momentum earlier this year after the publication of research papers that purportedly detailed how certain exchange-traded products could collapse, leaving investors without the exposure they thought they had established. The notion that ETFs with significant short positions can potentially collapse centered around the idea that a wave of redemptions would eliminate all outstanding shares of the fund. But the reasoning behind the paper¨Cwhich was picked up by several mainstream media outlets, presumably for the ¡°shock¡± value¨Cwas flawed from the beginning.
The reason an ETF cannot collapse is pretty straightforward; redemptions require settled shares of an ETF, meaning that access to and control of the shares in question must be shown before a redemption can take place. The mechanics here get pretty complex; rather than delve into an extended analysis, we¡¯ll leave a few links that contain in-depth explanations and analysis of why ETFs¨Ceven those with huge net short positions¨Care in no danger of collapsing.
20. Bond ETFs Can Be Flawed
In recent years, more and more advisors have embraced exchange-traded funds as tools for establishing fixed income exposure, electing to access bonds through a structure that provides lower costs and enhanced transparency. While the marriage of fixed income and the exchange-traded structure has tremendous potential, there are a number of noteworthy factors that should be considered before going down this road. First, the cash flow experience of bond ETFs differs from holding an actual bond. The majority of bond ETFs, including popular funds such as AGG and BND, are designed to operate indefinitely. That means that proceeds from any bonds reaching maturity are reinvested in new securities. In most cases, the effective maturities of bond ETFs remains constant over time, meaning that interest rate risk will not decline as clients age. That isn¡¯t the end of the world for advisors, but it does mean that more diligent monitoring may be required with these products [see Are Bond ETFs Broken?].
It should be noted that there are now a number of ¡°target date¡± bond ETFs designed to more closely replicate the experience of holding actual bonds. These ETFs, including the BulletShares products from Guggenheim and muni bond funds from iShares, focus on debt issues maturing in a specific year. As the maturity dates approach, the ETF¡¯s portfolio shifts to cash, ultimately making a distribution to investors that represents the return of principal.
There are some additional factors that should be noted with respect to some popular bond ETFs. Some investors see products such as AGG and BND as one stop shops for fixed income exposure. But even thought these funds are in our Total Bond Market ETFdb Category, there are some noteworthy omissions from the portfolio [see our Better-Than-AGG Total Bond Market ETFdb Portfolio ]. AGG and BND are tilted heavily towards U.S. Treasuries, with zilch in the way of international bonds or junk bonds. While these ETFs can be valuable core holdings in a fixed income portfolio, there is much more to complete bond market exposure that isn¡¯t found in these funds [see Don't Put All Your AGGs In One Basket].
21. ETFs Are A Vehicle (Not A Strategy)
ETFs are generally associated with passive management, and held out as alternatives to actively-managed mutual funds. It¡¯s somewhat common to hear investors compare ¡°ETFs vs. active management¡± or ¡°mutual funds vs. indexing strategies.¡± But it¡¯s important to keep in mind that ETFs are a vehicle that can be used to achieve exposure to passive index replication or active management, just as mutual funds can tap into either strategy.
22. Odds Are, You¡¯ve Got Options
Once upon a time, accessing a strategy or asset class through exchange-traded products was a binary decision: you either did it, or you didn¡¯t. And while the surge in ETPs in recent years has primarily been the result of innovation, there¡¯s been a fair amount of duplication as well. The result: many asset classes and even indexes are now covered by multiple exchange-traded products. For example, there are three S&P 500 ETFs, five pharmaceutical ETPs, three funds offering exposure to the Australian stock market, and four bond ETFs that seek to replicate the Barclays Capital U.S. Aggregate Bond Index.
In other words, advisors likely have options among the ETF universe. And you would be wise to take advantage of the abundance of choice; combing through the various options targeting a specific sector or benchmark can lower fees, improve depth and balance of a portfolio, and optimize tax efficiency [see ETF Webinar: How To Find The Right ETF].
23. Nice Returns Can Come In Small Caps (Or Not)
ETFs have become popular as tools for establishing exposure to international stock markets, ranging from developed markets in Western Europe to emerging economies in Asia to frontier markets in Africa and beyond. And thanks to impressive innovation in the last several years, just about every major global economy is accessible through a pure play ETF.
But it is important to understand that most international stock ETFs¨Cespecially those that were launched in the early 2000s¨Care linked to cap-weighted indexes that tend to be dominated by the largest and most valuable companies in that market. That isn¡¯t necessarily a bad thing, but the tilt towards large caps can have a meaningful impact on the returns achieved.
Specifically, large cap-heavy ETFs are likely to include companies that may generate revenue around the world though headquartered in a single market. As an example, imagine Coca-Cola: a U.S.-listed stock that derives the bulk of its revenues from overseas operations. While technically a U.S. stock, the company is perhaps more dependent on consumption patterns in China and India.
Small cap ETFs have become popular tools in recent years because they can represent more of a ¡°pure play¡± on the local economy¨Ca chance to get closer to the ground in international markets and invest in companies that stand to benefit from growth in the local market. And in many cases, these funds can exhibit returns that differ dramatically from their large cap counterparts. As an illustration, consider the performance of two Brazil ETFs last year: the large cap heavy EWZ and small cap focused BRF.
Both are Brazil ETFs, but these two products are clearly far from identical.
There are a number of small cap ETFs out there that offer international equity exposure, and in many cases these products may be a better fit for clients¡¯ portfolios than their large cap counterparts.
24. Sometimes, ETFs Aren¡¯t The Best Option
Don¡¯t get us wrong; the team at ETFdb includes some of the biggest ETF fans in the world. The tremendous growth of the industry in the last few years is a testament to the advantages inherent in the exchange-traded structure, ranging from lower costs to excellent transparency to intraday liquidity and improved tax efficiencies. In many cases, the exchange-traded structure is simply a better mousetrap; it represents the optimal vehicle for accessing a wide variety of asset classes. But there are some cases where it might make sense to employ another strategy: ETFs are not always the most appropriate tool in the toolbox.
Though ETFs are generally cheaper than their mutual fund counterparts, that isn¡¯t always the case; some Vanguard mutual funds, for example, offer a total cost proposition¨Cincluding management fees, transaction fees, and bid-ask spread considerations¨Cthat ETFs can¡¯t top.
Moreover, there may be some asset classes where investors are more comfortable with the expertise of an experienced management team, as opposed to subscribing to an indexing strategy that simply seeks to replicate a rules-based benchmark. Emerging market debt, for example, is one corner of the market where knowledge on liquidity issues and the nuances of individual issues can come in handy, potentially allowing an active manager the opportunity to add value.
25. Free ETF Tools Can Make Your Life Easier
The ETP universe now stands at more than 1,300 products¨Cand is expanding rapidly. With a growing number of increasingly complex tools available to more and more investors, keeping track of all the choices and identifying the best product for your investment objectives is no easy task. But there are a number of free analytical resources out there designed specifically for financial advisors who use exchange-traded funds.
Visit My Website
| |
0 Comment | Add Comment(s) |
|
What the MF?
Tuesday, November 01 2011 | 09:09 AM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | The big story yesterday was the bankruptcy filing of MF Global. The news angles to this story include Corzine's reputation, possible disruptions in trading, other firms with possible counter party risk to MF, the bonds the company floated during the summer and a bad trade.
There is no shortage of coverage of all aspects of the news but of most interest to me is the trade made by going long, in some form, debt from several of the PIIGS and Belgium. As I write this there appears to be some question as to the leverage to put the trades on but the notional exposure appears to be $6.3 billion.
The reason the trade is interesting is because of the repeat of one of the most common behaviors that does people in time and again which not simply being wrong but being wrong combined with a grossly oversized bet.
This is something I've written about many times over the years and I always include the fact that this will continue to happen forever. I don't know exactly why participants take on deathblow risk with their trades but they do and every so often it ends very loudly as is the case now with MF.
Zooming out a little bit, an actively managed portfolio is a combination of decisions. No one gets every decision correct. No matter the investor, some number of decisions will be incorrect--this is guaranteed. If you know as a fact that some of your decisions will be wrong and there is no escaping this. And if you know ahead of time you will be wrong some times and obviously you can't know ahead of time which decisions will be wrong then the important thing becomes not letting one of these incorrect decisions sink you.
As obvious as this sounds Corzine is evidence that these types of bets still get made. The trade itself could have worked (per one CNBC report the trade might end up working but on someone else's P&L) it just so happens it didn't which didn't have to be a big deal but for the leverage and what appears to be an unwillingness to take a loss earlier on.
Several years ago a reader was kind enough to share his having put 25% of his portfolio into a biotech stock that went on to have deathblow news from the FDA. This anecdote is much closer to the type of damage someone can inflict on themselves as opposed to levering up several times their equity (there are some exceptions) and then wiping out completely.
This type of wipeout is unnecessary but it happens every so often and will happen again. It is a great example to learn from.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
The Stock Market Dropped Yesterday Because It Did
Wednesday, October 19 2011 | 08:55 AM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | This appears to be the market we have right now, it was up on Friday just because and that was the same reason why it was down yesterday. I say this not to point out something new as it has been going on for a while but simply pointing out that this is what the market is giving us.
As a matter of investment philosophy this is an environment where I would rather try to shave off the peaks and troughs as the market seems intent on grinding around in the same range. The intent would be to go down less if the SPX goes back down to 1100 as we went up less as the market went from 1100 to 1200 the last time.
One relevant point I may not have conveyed adequately is that while I took defensive action consistent with how we always do it, I disclosed the various trades made along the way, and I do believe a recession is in the cards I do not believe the stock market action will be anywhere near as bad as late 2008/early 2009. We have been in the slogging through phase for a while and I think that will continue. A low from here of 900-1000 might sound terrible but it is obviously nowhere near SPX 666. The 900-1000 range is not meant to be a prediction so much as trying to have some expectation of worst case magnitude. Obviously I could be wrong and if we get to 900 or 700 then, as I have said before; however much defense we'll have taken by then we will wish we had more--human nature.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
Reasons & Excuses: Taking The Financial Media To Task
Friday, October 14 2011 | 02:10 PM
Vinny Catalano CFA
President & Global Investment Strategist,
BLUE MARBLE RESEARCH | The financial media is at it again. "Stocks soar today because..."(you fill in the reason). "Stocks plunge tomorrow because"... (you fill in the reason).
What the financial media fails to recognize is that, over the past several decades, the structure of the market has changed. Today's short-term market moves are at the margin and being driven not by rational ivory-tower-pipe-puffing-erudite academics but by momentum chasing lemmings who have copycat methodologies that require they follow the mob.
High correlations and high volatility are market outcomes in this reign of the momos. Yet, from a real world economic perspective, the financial media insists on attributing their actions as rational. They are not. They are, however, rational from a personal perspective: they are animal-spirit driven creatures intent on maintaining a lifestyle they have become accustomed to. Who can blame them? They are simply exploiting the system as it functions today.
Investment Strategy Implications
Investors look for reasons to take action. The agnostic momos look for excuses.
Investors look for fundamental and/or technical analysis reasons to act. The agnostic momos could care less.
Keeping my house in Greenwich is how I first described this syndrome, in which the momos' relative performance vis-a-vis their "competitors" trumps all else. In order for them to keep their house in Greenwich, they must not underperform their "competitors". Hence, the mob rule of the momo lemmings' effect and its effect on the markets.
It, therefore, behooves the financial media to get up to speed and start educating the investing public about how the changed structure of the market has changed how the game is played. Which brings us to this question: Is the financial media's job to educate or to entertain? (I guess the answer to this question can be found every weekday at 6 PM eastern.)
Visit My Website
| |
0 Comment | Add Comment(s) |
|
Commodity ETF With Asian Twist On Tap
Wednesday, October 12 2011 | 08:54 AM
Michael Johnston
Managing Director,
ETF DATABASE | United States Commodity Funds, the company behind the ultra-popular natural gas (UNG) and crude oil (USO) products, has laid the groundwork for another unique exchange-traded commodity product. In a recent SEC filing, USCF outlined some details for a proposed Asian Commodity Basket Fund, which would include exposure to commodities deemed to maintain “systemic importance to Asian economies, including the three major Asian economies of China, Japan, and India.” The filing noted that the proposed fund may also include futures contracts that trade on an Asian domiciled futures exchange.
The construction of the underlying index of commodity futures will take into account a number of different factors, including:
Percentage of global production that occurs in Asian countries
Percentage of global consumption that occurs in Asian countries
Tendency of the Asian economies to be either net importers or net exporters of a particular commodity
Size and liquidity of the regulated futures markets based on such commodities.
The result of this approach is a basket of futures contracts deemed to generally reflect Asian demand for physical commodities. The fund would generally include near month and next-to-near month futures contracts, with the “roll” process occurring on a monthly basis [read Warning: These Three ETFs Could Be Crippled By Contango].
Asian economies have become increasingly important drivers of commodity prices in recent years, as rapid urbanization in developing economies has accounted for a significant portion of global natural resources usage. Swelling urban areas and aggressive infrastructure campaigns throughout the continent have translated into an insatiable appetite for all types of natural resources, boosting the fortunes of commodity-intensive economies throughout the world. Despite some signs of slowdown in China and elsewhere, investors generally expect that demand from Asian markets will remain strong in coming years.
So this proposed ETF essentially would offer a way to achieve commodity exposure that is targeted in that it tilts holdings towards resources that are particularly in demand within the economies of Asia [see more in the Emerging Markets ETF Center].
Under The Hood
According to the filing, the benchmark contracts to be included in the proposed fund would include various types of commodities, ranging from energy resources to precious metals to agricultural commodities:
Commodity Base Weight DBC Weight
Crude Oil: Light/Sweet-Brent 20% 24.8%
Crude Oil: Medium-Dubai/Oman 2% 0%
Gasoil 2% 12.4%
Corn 10% 5.6%
Soybeans 10% 5.6%
Wheat 10% 5.6%
Copper 10% 4.2%
Zinc 5% 4.2%
Nickel 5% 0%
Sugar 5% 5.6%
Platinum 5% 0%
Gold 5% 8.0%
Silver 5% 2.0%
Canola Oil 2% 0%
Palm Oil 2% 0%
The filing noted that certain commodities that are of major importance to Asian economies, such as rice, iron ore, and coal, lack liquid and regulated futures exchanges, and as such are not able to be included in the underlying benchmark.
The above table also includes the base weightings assigned to each commodity within the PowerShares DB Commodity Index Tracking Fund (DBC), the most popular exchange-traded commodity product [see more on DBC's Fact Sheet]. While there is some overlap, the proposed fund from USCF would maintain a relatively unique portfolio that features smaller allocations to energy commodities and higher weightings to agricultural resources (it should be noted that there are several resources–such as aluminum and natural gas–that are found in DBC but would not be included in the USCF fund).
Most exchange-traded commodity products maintain hefty allocations to energy commodities, including crude oil, natural gas, and heating oil. But a few offer up access to more diversified baskets of futures contracts; the Greenhaven Continuous Commodity Index Fund (GCC), for example, is linked to an index comprised of equal positions in 17 contracts, resulting in an ag-heavy portfolio [compare GCC to DBC here].
Innovative Commodity ETPs
Last year USCF launched its first broad-based commodity product, the United States Commodity Index Fund (USCI). That product determines which futures contracts to include in the underlying portfolio based on certain observable price indicators, including the extent of contango / backwardation in the related futures market and momentum scores. USCI has attracted almost $400 million in assets, thanks in part to an impressive performance record [sort all Commodity ETFs by historical returns].
According to the SEC filing, the proposed fund would charge an annual management fee of 0.90%. Expense ratios for the Commodities ETFdb Category range from 0.50% to 1.25%, with an average of 78 basis points [see The Definitive Guide To The United States Commodity Index Fund].
| |
0 Comment | Add Comment(s) |
|
What Is A Bear Market?
Friday, October 07 2011 | 05:05 PM
Vinny Catalano CFA
President & Global Investment Strategist,
BLUE MARBLE RESEARCH | To many, especially those in the financial media, a bear market is a statistic. For example, during Monday's swoon, the words "The market, down 20%, is now in bear market territory" could be heard early and often. However, to investment strategists and seasoned portfolio managers, a bear market is not a statistic but a trend established or in the process of being established in which lower prices are the dominant trend. How one comes to this conclusion is a process of the methodology employed. And only time will tell if the forecast is correct.
At present, the view here is that the bear is the operative major trend. This is so for reasons described on many previous occasions, most notably the Mega Trend. If I (and others) are correct and we are in the throes of the bear, then there are three portfolio decisions that need to be made.
First, what is the appropriate asset allocation mix? The answer depends on one's risk tolerance, goals, objectives, constraints, etc.
Second, what is the appropriate sector mix? The answer here depends partly on the answer to first question but also includes a standard reduced volatility exposure (lower beta) via "defensive" sectors. Thus far, in this bear that has produced some good alpha.
Third, what is the most productive tactical approach to take? Here, the answer resides in what phase of the bear we are in. If in the first wave (which is what I believe we are still in), fade (sell) the rallies is the appropriate course of action. Rallies are a feature of the first phase, as the bulls still have considerable residual strength and the supporting argument that we are only in a correction. This is not the case in the second and third phase, when rallies are few and far between.
There is a related topic to discuss re the bear: "Because."
Like all market factors, the reasons for the bear (or the bull, for that matter) are many and complex. The simple "Because" reasons given so blithely so often in the financial media are the construct of the business dynamics of the financial media industry and human nature. For many, it is hard to believe that cause and effect (the real world reasons for why markets move) is not always the case. The problem with this is simple: the cause is rarely one thing. It is predominantly many issues with many complex dynamics at work.
One last point: the magnitude of a move is very difficult to forecast. Assumptions can (and should) be made. However, given the highly dynamic nature of the markets (see Soros' "Reflexivity" on this*), it is hard enough getting the direction correct let alone how large the move will be and when it will end.
Bottom Line: A bear market is not just a statistic. It is the view (followed by the reality) that a downward trend is in effect that results in significant loss in value or time. It's a bear until it ain't. Or, to quote the famed philosopher, Yogi Berra, "It ain't over 'til it's over."
Visit My Website!
| |
0 Comment | Add Comment(s) | Bear_Market, US_Economy, Stock_Market, |
|
ADP Says Private Payrolls Rose 91,000 In September
Wednesday, October 05 2011 | 09:58 AM
James Picerno
Editor,
CAPITALSPECTATOR.COM | The ADP Employment Report for September reveals another month of mediocre job growth in this data series, but that’s better than what the crowd’s been expecting. It sets us up for somewhat brighter expectations that Friday’s employment report from the government will confirm a mild revival in the labor market compared with August’s dismal number a la Washington's bean counters.
Employment in the U.S. nonfarm private business sector rose 91,000 on a seasonally adjusted basis last month, according to ADP. That’s only slightly higher than the 89,000 gain in August, based on ADP’s accounting. The question is whether the September data will bring the Labor Department’s estimate of job growth back from a near-death experience in the last report.
The ADP update suggests there’s reason for hope, as the chart above shows. The monthly gap between the two employment series wanders, but last month’s gap was the widest in absolute terms since January. The implication is that the spread will narrow in favor of growth. With the September ADP number in hand, the odds look a bit stronger that that the government’s report on Friday will bring us a higher number than August’s 17,000 net gain for private payrolls. A bounce back is expected even without the ADP support since the government's previous estimate was reportedly skewed to the downside because of a Verizon strike—a burden that evaporated when the strikers returned to work in late August.
Economists are inclined to agree that Friday's update will show some improvement over the August numbers. The consensus outlook is that the government's employment report for September will reveal an 83,000 net gain in private payrolls, according to Briefing.com. That's still weak by historical standards, but it'd be a lot better than the 17,000 private-sector rise for August. Last week’s encouraging update for initial jobless claims offers some additional support for thinking that the next data point will at least be moving in the right direction.
Even if the optimistic forecasts for Friday prove accurate, the best you can say is that the economy appears to be resisting the gravitational forces of recession, which some analysts are predicting is inevitable. It's premature to dismiss calls of a fresh downturn, but the ADP report offers a counterpoint, mild as it is. There’s no law that says a recession can't commence with private-sector job growth rising by 90,000 a month. But if we’re in or near another recession, it would be unusual to see the labor market expanding. We’ve heard of a jobless recovery; is there such an animal as a job-growth recession too?
Hold that thought as we wait for tomorrow’s weekly update on jobless claims and Friday’s employment report.
Visit My Website!
| |
0 Comment | Add Comment(s) | US_Employment, Recession, US_Unemployment, US_Economy, |
|
Thinking Loooooooong Term
Monday, October 03 2011 | 11:27 AM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | Thinking Loooooooong Term
Last weekend I had a post up that tried to poke holes in the Five Stocks to Hold Forever types of articles. In that post I mentioned in passing that while we don't have to pick five of anything to hold forever, it would make more sense to think about this in terms of countries instead of individual stocks.
An editor at Seeking Alpha asked me to write something up following through on the five country idea which I was not thrilled about doing but then a reader asked the same thing. In thinking about this a little I thought that what this really should be about was five (or any number important to you) top down segments which could include countries but also themes and sectors.
One theme would be things related to food and water. Yes this is a Malthusian argument but it seems very obvious that there is now not enough food and water in many places and a lot of money will be spent trying to solve this problem as the world population continues to grow. Some do not believe in this and so they would have no interest in the theme.
There are plenty of ETFs and individual stocks for this theme taking on all sorts of attributes in terms of countries, volatility and yield.
Another theme but also is about country selection is the Brazilification of other countries. You can probably guess that I mean countries that are likely to become more prosperous and see a middle class emerge/proliferate as they sell resources to other countries. We own Brazil which is relatively mature in this phase but still has a ways to go IMO. We also own Colombia for similar reasons. As I have mentioned before I can see owning Mongolia and Kazakhstan at some point as part of this idea. There are ETFs filed for both countries and we own individual stocks for Brazil and Colombia. At some point I imagine there will be other countries to add to this list like maybe some of the other 'stans or a couple of countries in Africa.
As disclosed in previous posts we have exposure to about a dozen foreign countries and for reasons I've talked about before I guess Chile and Norway would be my two "favorites" but I don't necessarily expect them to be the top performing countries. Both countries are low octane and the fundamentals are very solid which creates a backdrop for ongoing and meaningful outperformance of the US even if they are not the ones that go up 1000% in the next ten years.
Assuming I keep both countries for the next ten years, or even add to their respective weightings, chances are it will be some other country that is the top performer and I obviously don't know which one it would be which is why I believe in owning many countries. In the last decade commodity related countries and small emerging markets seemed to be the best performers and I think that argument is still fully in tact but what if it is some other grouping of countries? What if instead it is the small emerging debtor nations like Hungary and other countries of that ilk? I can't make a fundamental argument for Hungary but that might change.
What about the CIVETS, the N-11 and any other grouping of countries, those could all work out too--or not.
There are other ideas we could also add to the list including natural resources, Africa and some Asian markets where there is really not much of a stock market yet; Laos and Cambodia come to mind. Who's to say that five years from now there won't be a Cambodian cement company with ADRs on the NYSE?
My favorites will be my favorites until they aren't, if you take my meaning.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
Saved by the DOW
Wednesday, September 28 2011 | 05:02 PM
Bill Carrigan
Founder,
GETTINGTECHNICAL.COM | First the bad news: The big technical test is for the August 8 lows to hold – see the inter-day DOW chart below. The August 8 low is Dow 10604 and so at 10680 we are at the tipping point. Can we recover from here? See the breadth observation below
Now the good news – so far The Dow internals (breadth) are today in better shape than back in August 8 At quick look at the Dow 30 components and counting how many are above or below their relative August 8 lows As of 2.50 pm September 22, 2011 – I count only 8 (eight) components trading under their relative August 8 lows. The symbols: AA, BAC, CAT, DD, HPQ, JPM, MMM and TRV - Total 8 - All the rest, a total of 22 (twenty two) components are above their respective August 8 lows
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
A 15-Year Review
Tuesday, September 27 2011 | 09:54 AM
James Picerno
Editor,
CAPITALSPECTATOR.COM | John Bogle, the founder of Vanguard and the man who gave the masses the first index fund, was reminiscing recently. In a talk he gave earlier this month, Bogle reviewed the lessons in a 15-year-old bit of investment advice. "I thought it would be fun, interesting, and provocative to examine what’s happened over the exciting era since I made my policy recommendations." In particular, he revisited his recommendations from the summer of 1996 and "how they compared with the actual results of the average endowment fund tracked by The National Association of College and University Business Officers," aka NACUBO.
Ever the skeptic, Bogle was cautious about reading too much into a rear-view mirror approach to investment analysis, even his own. "Perhaps we can learn something from that past, or perhaps not," observed the author of several worthy investment tomes, including The Little Book of Common Sense Investing and last year's Don't Count on It!: Reflections on Investment Illusions, Capitalism, "Mutual" Funds, Indexing, Entrepreneurship, Idealism, and Heroes. But sometimes the basic facts do all the talking for you. Indeed, Bogle reports that the average endowment fund earned a 7.3% compounded return for the decade-and-a-half through this past June.
Meanwhile, Bogle summed up his 1996 recommendation as follows:
George Putnam and yours truly recommended a balanced approach. With bonds then yielding 7 percent and stocks but 2 percent, we both liked the concept of earning more income for endowments that must pay out returns to their universities, as well as the likelihood of substantially reduced volatility. I also urged endowment managers not to rely on “history and computers” to forecast stock and bond returns. My major recommendation couldn’t have been more specific: a 50/50 portfolio using U.S. stock and bond index funds, a balanced portfolio with extraordinary diversification and remarkably low costs—“on automatic pilot,” if you will. Simplicity writ large.
How did Bogle's advice fare? He continues:
My principal recommendation would obviously have been best implemented with the lowest cost stock and bond index funds, so I had no choice but to rely on Vanguard Total Stock Market Index Fund and Vanguard Total Bond Market Index Fund, rebalanced each quarter to 50/50. Our institutional shares—net of all fund expenses—provided an annual rate of return of 7.1 percent—6.2 percent for the bond fund and 6.0 percent for the stock fund, itself a surprising outcome. (That the total portfolio provided a higher return than either of its components is explained by the quarterly rebalancing.)
Bogle's recommendation, in short, trailed the average NACUBO result, if only slightly. But the performance looks somewhat better on a risk-adjusted basis, he notes. "The indexed portfolio had a standard deviation of annual returns of 8.9 percent, exposed to some 20 percent less risk than the 11.3 percent volatility of the average endowment. As a result, the risk-adjusted return of the 50-50 portfolio, measured by the Sharpe Ratio was 0.45, well above the 0.38 Sharpe Ratio for the average endowment."
What's interesting is that Bogle's simple, perhaps even naive strategy turned out to be competitive with some of the best investment minds in the NACUBO universe over a fairly long stretch of time. The average figures no doubt mask some big winners among endowment funds (along with some big losers). But the outliers don't tell us much, since most of the money was surely invested in and around the average performers.
I don't have access to the data, but I'm willing to bet that most of the NACUBO funds' returns cluster around the average. I say that based on numerous studies over the years that tell me that this is a fairly typical result when looking at a broad sample of portfolios. I've also crunched the numbers in various ways over the years and found similar results, including my ongoing comparisons of actively managed asset allocation mutual funds vs. my Global Market Index (GMI), an unmanaged benchmark that holds all the major asset classes in their market value weights. As I reported a few weeks ago, GMI boasts a competitive if not exactly stellar record against the sea of managers intent on doing better.
Bogle's 15-year retrospective offers yet another bit of support for thinking that a bit of modesty can do wonders for a portfolio strategy. No, the lesson isn't that we should turn our minds off and do nothing. But we should be mindful that there's also lots of risk in going to the opposite extreme.
"Remember reversion to the mean," Bogle concludes. Why? James Montier of GMO’s asset allocation team explains by noting that "reports of the death of mean reversion are premature."
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
What’s Crushing The Austria ETF (EWO)?
Thursday, September 22 2011 | 09:07 AM
Michael Johnston
Managing Director,
ETF DATABASE | Given the broad weakness in the euro zone throughout 2011 and the ever-present fears of default in a number of nations, most investors shouldn’t be surprised to read that all of the ETFs in the European Equities ETFdb Category are down in year-to-date terms. In fact, at time of writing, only the iShares MSCI UK Index Fund (EWU) was down less than 10% on the year while most funds were off by more than twenty percent. Thanks to the heavy focus on the PIIGS economies, one would expect to see national ETFs such as those tracking Spain and Italy, would be vying for the title of worst performer so far this year, but this has not been the case. While the Italian ETF, EWI, is close to the worst performer, it still has proven to be no match for one of the country’s neighbors to the north and their ETF; Austria and the iShares MSCI Austria Index Fund (EWO).
EWO is, at time of writing, down 29.5% so far in 2011, beating out all other funds in the European category by at least 200 basis points on the downside, if not more when compared to the better performing funds in the space. This should be somewhat surprising to many since the country isn’t a member of the PIIGS group and has inflation and debt relatively under control. Furthermore, the country has a relatively solid trade position, doing business with a number of nations while running only a minor trade deficit. Additionally, thanks to the country’s ease of doing business and historic ties to the emerging eastern European region, it has become a favorite spot for those looking to access developing nations while still basing operations in a robust developed market [Pro Members can see the Analyst Take of EWO here].
With that being said, all of the positives of the Austrian economy have been largely overshadowed by the country’s financial sector in recent months as this important corner of the nation has dragged down both growth hopes and market expectations throughout the year. Worries have largely come about from the nation’s banking sector and its exposure to the PIIGS nations. Accoridng to a report from CNBC, close to 2.6% of the banking sector assets go to PIIGS nations with close to $3.4 billion going to Greece and $22.2 billion to Italy.
In total, the country has about $36.8 billion in exposure to the five nation group and while this may not sound like a lot in the grand scheme of the euro zone’s troubles, consider that Austria’s financial sector isn’t nearly as large in terms of total banking assets as many other financial centers in Europe, making a rough stretch for the financial sector much harder to absorb for Austria than the giants of the euro zone [see all the European ETFs here].
Second, and more recently, is another event stemming from beyond Austria’s borders, this time involving the country’s neighbors both to its west and east, Switzerland and Hungary. Switzerland’s decision to peg their currency to the euro has apparently had far reaching effects on the economies of central Europe and especially so on the country of Hungary. Apparently, thanks to lower interest rates in Switzerland when compared to Hungary, many Hungarians decided to take out loans from banks– generally Austrian ones– in francs instead of forints. While this may have seemed like a good idea at the time given the savings in interest, a rapid appreciation of the Swiss franc to near-historic levels has had a devastating impact on many Hungarian borrowers, forcing the government of the country to go to drastic measures [also see Austria ETF Sinks On Fears In Neighboring Hungary].
In a recent move, the Hungarian government declared that borrowers who make their payments on time can shift their loans back into the home currency at a rate of 180 forints to a franc and 250 forint to a euro. Given that current exchange rates are at 236 HUF per franc and 287 HUF per euro, this represents a rather large overvaluation of the Hungarian currency in true market terms. Since the Hungarian government expects about 10% of the mortgages to be refinanced under this scheme– with some estimates going far higher due to two-thirds of citizens in Hungary using foreign currency loans–this could represent a loss of about 2 billion euros for the banks, should the high end of expectations be met. Since Austrian banks are among the biggest underwriters of these loans they stand to lose the most from the plan, especially if Hungarian officials do not fall to growing pressure to scale back the system.
Thanks to all this, the Austrian ETF has been pretty much decimated so far in 2011. The fund which tracks the MSCI Austria Inversatble Market Index, measures the broad performance of the Austrian equity market, allocating to 33 securities in total. In terms of sector exposure, materials and energy both make up over 10%, industrials constitute just over 20%, and a plurality of assets goes towards the troubled financial sector at 37.5% of total assets. Given how much of the fund is exposed to financials it shouldn’t surprise investors to see EWO in trouble so far this year. In fact, the fund’s top holding, Erste Group Bank AG, which makes up just under 14% of total assets, currently sees its shares near their 52 week low and are off by more than 43% so far in 2011, underscoring just how bad things have been in the Austrian financial sector this year [see charts of EWO here].
The only thing that Austrian investors can take solace in is that over the longer term, the product has done much better. While it is still down significantly, over both the past three and five year periods it drops out of the running for worst performing ETF in the time periods suggesting that if recent events can be contained the fund can go back to performing in line with its strong fundamentals. In fact, EWO has a dividend of about half a percent and a PE ratio below 11 suggesting it may not have much further to fall, assuming of course the worst doesn’t happen in several PIIGS markets. Either way, whether the fund can turn it around later this year remains to be seen but if recent history is a guide, events beyond Austria’s control are likely to play an outsized impact in the overall return of the fund for the foreseeable future.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
DO Fight The Fed
Wednesday, September 21 2011 | 11:07 AM
Vinny Catalano CFA
President & Global Investment Strategist,
BLUE MARBLE RESEARCH | Today, Wall Street's Professional Investor Class (PIC) waits with bated breath for the Fed to provide words of comfort so that one of Wall Street's revered axioms, "don't fight the Fed", will deliver much needed relief to the beleaguered warriors of finance.
One of characteristic of the PICs that is useful to remember is that they are highly reliant on heuristics - rules of thumb that help frame the world into bite-sized analytical pieces. One of the heuristics that has worked from time immemorial is 'don't fight the Fed". For example, last year, around this time, a well-known hedge fund manager advised investors and traders of this well-worn axiom to great effect and result (stocks rose from the fall of 2010 into the summer of 2011). Unfortunately, while the monetary elixir did work its magic on the PICs (they bought stocks), it had little effect on the real economy.
Never sated, the ever-thirsty PICs are back at the don't-fight-the-Fed troff for another hearty slurp of monetary ease = higher risk asset values. From the PICs and Fed's perspectives, the economic rationale for this view is rather simple: Easy money = an increase in the value of risky assets = a positive wealth effect = increase demand = higher GDP (which then = higher wages, increased hiring, etc, etc). Hence, don't fight the Fed ALWAYS delivers. Or does it? And when it does, is the effect always the same under all conditions? Or are the results a product of the economic and financial times?
It may be a risky thing to go against such a dogma. After all, the four most dangerous words in the investment language is "this time is different". And to assume that more easy money will not produce the above listed outcomes is the speak those very dangerous words. Yet, if one believes we are in times that are truly different, particularly in the post WW II era, then perhaps it's time from some fresh perspectives.
Going against such a well-established dogma of day is also especially dangerous given the changed structure of the market. For, when the momo lemmings (who could care less what the drivers are or what direction the markets are headed, just along as stock prices move) jump on the market trend du jour bandwagon, the wheels get turning rather quickly.
Investment Strategy Implications
If you are going to go against a revered heuristic it is useful to have your own heuristic to counter the revered one. My heuristic is this: in a liquidity trap, the effectiveness of monetary policy is limited, at best. Moreover, monetary ease becomes even more limited when fiscal policy is contradtionary (i.e., expansionary austerity). These global macro forces are strong, pervasive, and global in scope.
So, the PICs may rejoice in what they hear today. And risk assets may rise - for a while. But the global macro forces at work can, and I believe will, overwhelm the monetary elixir the Fed will provide. And the PICs don't do global macro very well. (More on this point in a future blog posting.)
Visit My Website!
| |
0 Comment | Add Comment(s) | Investment, Federal_Reserve, Risk, Global_Macro, |
|
One Investor’s Trash Is Another’s ETF: Investing In Waste Management Funds
Tuesday, September 06 2011 | 05:04 PM
Michael Johnston
Managing Director,
ETF DATABASE | Given that the recent ISM Manufacturing Report was just barely above contraction levels, many investors might have second thoughts about buying up securities in the industrial sector. This is especially true considering the lackluster employment prospects for much of the country as well as a general lack of spending by businesses, who are often the primary consumers of these industrial goods anyway. Yet, as with any sector, there is a corner of the industrial segment which may be poised to grow no matter what happens in the economy both here and abroad; the environmental services/waste management division.
Companies in this corner of the market are somewhat immune to downturns as trash is always created and demand for waste removal is always prevalent. Furthermore, consumers in emerging markets, who are just beginning to make discretionary purchases for the first time, are starting to require more services in this segment and could represent a nice patch of growth for the industry no matter what happens in developed markets.
In fact, while some ETFs in the Industrial Equities ETFdb Category have lost more than 10% on the year, the comparable environmental service fund has only lost 4.3%. When taking a longer term look, the results are even more skewed towards the sector as it outperformed every fund but one in the Industrials category over the trailing one year period [ETF Plays To Invest Like Buffett, Fisher, Paulson].
In light of this recent outperformance, low levels of exposure to cyclical trends, and positive forces in emerging markets, we have decided to take a closer look at two ways for investors to play the environmental services sector in ETF form. Both funds represent quality choices, but each have pros and cons that investors must be aware of before choosing a particular product for their portfolios.
Global X Waste Management ETF (WSTE)
WSTE is the newcomer to the space, having debuted in April of 2011. The fund tracks the Solactive Global Waste Management Index which seeks to reflect the performance of the broad waste management industry, tracking roughly 30 companies in total. In terms of sector exposure, it is relatively heavily broken down between three key groups; hazardous waste removal, non-hazardous waste management, and recycling, giving the fund a nice balance. Investors should also note that WSTE is relatively evenly split between American and international equities with top holdings going towards companies in Australia, France, and Hong Kong in the global market. WSTE charges investors 65 basis points a year in services and is a decent value play; the fund has a P/E below 16 and a beta below 1.0 [see charts of WSTE here].
Market Vectors Environmental Services ETF (EVX)
EVX is far older than its competitor from Global X, having debuted in October of 2006. The fund from Van Eck holds just over 20 securities in total with the largest levels of exposure going towards names such as Veolia Enviornment, Stericycle, and Waste Management, all of which are given about a 10% weighting in the fund. In addition to these names, the fund by tracking the NYSE Arca Environmental Services Index, follows companies that may benefit from the global increase in demand for consumer waste disposal, removal and storage of industrial by-products, and the management of associated resources. In terms of country exposure, just 15% goes to international markets with the vast majority of that exposure going to Europe and Canada. With that being said, investors should also note that EVX affords a significant portion of its securities to small and micro cap firms, giving the product a growth tilt. In fact, EVX has both a P/E ratio and beta higher than its Global X cousin, although it does pay out a decent yield that is just above 1.0% [see how EVX and WSTE compare with the Head-To-Head ETF Comparison Tool].
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
Emerging Markets Financials Jump To Forefront
Monday, August 08 2011 | 09:04 AM
Michael Johnston
Managing Director,
ETF DATABASE | Following a wave of massive writedowns, record losses, and even closures at financial institutions across developed markets, emerging markets banks have taken on a new importance in the global financial sector. A decade ago, the list of the world’s largest banks included none from emerging markets. Today, China is home to the three largest banks by market capitalization in the world, and four of the top ten.
Compared to JP Morgan Chase, Wells Fargo, and other U.S.-based banking behemoths, emerging market financial companies continue to look attractive for a number of reasons:
* As citizens of emerging markets continue their push from rural to urban areas, banks in China and the other BRIC countries have a steady stream of customers and a reliable source of growth without resorting to risky loans to unqualified buyers.
* As emerging markets continue on the path towards developed status, billions of people in these countries are expected to make the transition from agricultural employment in rural areas towards higher-paying employment in big cities. As quality of living and per capital income increases in these countries, so too will purchases of cars houses, and other big ticket items that generally require financing.
* As existing cities expand and new major metropolises spring up, spending on utilities, transportation infrastructure, and commercial and residential real estate is poised to explode. This massive need for spending could put cash-rich banks in an excellent position to finance ongoing development.
Of course, emerging markets financials firms have significant risk factors as well. Some analysts worry that the recent credit woes in Dubai are a “canary in the coal mine,” signaling pending troubles for emerging markets that have borrowed beyond their means (although Chinese banks remain extremely well-capitalized by most measures). Moreover, many financial institutions maintain less-than-arms-length relationships with national governments (some are effectively state-owned), setting the stage for decisions to be made that aren’t necessarily for the benefit of shareholders.
Not Out Of The Woods Yet
Although a complete overhaul of the U.S. financial system appears to be underway, it is not clear to what extent the underlying “problems” that spawned the global financial crisis have been solved. Many analysts worry that major banks have significant exposure to commercial real estate, and that a collapse in this sector (which appears to be a matter of “when” and not “if”) could have material adverse consequences. Moreover, intense scrutiny of executive compensation threatens to cause a case of severe “brain drain,” sending talented employees elsewhere.
Emerging Markets Financial ETF Options
For ETF investors looking to gain exposure to the financials sector in emerging market economies, the Dow Jones Emerging Markets Financials Titans Index Fund (EFN) presents perhaps the best “pure play” option. This ETF invests in about 25 companies in eight different emerging markets, with its largest allocations to China and Brazil. Through the third quarter of 2009, EFN had a price-to-cash-flow ratio of about 5.3 and a median market capitalization of almost $9 billion.
Visit my website
| |
0 Comment | Add Comment(s) |
|
A Father/Son Conversation About Bear Markets
Thursday, August 04 2011 | 05:07 PM
Vinny Catalano CFA
President & Global Investment Strategist,
BLUE MARBLE RESEARCH | Son: Hey, dad. How do bear markets get started?
Father: Well, son, after stocks have been going up for a few years they then go sideways for a while. While they go sideways, the price and its moving averages begin to converge. At the same time, markets begin to diverge from one another.
Son: What happens then?
Father: Well, stocks begin to rollover, going down in a rather gentle manner.
Son: Why is that?
Father: You see, son, investors are still big believers in the bull market. So, when the price starts to go down they don’t believe it will go much lower. In other words, they are complacent at the start of a bear market.
Son: Is that what is happening now?
Father: No, not exactly. Yes, stocks did go sideways for a while. So that part of the story is true to form. But the moving averages have not crossed, nor has the longer term moving average, its 200 day, which has yet to roll over and point downward. Also, when the sideways action was occurring, very few divergences emerged between markets, and those that did were very minor.
But that’s not the big thing.
Son: No? What is?
Father: Bear markets are sneaky. They start out with disbelief as they gently rollover. Kind of like a sleepy bear waking up from his long winter nap.
Son: Well, dad, that doesn’t sound like what I see on TV today.
Father: No, son, it isn’t. What you see and hear today is fear. And fear is not how bear markets start out. Fear is a characteristic of bull market corrections and end of bear markets, not at their sneaky, sleepy starts.
Of course, this is way bear markets have happened for more than 50 years. So, maybe this time is different. But you know what they say about that?
Son: No, dad, what?
Father: The four most dangerous words in the investing vocabulary is “this time is different.”
Son: Thanks, dad. You’re the best!
example: Visit My Website!
| |
0 Comment | Add Comment(s) | Bear_Markets, Bull_Markets, Trading, Stocks, |
|
IMF’s Revised GDP Forecast: Down, But Not Out
Monday, June 20 2011 | 07:52 AM
James Picerno
Editor,
CAPITALSPECTATOR.COM | The IMF cut its forecast for global economic growth today, albeit slightly. The organization expects global GDP to rise this year by 4.3%, down from its previous 4.4% estimate. “The global economy, hit by slowdowns in Japan and the United States, is expected to reaccelerate in the second half of the year, but growth remains unbalanced and concerted policy action by major economies is needed to avoid lurking dangers,” the IMF advises.
For the U.S., the new prediction calls for a 2.5% rise, down from a 2.8% forecast in April. That's more or less what I've been expecting, which is to say growth of some degree. Not great, but enough to keep the macro demons at bay. Next week's economic data updates may change my view, but as I've been discussing this week, the numbers for the U.S. still fall short of risking a new recession. The argument that's it's soft patch still look more compelling, if only moderately. Apparently the IMF agrees.
But there may be a joker in this deck, the IMF notes. As The Telegraph reports:
The IMF added that a lack of political leadership in dealing with the debt crisis and the budget showdown in the United States could create major financial volatility in coming months.
"You cannot afford to have a world economy where these important decisions are postponed because you're really playing with fire," said Jose Vinals, director of the IMF's monetary and capital markets department.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
Ben Opens The Kimono
Monday, June 13 2011 | 11:06 AM
Vinny Catalano CFA
President & Global Investment Strategist,
BLUE MARBLE RESEARCH | If one took the time to sit and listen carefully, the Bernanke press conference was an excellent opportunity to understand not only the decisions made but the economic philosophy underlying them. For that, Bernanke should be applauded. Transparency is almost always a good thing.
You don’t have to agree with the decisions made. However, knowing the thought process that leads to the decisions will help much more than whether his voice sounded shaky (which, if you listen to his testimony to Congress, it always does) or if he appeared to be sitting behind a piano (I actually love that comment. The imagery of Ben crooning a tune is priceless. Thanks, to Matt Phillips at WSJ).
In a manner similar to what St. Louis Fed President James Bullard discussed at the NYSSA luncheon I moderated last fall, Bernanke lays out the thinking behind the decisions. Therefore, here are a few observations:
• First quarter slowdown is transitory. Economic pace will pick up over time. Accordingly, the US economy should achieve a sustainable expansion. Continued improvement is expected. (Key words "over time". Lots of wiggle room.)
• Concern re inflation and its impact on jobs. Inflation (and any deviation away from stable, low inflation, which, of course includes deflation, for that matter) will inhibit job growth and must be guarded against.
• Related to this is the issue of long-term unemployment, which the Fed can virtually nothing about beyond seeking to help the current conditions and, thereby, help facilitate a virtuous circle of jobs creation. The long-term unemployment problem is one for the political process and other areas of the US economy.
• The Fed holds a “stock view”, which is actually Soros' "Reflexivity" – the feedback loop from the financial markets to the real economy and back and forth over and over. In this regard, QE (1 and 2) worked because “easing financial conditions leads to better economic conditions.” This is exactly the same philosophy and view expressed by St. Louis Fed President James Bullard at the New York Society of Security Analysts luncheon I moderated last fall.
• As for the potential of more QE, Mr. Bernanke took that off the table when he noted that in the Fed’s view the tradeoffs of more easing versus the risks of inflation and inflationary expectations are not favorable. (Perhaps for the reasons John Hussman has been fretting about.)
• Fiscal cuts (austerity) at the state and local level are not a major concern and, therefore, no plans to respond monetarily. The Fed is ready to react but no worries right now. (Not sure how this squares with the previous point.)
• The first step that signaled the end of monetary easing is occurring at the end of June, when QE2 ends. The second step that will signal the end of Fed easing is when the Fed stops reinvesting the US Treasuries and the mortgage back securities it has on its bloated balance sheet. This will, in effect, lower the size of its balance sheet.
• Rogoff and Reinhardt have shown that recoveries following financial crises tend to be slower and less robust. Bernanke believes this is true, as the problems tend to be in the credit markets and housing. He also, believes, however, that the reason for the post credit crises below average recoveries is that policy responses were not adequate. In his and the Fed’s board view, the aggressive and extraordinary actions undertaken by the Fed should help lead to a better economic outcome for the US. That said, he did acknowledge that the US economy growth (and employment, for that matter) thus far has been sub par but, as noted above, the Fed expects “recovery continues to be moderate but the pace will pick up over time.”
So what can we take away from this press conference that is of meaningful investment value? Two main items come to mind:
1 – The Fed is driven to maintain stability at the price level. They are very concerned about inflation (for the employment related reasons noted above). They are, however, deathly afraid of deflation. A Goldilocks approach to inflation is the only porridge that will do. And that is a very difficult thing to accomplish indefinitely.
2 – In the current environment and now that, in the Fed's view, the deflationary dragon has been slain, inflation and job creation are joined at the hip. Rising inflation will impact job creation and must be avoided at all costs.
Everything described above assumes an private sector led sustainable economic expansion lies ahead, which takes us to my third and most important point:
3 - No one asked the one question that I would have asked (and the one I have been asking for months now), What if the US economy does not achieve the escape velocity of a private sector led sustainable economic expansion?
What will the Fed do? What can the Fed do?
How will the markets, the economy (US and global), the geo and socio political environment react to another round of monetary easing? Why would QE 3, 4, or 5 work when 1 and 2 produced such transitory (and some would argue negative) effects?
If the Fed is right and a private sector led sustainable economic expansion does emerge, then the outlook will improve but to what extent remains to be seen. If not, then what?
Is there a plan B? A plan C?
Bottom line: What Bernanke did is a terrific thing. Transparency is almost always an excellent thing. Moreover, I truly believe he is sincere, knowledgeable, hard working, and has little in the way of political agenda (unlike Geithner). That said, being a good guy is not enough if the actions taken lead to a bad outcome.
Herbert Hoover was a good guy and look at how that turned out.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
No Investment Sheep in Sight
Thursday, June 09 2011 | 11:27 AM
Bill Carrigan
Founder,
GETTINGTECHNICAL.COM | If I had to pick one commodity that is still out of favour with investors it would be natural gas. When I study a long term chart of natural gas (monthly) I see a bear market low in September 2009 followed by a large 20 month symmetrical triangle. This in turn has printed a series of higher lows and is about to generate a positive 10-month ROC number.
We need to get into the natural gas space before the investment sheep arrive. In this case the investment sheep will likely be those trend following portfolio managers who are currently chasing the utilities, consumer staples and telecom stocks. Now when the sheep take note that natural gas prices have stopped declining (three higher lows since last October 2010) they may begin to accumulate the shares of the natural gas producers.
Some smaller names would be Celtic Explorations Ltd., Trilogy Energy Corp, Birchcliff Energy Ltd, Paramount Resources, Fairborne Energy Ltd., Perpetual Energy Inc, Corridor Resources Inc., Tethys Petroleum Ltd., Delphi Energy Corp. and Vero Energy, Inc. The big go to name is EnCana Corporation (ECA). The long term (monthly) chart of ECA displays the monthly cycle troughs of 2003, 2008 and 2009. Note the pending trough of May 2011 that is about to signal the end of the short 10-month ECA bear. This pending cycle trough is supported by an improving relative reform signal. On a P & F chart ECA needs to break above $35 to trigger a bullish stampede into the name.
Visit My Website!
| |
0 Comment | Add Comment(s) | Commodities, Investors, Energy, Natural_Gas, |
|
Emerging Markets Financials Jump To Forefront
Wednesday, May 25 2011 | 09:49 AM
Michael Johnston
Managing Director,
ETF DATABASE | Following a wave of massive writedowns, record losses, and even closures at financial institutions across developed markets, emerging markets banks have taken on a new importance in the global financial sector. A decade ago, the list of the worldfs largest banks included none from emerging markets. Today, China is home to the three largest banks by market capitalization in the world, and four of the top ten.
Compared to JP Morgan Chase, Wells Fargo, and other U.S.-based banking behemoths, emerging market financial companies continue to look attractive for a number of reasons:
¡As citizens of emerging markets continue their push from rural to urban areas, banks in China and the other BRIC countries have a steady stream of customers and a reliable source of growth without resorting to risky loans to unqualified buyers.
¡As emerging markets continue on the path towards developed status, billions of people in these countries are expected to make the transition from agricultural employment in rural areas towards higher-paying employment in big cities. As quality of living and per capital income increases in these countries, so too will purchases of cars houses, and other big ticket items that generally require financing.
¡As existing cities expand and new major metropolises spring up, spending on utilities, transportation infrastructure, and commercial and residential real estate is poised to explode. This massive need for spending could put cash-rich banks in an excellent position to finance ongoing development.
Of course, emerging markets financials firms have significant risk factors as well. Some analysts worry that the recent credit woes in Dubai are a gcanary in the coal mine,h signaling pending troubles for emerging markets that have borrowed beyond their means (although Chinese banks remain extremely well-capitalized by most measures). Moreover, many financial institutions maintain less-than-arms-length relationships with national governments (some are effectively state-owned), setting the stage for decisions to be made that arenft necessarily for the benefit of shareholders.
Not Out Of The Woods Yet
Although a complete overhaul of the U.S. financial system appears to be underway, it is not clear to what extent the underlying gproblemsh that spawned the global financial crisis have been solved. Many analysts worry that major banks have significant exposure to commercial real estate, and that a collapse in this sector (which appears to be a matter of gwhenh and not gifh) could have material adverse consequences. Moreover, intense scrutiny of executive compensation threatens to cause a case of severe gbrain drain,h sending talented employees elsewhere.
Emerging Markets Financial ETF Options
For ETF investors looking to gain exposure to the financials sector in emerging market economies, the Dow Jones Emerging Markets Financials Titans Index Fund (EFN) presents perhaps the best gpure playh option. This ETF invests in about 25 companies in eight different emerging markets, with its largest allocations to China and Brazil. Through the third quarter of 2009, EFN had a price-to-cash-flow ratio of about 5.3 and a median market capitalization of almost $9 billion.
Visit my website
| |
0 Comment | Add Comment(s) |
|
Housing Activity Weakens In April & Industrial Production Is Flat
Wednesday, May 18 2011 | 05:26 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | Today’s update on new housing starts and building permits for April isn’t surprising, but it’s still not encouraging. Permits slipped 4% last month and are down by nearly 13% from a year ago. Housing starts look even worse, falling nearly 11% in April, pushing the seasonally adjusted annual rate down by 24% vs. the year-earlier number.
The residential real estate market remains in a deep slump and there’s nothing in today’s numbers from the Census Bureau to tell us different. The only questions: 1) Will the slump worsen; and 2) if the answer to first question is yes, will it drag down the rest of the economy?
Answering no in both cases is still reasonable, although the level of confidence with that outlook is far from robust. The main bit of evidence for thinking that we’re not looking at a new leg down comes from reviewing history. As the chart below reminds, starts and permits have been moving sideways for three years. Unless you think a new recession is lurking, there's a case for predicting that the range will hold. Today’s update brings us into the lower realm of that range, but there’s nothing unusual here, judging by recent history.
Then again, if the broader economy is set for another rough patch, the housing market may suffer even deeper levels of pain. Unfortunately, the margin for comfort is now unusually thin. Last year at this time, starts and permits were moderately higher. That didn’t stop the summer slump of 2010 from taking a toll. But the worst levels in starts and permits of last year are now north of current numbers.
It doesn’t help to learn that industrial production was flat last month vs. March, or that manufacturing production slipped 0.4% in April after nine straight months of growth, according to the Federal Reserve update today.
The good news is that the broad trend for industrial production is still positive, as the second chart below shows. Indeed, the 5% year-over-year increase for this series last month is well above average. Historically, that's a strong number. Of course, it’s destined to fade as the cycle ages, and perhaps by more than the crowd expected just a few weeks ago.
Analysts say that industrial production stalled last month because of a drop in auto production, which was hit by the blowback from supply-chain disruptions due to the Japanese earthquake in March. In other words, technical difficulties are to blame. Maybe so, but that doesn’t change the fact that housing is still weak and possibly set to get weaker. Meantime, new questions about the labor market’s strength are still bubbling.
The focus now shifts to Thursday’s update on new jobless claims. The consensus forecast calls for a modest drop. A negative surprise of any magnitude, however, may bring a major attitude adjustment on the general outlook.
Visit My Website!
| |
0 Comment | Add Comment(s) | US_Unemployment, US_Economy, Recession, Housing, Industrial_Productio, |
|
Wednesday, May 11 2011 | 09:44 AM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | Emerging Markets
The CFA Institute had a shindig with one of the sessions being about how much emerging market exposure to have and Seeking Alpha posted a recap of the session. The basic take was that most investors are not only under-invested but also under-benchmarked--meaning that investors who actually benchmark are looking at the wrong target.
Reading this was a great reminder of why the term emerging market has lost most of its meaning and the utility of the term continues to erode. It would seem unlikely that anyone who is willing to go to at least the country level (so narrower than EFA and VWO) is going to buy only the most volatile of countries. It is unlikely that someone would buy only debt-laden, low-growth stinkers. It is (hopefully) unlikely that someone would only buy commodity based countries. It is (hopefully) unlikely that someone would only buy countries from one region of the world.
In terms of the country by country aspect of constructing a portfolio it would be logical to take in countries with varying attributes such that certain expectations are expressed in the choices but without being so lopsided that some un-analyzable event doesn't destroy the portfolio; otherwise I might have 25% each in Chile and Norway.
The process for selecting countries should probably include understanding what the country has to offer (stuff, cheap labor or something else), its growth prospects, the demographic situation, the economic underpinnings (growth, inflation, debt, unemployment), trends in prosperity along with whether the country is becoming more important in the world economic order.
The next step after figuring what countries to own is the best way to own each country. Some holdings might be a very good proxy for the country and some not. Sorting this out comes from studying potential holdings. There is nothing wrong with buying something that may not be a proxy for the country unless you don't realize this.
As an example on Friday afternoon we bought ABB (ABB) for most clients. We got a lucky entry point as the job-print-lift had retraced to just about flat late in the trading day. ABB is headquartered in Switzerland but has a global footprint. This is our second Swiss company as we have owned Novartis (NVS) for many years. NVS has been a pretty good proxy for the Swiss market except for the financial crisis when iShares Switzerland (EWL) went down a lot more due to its heavy weight (currently 22%) in financials. ABB's chart looks very little like EWL's chart and I don't expect it to look too much like EWL in the future.
Obviously EWL would be a proxy for the country but in terms of figuring the best way in I knew seven or eight years ago when I first bought NVS that my preference was to avoid Swiss financials. I knew there was a good chance it would never matter and most of the time it has not mattered but this was one less trade I had to make during the meltdown.
A related quote from Jim Rogers: Buy where the people are going be rich.
He was talking about farmland in Iowa but I think it pertains to country selection too although I might tweak it to read buy where the people are going have an improved quality of life. People in China are never going to have the GDP per capita that Luxembourg (or do I mean Lichtenstein?) has but the China number is going to work higher despite the 60 million empty apartments (I read an article yesterday that cited that number, sorry for not having the link as I did not know I would use it). Like many countries buying into China requires being very selective, I've said many times I want nothing to do with the banks, real estate companies or parts of China that rely on US consumption.
Finally a little Twitter humor. I've been trying to be a little more active with Twitter lately. Yesterday I saw two different Twitter names that included fee-only in the name and when it ran together as feeonly it looked like it said felony. Oops.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
Gold and Silver Manias Updated
Friday, May 06 2011 | 03:00 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | A couple of weeks ago I had two posts (here and here) outlining the mania in precious metals. Then starting early Monday of this week silver started to blow up, see the chart below. As I mentioned in the second post, I got some push back from some commenters on Seeking Alpha who essentially were saying that the fundamental argument of debt and money printing meant that precious metals could not go down.
Even if I was incorrectly interpreting those comments we have all read commentaries that have said precious metals can't go down. My reply to this is and always has been that anything can go down in price at any time for no apparent reason. That silver started to drop so quickly after my comments is just a coincidence as I can assure you I had no idea when it would correct and now that it is correcting I have no idea how long this will last.
What I try to understand is when manias are occurring and how they might impact client portfolios. Those two posts, among other things, reminded any clients who read them that occasionally there are distortions in the market like the extreme lift up and now a decline that seems to be pretty big. We have increased volatility in our exposure to materials and energy so for example we were down a hair more than the SPX yesterday and I would expect that with our current exposure anytime energy, materials and related foreign markets fare worse than the SPX so too will our portfolio.
As I said yesterday in an interview about the decline in silver "a long term strategy that unravels based on one week's trading was never a long term strategy to begin with."
I would also repeat something else I always say during these sorts of things; these type of events have come along before and are guaranteed to come along again in the future. The key for most types of market participants is to not learn you had to much exposure to thing that is going down a lot after it has declined such that you panic out at a low.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
BRIC ETF Investing: Small Cap Edition
Wednesday, May 04 2011 | 02:34 PM
Michael Johnston
Managing Director,
ETF DATABASE | In recent years interest in achieving exposure to emerging markets has intensified tremendously, as the developing economies of the world have established themselves as the clear leaders of GDP growth while advanced economies have struggled to regain their footing. While there are dozens of countries that fall under ¡°emerging¡± status, exposure to this investment strategy has generally focused around the BRIC bloc that includes four economies expected to see their contribution to global GDP swell in coming decades.
The BRIC economies¨CBrazil, Russia, India, and China¨Chave very little in common in terms of geography, culture, or even the makeup of their respective economies. The term was originally coined by a Goldman Sachs economist who had never visited three of the four countries but believed that the collective economies would grow to eventually surpass the six largest western economies in terms of economic size and importance. What seemed like a ludicrously bold prediction a decade ago has become an increasingly likely scenario, as the BRIC economies have grown tremendously over the last several years¨Cand are now represented among the two largest economies in the world [see the Definitive Guide To BRIC ETFs].
ETFs have become a popular way to gain exposure to emerging markets, as the low cost structures and inherent diversification are appealing to those looking to enhance the international component of their portfolios. While the BRICs are represented heavily in most emerging markets ETFs, there are also a handful of funds dedicated specifically to these four economies. Currently, there are three pure play BRIC ETFs:
¡öiShares MSCI BRIC Index Fund (BKF)
¡öGuggenheim BRIC ETF (EEB)
¡öSPDR S&P BRIC 40 ETF (BIK)
ETF Mega/Large Cap Holdings Small Cap Holdings
BKF 77.4% 0.3%
EEB 86.2% 0.7%
BIK 86.1% 0.0%
Source: Morningstar
This large cap focus is not necessarily undesirable; each of these funds has delivered impressive performances over the last several years. But the focus exclusively on large cap stocks can introduce some biases, including tilts towards the energy and financial sectors. And because large cap companies are more likely to generate revenues overseas or be impacted by macroeconomic factors, they may be less of a ¡°pure play¡± on the local BRIC economies. Potentially, the connection between the positive demographic trends and growing local consumption will be diminished in a strategy that involves exclusively large cap companies [Emerging Market Investing: Seven Factors To Consider].
There isn¡¯t yet a small cap BRIC ETF available, but investors are able to access small cap stocks in each of the BRIC economies independently through ETFs. These funds can be used to create more balanced emerging market exposure, tapping in to an asset class that may represent the best option for accessing the emerging market giants:
Brazil
The most popular way to play Brazil is through EWZ, a fund consisting primarily of large cap companies and concentrated heavily in oil giant PetroBras and mining firm Vale. Adding small caps to this type of exposure brings greater balance across sectors, increasing weights afforded to consumer companies. For investors seeking to access small cap Brazilian stocks, there are multiple options available:
¡öMarket Vectors Brazil Small Cap ETF (BRF)
¡öiShares MSCI Brazil Small Cap Index Fund (EWZS)
The exposure offered by these two ETFs is generally similar, including balance across sectors of the Brazilian economy and depth of holdings. Moreover, both funds charge an expense ratio of 0.65%, making them similar from a cost efficiency perspective as well [see BRF holdings].
Russia
There are a handful of Russia ETFs available that focus primarily on large cap stocks, including RSX, RBL, and ERUS. Each of these funds is weighted heavily towards oil and gas companies, with the energy sector accounting for as much as half of total assets. While that composition may accurately reflect the Russian economy, it may be less than desirable from a balanced investment perspective. The recently launched Market Vectors Russia Small Cap ETF (RSXJ) offers a way to round out Russia exposure, as this fund has very little exposure to energy companies [see Under The Hood Of The New Russia ETF].
India
India is a particularly challenging investment destination, as the world¡¯s most populous democracy maintains tremendous economic potential but also faces significant hurdles¨Cincluding inflationary pressures and high levels of corruption. Again, there are a number of India ETFs that focus primarily on large cap stocks, including EPI, INP, PIN, and INDY. There are also multiple choices for those seeking to invest in small cap Indian stocks, an asset class that could surge if the Indian economy comes close to realizing its full potential:
¡öEGShares Small Cap India ETF (SCIN)
¡öMarket Vectors Small Cap India ETF (SCIF)
These ETFs offer generally similar exposure, though the methodologies employed are slightly different. SCIF includes more total holdings and a larger allocation to industrials, while SCIN holds fewer total stocks and is more balanced from a sector allocation perspective [see SCIN holdings].
China
China is now among the most important economies in the world, representing a significant portion of global GDP growth. While a number of ETFs offer exposure to Chinese stocks (there are 19 in the China Equities ETFdb Category), these funds are subject to some significant biases. Many are focused exclusively on large caps, which results in tilts towards state owned energy companies and completely overlooking the tech and consumer sector. There are a couple of small cap China ETFs that can be used to round out exposure:
¡öiShares MSCI China Small Cap Index Fund (ECNS)
¡öGuggenheim China Small Cap ETF (HAO)
Again, the exposure offered by these two ETFs will be generally similar¨Cthough there are some differences. ECNS is a bit cheaper and casts a wider net, including more individual names in its portfolio [see breakdown of ECNS holdings]. Either could be a nice complement to FXI or other large cap heavy China ETFs.
Visit my website
| |
0 Comment | Add Comment(s) |
|
Fresh Reminders That The Economic Recovery Continues To Struggle
Thursday, April 28 2011 | 05:12 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | Is the labor market headed for a fresh round of trouble? Today’s weekly jobless claims report provides some new motivation for going over to the dark side on this question. The usual caveat applies, of course: divining the future from any one number in this volatile series can be misleading. Unfortunately, the jump in new filings for unemployment benefits is no longer an isolated data point.
“It’s clearly disappointing,” Michael Feroli, chief U.S. economist at JPMorgan Chase, tells Bloomberg in the wake of today's update. “It may be that the pace of improvement is slowing.”
Peter Boockvar of Miller Tabak + Co. agrees , writing in note to clients today: "The trend over the past few weeks is clearly disappointing as signs were pointing to a more sustainable pick up in the labor market.”
A chart of recent history tells the story. New filings jumped to a seasonally adjusted 429,000 last week—the highest since January. More worrisome is the recent rise in the four-week moving average for weekly claims, a trend that increased to more than 408,000 last week. Save for one week earlier this month, the four-week average has risen continually since this measure bottomed out in early March at just under 389,000. And while we’re reviewing distressing signals in this corner, let's note too that the four-week average is now above the 400,000 mark for the first time since February.
Is it all just noise? Possibly. Much depends on whether there’s corroborating evidence from other corners of the economy, starting with the next report on nonfarm payrolls, which is scheduled for release next week (Friday, May 6). The last report revealed a fairly strong number: private job creation advanced by a net 230,000 in March. That's hardly a cure-all for the various ills that afflict the U.S., but it's far too strong to inspire writing the epitaph for the current recovery. Even with the concerns embedded in the latest jobless claims report, it still requires an especially negative interpretation of the vast majority of economic reports to argue that the labor market is set to crumble.
One reason for thinking positively is the recent momentum in U.S. corporate earnings and manufacturing. Ed Yardeni reminds that the news on these fronts has been quite positive recently. Even so, “the growth rate in earnings may be peaking,” he notes. “However, that doesn’t mean that it won’t continue to grow along with world exports.”
But the rough rule of thumb that jobless claims under 400,000 imply continued expansion in the labor market will weigh heavily on sentiment until (or if?) a fresh batch of numbers re-boost confidence.
Today’s estimate on Q1 GDP certainly isn’t up to the task. The U.S. economy expanded at a much-slower 1.8% real (inflation-adjusted) annual rate in the first three months of this year—a sharp downshift from the 3.1% pace in last year’s fourth quarter, the Bureau of Economic Analysis reports. The blame for the slower economic growth was a “sharp upturn in imports,” a “deceleration” in consumer spending, “a larger decrease in federal government spending, and decelerations in nonresidential fixed investment and in exports.”
Nonetheless, the bigger risk for now is that the economy’s rebound moderates rather than evaporates. In fact, that’s been the concern all along. There’s still forward momentum in the broad trend, but it’s not as potent or persistent as some have argued. And with various corners of the economy still firmly on the defensive, starting with the residential real estate market, there's little reason to assume that we're set to grow out of our troubles any time soon.
In short, the real danger is less about a new recession than coming to terms with an economy that struggles (still) to grow.
“There are some concerns going forward,” reminds Scott Brown, chief economist at Raymond James. “We think gasoline prices will continue to dampen the recovery,” he writes. “We are looking at a moderate recovery here. It will still some time before we see the economy fully recover.”
Visit My Website!
| |
0 Comment | Add Comment(s) | US_Economy, US_Unemployment, Recession, |
|
Sectorology
Tuesday, April 26 2011 | 02:41 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | Yesterday on CNBC I heard a tease for segment (I missed the actual segment) about the fact the domestic financial stocks are not doing well relative to technology. While I am not sure that tech is the best comparison there is a point here about financial stocks that I have been making for a long time that I believe will remain relevant for several more years.
First, some numbers with results of a few different sectors over several time periods;
YTD;
Financials XLF +0.88%
Technology XLK +4.75%
Energy XLE +14.97%
Staples XLP +5.12%
Discretionary XLY +6.51% (XLY is a client holding)
S&P 500 6.16%
One Year;
XLF -4.11
XLK +9.58%
XLE +26.37
XLP +9.92%
XLY +11.72%
S&P 500 +9.68%
Four Years;
XLF -56.64%
XLK +8.91%
XLE +24.35%
XLP +11.63
XLY +0.71%
S&P 500 -10.05%
The numbers say a lot about the mess that has been made in the domestic financial sector. The events in the market from 2007-2009 were obviously about the financial sector. There were many types of excesses that resulted in a monumental meltdown in the sector--monumental for the number of large companies that failed and the large number of stocks that dropped 90% and are nowhere close to where they traded before the implosion.
The nature of this sort of event is such that it will be years before domestic financials, collectively, are attractive on a fundamental basis and so I think it is likely that they will continue to struggle as stocks. This has been the case with technology from that market event. For ten years the S&P 500 is up 7.41% while XLK is down 12.02% (MSFT is down 25% for ten years and INTC is down 32% for ten years). It looks to me like outperformance of tech over the SPX may have started at the 2009 bottom which is a long time for the ground zero sector to lag and while an exact duplicate in financials is unlikely, if you then consider the fundamental outlook, I think we are a long way from health.
The above brings in two different things to consider; one being how markets tend to work which is more of a top down factor and the other being what I believe is a lack of fundamental health which is of course a bottom up factor. It seems to me that no matter any of this, that the financial sector has been a favorite of many professional market participants. Given my perceptions of the sector I think it makes sense to underweight the risk in whatever financial sector exposure you have (I believe in having exposure to all sectors as zero weight is a big bet). For us this means mostly owning foreign banks as I have discussed many times before.
Think of it this way, in speculating on parts of the financial sector where the fundamentals are not yet healthy, how much do you hope to make? Let's say you think you can double your money. I would say it makes more sense to go to a sector that is healthy on all fronts to pick a stock where you think you could double your money. I realize other people view it differently and clearly there were some great trades off the bottom in the financial sector but speculating on something with weak fundamentals is not a risk I am willing to take.
Visit My Website!
| |
0 Comment | Add Comment(s) | Technology, Stocks, Trading, US_Economy, |
|
ETFs vs. Index Funds: What's The Difference?
Wednesday, April 13 2011 | 12:34 PM
Michael Johnston
Managing Director,
ETF DATABASE | When categorizing various investment vehicles, most investors tend to think of mutual funds and exchange-traded funds (ETFs) as polar opposites. Mutual funds are associated with active management, with a team of analysts and managers seeking to generate alpha by identifying undervalued securities from a relevant universe of stocks and bonds. ETFs, on the other hand, connote a passive investment strategy, products that seek to replicate the performance of a certain benchmark instead of seeking to beat it. For those who believe that active management (or at least certain active managers) add value, mutual funds may be preferred. For those who believe that it is impossible to consistently outperform markets, the lower-expense beta offered by ETFs are more attractive [see Five Advantages of ETFs].
While these classifications of mutual funds and ETFs are generally true–most mutual funds are actively-managed, and more expensive than passively-indexed ETFs–they certainly aren’t hard and fast rules of investing. There are, of course, actively-managed ETFs that utilize quantitative analytical strategies and manager expertise to select individual holdings, much like most actively-managed mutual funds. And there are mutual funds that seek to passively replicate an index, exhibiting characteristics similar to traditional ETFs. In reality, the true division is not between ETFs and mutual funds, but between active and passive. ETFs and mutual funds fall into both sides of that division [see When Is An ETF Not An ETF?].
ETFs vs. Index Funds: Similarities and Differences
Index mutual funds and passive ETFs are similar in a number of key ways. Most significantly, both seek to replicate the performance of underlying index. Although ETFs receive the bulk of the credit for the surge in popularity of indexing as an investment strategy, index mutual funds started the movement long before the first ETFs came to market. The Vanguard 500 Index Fund (VFINX), launched in 1976, is designed to track the return of the S&P 500, making it similar to the three ETFs that also seek to replicate the S&P 500. The recently-launched Vanguard S&P 500 ETF (VOO) is actually a separate share class of the S&P 500 index mutual fund, which has total assets of more than $90 billion.
Because they seek not to generate alpha but to capture beta, index mutual funds are also similar to most ETFs in that they offer potential tax advantages resulting from lower turnover of underlying holdings. It also allows index mutual funds to charge low expense ratios that most investors associate with ETFs. The general assumption is often that all mutual funds maintain expense ratios significantly higher than ETFs. While that’s generally true when comparing passive ETFs with actively-managed mutual funds–the industry average for mutual funds is somewhere in the neighborhood of 1.4%–it isn’t universally true. VFINX, for example, charges just 0.18%; while that’s three times the charge for VOO, it’s lower than most of the ETF universe. And it’s significantly lower than the expense ratios charged by some actively-managed ETFs; the Dent Tactical ETF (DENT), for example, offers a net expense ratio of 1.56% [see Ten Most Expensive ETFs].
The biggest difference between these two products is the frequency with which they are priced and traded. Index mutual funds are, after all, mutual funds, and as such they are priced once a day after markets close. ETFs–including both active and passive ETFs–are priced throughout the day, and can be bought or sold whenever the markets are open. Index mutual funds are priced based on the NAV of the underlying securities, whereas the price of an ETF depends on supply and demand for the security. Although the arbitrage mechanisms in place prevent ETF prices from deviating too significantly from the NAV, it is not uncommon for these securities to trade at a slight premium or discount. So in exchange for the flexibility to trade throughout the day, investors who utilize ETFs may incur a bid-ask spread to establish or close out a position [see Five Ways To Slash Your ETF Expenses].
Which To Use?
While index mutual funds and ETFs are similar in many ways, there are still some definite advantages to utilizing ETFs. The ability to trade ETFs at any time throughout the day–instead of having to wait until markets close to redeem at NAV–can be very valuable, especially in volatile environments. And while index mutual funds feature significantly lower costs than their actively-managed counterparts. The comparison between the mutual fund and ETF share classes of the Vanguard 500 Fund illustrate this quite well; as mentioned previously, VFINX charges 0.18%, while VOO charges just six basis points.
The primary advantages of index mutual funds, including the security of being able to execute buy and sell orders at the NAV, can be significant. Countless ETF investors have put themselves in a hole by buying at a big premium or selling at a big discount. But for those who know what they’re doing, the uncertainty associated with trading ETFs can generally be mitigated.
Visit my website
| |
0 Comment | Add Comment(s) |
|
Measuring Inflation
Thursday, April 07 2011 | 04:26 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | Economist Mehmet Pasaogullari at the Cleveland Fed reviews inflation from several angles. If nothing else, he offers a timely reminder that there's more than one way to skin this statistical cat. Inflation comes in a variety of flavors. But while the numbers vary, there's a common trend afoot, he reports, noting that "all measures of short-term inflation expectations we have looked at show an upward trend since last summer."
Pasaogullari continues:
"Some measures showed higher increases, and others were much more limited. Measures of longer-term inflation expectations have also risen in the last six months... However, most of the increase in the market-based measures happened in September and October 2010. The recent increases in food and energy prices have had limited, if any, effect on the long-term expectations. They seem to be well-anchored and are in line with their averages of the previous decade."
The question (as always) is whether the past is prologue? Looking for answers in real time is forever problematic. That said, the inflation forecast based on the yield spread between the nominal and inflation-indexed 10-year Treasuries has inched higher since Pasaogullari's essay was published on April 1. In fact, the Treasury market's inflation outlook is 2.57%, as of yesterday. That matches the previous peak, set back in early July 2008, when oil was near an all-time high.
The last time we hit 2.57%, the peak was short lived. Inflation expectations started falling, and crashed soon after. That's not likely to happen this time, of course. Why? The catalyst isn't likely to make a repeat performance. Massive financial crises of the type that hit the world in late-2008, fortunately, are rare. So what does that mean for the inflation trend this time? Stay tuned...
Visit website
| |
0 Comment | Add Comment(s) | Inflation, Oil, Commodities, US_Economy, |
|
Action and Reaction
Wednesday, March 30 2011 | 06:30 PM
Bill Carrigan
Founder,
GETTINGTECHNICAL.COM | The Japan event of March 11, 2011 is probably going to be stimulative. Japan unlike Haiti is a large modern economy and the re-build will be a priority for the Japanese people. We know that Japan will need a lot of “stuff” – commodities, machinery, and infrastructure along with complicated transportation needs.
Technical analysts tend to believe that for every negative event there is a positive event somewhere else – sort of like Newton’s laws of motion – one being action and reaction. The negative Japan event should boost the price of coal, copper, wood and natural gas. Now the one big commodity laggard over the past several years has been the price of lumber – likely due to the depressed U.S. housing starts. We need to watch lumber closely. Note the weekly chart displaying lumber’s intermediate cycle along with a very slow %K and %R stochastic. Note the current down cycle and the bullish flat price, a sign that the intermediate cycle will turn up above the zero line. If we break above that 5-year level we need to buy the beneficiaries – action and reaction
Visit My Website!
| |
0 Comment | Add Comment(s) | Japan, Commodities, Infrastructure, |
|
Worrying About Inflation
Thursday, March 24 2011 | 10:15 AM
James Picerno
Editor,
CAPITALSPECTATOR.COM | Wharton professor Jeremy Siegel, author of the best seller Stocks for the Long Run, worries about mounting inflation pressures. Last week, he said in a TV interview with Bloomberg that the Fed should consider raising rates soon.
Siegel’s hardly alone in calling for the Fed to act, but so far there are few signals from the market for expecting a hike in interest rates in the near term. Fed fund futures are priced this morning on the expectation that the current zero-to-25-basis-point policy range will prevail for the foreseeable future. The January 2012 contract, for instance, is priced for Fed funds at roughly 30 basis points as we write.
The Treasury market doesn't seem worried about inflation either. The market's inflation forecast, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries, was a modest 2.44% yesterday.
Federal Reserve Bank of Cleveland President Sandra Pianalto said in a speech today that she thinks inflation will remain moderate:
I expect the underlying trend in broad consumer prices, which is currently quite low, to rise only gradually toward 2 percent by 2013. I think several factors will keep inflation in check. One factor is the continuing slow growth in wages, which helps determine the cost of producing goods and services and, in turn, the prices set by firms. Another factor is many retailers' reluctance to raise prices in the face of strong competition and soft business conditions
What about the rise in commodity prices that has Jeremy Siegel worried? Pianalto says the associated inflation risk is "transitory":
Some of the most recent rise in gasoline prices reflects the dramatic recent global events that have pushed oil prices significantly higher. The natural question in these times is whether these higher prices will be enough of a driving force to cause a lasting increase in the rate of inflation. At this point, I don't think they will, and let me explain why.
First, large increases in food or energy prices have often been balanced out over time by sharp declines. For example, in 2006, oil prices rose significantly over the first eight months of the year but then dropped in the remainder of the year. While periods of rising energy prices cause inflation to rise, the subsequent periods of falling energy prices cause inflation to fall.
Second, to cause a lasting rise in inflation, the increases in food or energy prices have to be large enough and persist long enough that they spill over and cause sustained increases in a wide array of other consumer prices. At this point, there is no evidence of broad spillover, but as a central banker I keep a close eye on this.
To assess the underlying trends in a broad array of consumer prices, my staff at the Federal Reserve Bank of Cleveland calculates and publishes an indicator known as the median CPI. This index is designed to provide a reliable measure of the average increase in a wide set of consumer prices, and it has been shown to be a superior predictor of future inflation rates. To this point, inflation in the median CPI remains very low: just 1 percent over the past year. Based on the behavior of the median CPI, I don’t expect recent rises in food and energy prices to cause broader inflation.
For the moment, at least, the market seems to agree.
Visit My Website!
| |
0 Comment | Add Comment(s) |
|
ETFs Jump In It
Tuesday, March 22 2011 | 03:31 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | If you didn't hear, Index IQ is coming out with a global small cap agribusiness ETF that will have ticker CROP. It is supposed to start trading today.
About all I could glean for now about the make up of the fund is that it will hold stocks from a lot of different countries, no stock will exceed 10% (subject to rebalancing) and 30% of the fund will be in crop production and farming. We'll see what that means perhaps as soon as later today but this could be about a close as we get to a farmland ETF.
There are all kinds of plantation stocks trading in Asian markets and a couple where the plantations are in Asia but the stocks list in London. These are not easy to trade and if the fund captures that then this stands to be meaningful and also have the potential to look much different than Market Vectors Agribusiness (MOO) that we own for clients.
Emerging Global filed last week to dramatically increase its India offerings with sector funds that correspond to the ten big SPX sectors. They already have India covered with infrastructure and small cap. India has become a tougher market to own, fundamentally. A few years ago it seemed like anything India went up, this was also the case with Chinese stocks. As is often the case the theme has evolved and success requires being more selective.
Long story short I want no part of financials or telecom in India. The other sectors are all at least maybes. Any broad large funds will have exposure to those two sectors, the EG Shares India Small Cap Fund (SCIN) doesn't seem to have any telecom but does have some financials in it. The consumer space is very promising from the top down but buying that fund would depend on what was in it. I think utilities is kind of a sector for the future as there are things like hydroelectricity but the electricity infrastructure seems fairly primitive for now. The industrial and materials sectors will obviously capture the infrastructure needed as well the actual infrastructure fund.
At some point I expect we'll add India across the board as we had it quite a few years ago and it would be nice to have choice at the sector level as individual stocks from India are a little tougher to access.
WisdomTree now has an Asian bond ETF and it avoids Japan which is a plus. I wrote about it for theStreet.com. WisdomTree has a Latin American bond ETF in the works which could also be very interesting unless it is 40% Mexico or something.
Yesterday I stumbled across a Brazilian hydroelectric company called AES Tiete (AESAY). I don't know much about it yet but where there is at least one in Brazil, India and a couple in China I'm thinking there are several others around the world--maybe enough for an ETF? Alternative energy is a volatile space but I think it makes more sense to consider when the alternative energy comes from the utility than when it is dependent on the end user retrofitting their home.
Maybe we can add this to the list of ETF ideas we've compiled over the years which includes toll road, air and sea ports, cement companies and publicly traded exchanges.
Visit My Website!
| |
0 Comment | Add Comment(s) | Emerging_Markets, Indexing, ETFs, Energy, Agribusiness, Asia, |
|
Black Swan Hype
Monday, March 21 2011 | 03:01 PM
Bill Carrigan
Founder,
GETTINGTECHNICAL.COM | I don’t know about you but I grow weary of being regarded as stupid by these “Black Swan” guys who use scare tactics to influence normally sane investors.
A Black Swan is the latest buzz word which is a metaphor that encapsulates the event to be a surprise with major impact. In the “old” days we used the term “exogenous event”. An exogenous event in the capital markets is a one-off variable that is not resultant from any of the usual market drivers such as earning releases, employment data and industrial production numbers. The exogenous event (in this case Japan) is an external event that is large enough to affect markets and because it is change that comes from outside any model or analysis, there is no way to anticipate the event
The black swan buffoons tell us “this time it’s different, something is wrong.” The idea here is to have you believe that what ever worked in the past, won’t work anymore. We are to reject traditional stock analysis and to fear the current environment because it always the wrong time to invest.
They will tell you that buy-and-hold is dead because the equity markets have delivered zero returns over the past twelve years, just like the 1968 – 1980 period. What they don’t tell you is that during these long congestive periods there is great opportunity because “the next big thing” can emerge from these periods. The next big thing that emerged from the 1968 – 1980 zero return period was the new economy and the related components. To-day start-ups like Intel Corporation, Cisco Systems, Inc. Microsoft Corporation and Apple Inc. are household names.
The current 2000 – 2011 zero return period introduced the global economy and the related commodity boom. I do believe the Black Swans which is a large waterbird found mainly in the southeast and southwest regions of Australia missed this great investment opportunity.
Visit My Website!
| |
0 Comment | Add Comment(s) | Risk, Black_Swan, Investors, Japan, |
|
The Recovery Isn't Jobless, But Job Growth Is Still Weak
Wednesday, March 09 2011 | 04:32 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | A number of pundits warn that the U.S. is suffering from an era of jobless recoveries. It's a popular complaint and it's surely grounded in legitimate concerns about the labor market's strength. But taken at face value, the claim that we're in a jobless recovery is false. The economy's recovering and new jobs are being created. Since the private-sector labor market started growing in the latest cycle in March 2010, total nonfarm private payrolls are higher by 1.5 million through February 2011, based on seasonally adjusted figures, which are used in the analysis below as well. That's a fraction of the jobs lost in the Great Recession, but modest job growth isn't the same thing as a jobless recovery.
The real issue is deciding how the trend in job creation compares with history. To start, let's look at a graph of the monthly change in private nonfarm payrolls over the last 30 years. The average monthly rise for those decades is roughly 93,000, as indicated by the blue line in the chart below. Obviously, the economy has a history of creating jobs over the previous three decades. But it's also true that running a linear regression over those years on the month numbers reveals a gently falling trend (red line). In other words, it appears that the strength of job creation has been weakening through time.
Analyzing the trend over long stretches of time has limits, of course. A more productive focus is comparing job creation during the recovery phases. Considering that there are several ways to proceed, the challenge is deciding how to evaluate the data. One possibility is adding up the total of monthly changes in nonfarm payrolls for each post-recession growth period, based on NBER's cycle dates. By that standard, the last full growth cycle was weak for minting jobs. Nonfarm private payrolls rose by just 6 million from December 2001 through December 2007. By comparison, the gain in jobs during previous cycles was far higher: nearly 22 million for 1991-2011, and 18 million from 1982 to 1990.
Other measures of the labor market's strength also show that the 2001-2007 period looks weak vs. its predecessors. Average monthly job creation was substantially lower in 2001-2007 vs. the earlier periods, for instance. The trend doesn't look any better if we measure the total net change in private nonfarm payrolls as a percentage of the civilian labor force at the peak of each cycle.
Clearly, there's a subpar recovery in jobs in recent years. The big question is whether the 2001-2007 period was an exception or a sign of things to come? Based on the trend since the Great Recession was formally declared history, the case for optimism looks weak.
Measured from the first month of the current expansion, the net change in total private nonfarm payrolls is a mere 362,000. This figure includes the first eight months of the current "expansion," when the economy continued to lose jobs. Before the next recession arrives, surely many more jobs will be created. Indeed, the recent economic news is relatively upbeat for thinking that the recovery is picking up speed. February's jobs report, for instance, was the best in nearly a year.
But it's also true that we are now 21 months into the recovery and total job creation is, at best, modest on both relative and absolute levels. The hope is that this expansion runs longer than usual (the post-World War Two average is 59 months) and/or the labor market accelerates. The prospects on these fronts are mixed. What is clear is that there's a huge amount of ground to make up from the Great Recession and the record so far in repairing the damage is uninspiring. It's not a jobless recovery, but that's cold comfort given the hole we're in.
Visit My Website!
| |
0 Comment | Add Comment(s) | Job_Growth, Recession, US_Economy, US_Unemployment, |
|
Ok, But The Math Doesn't Work
Tuesday, March 08 2011 | 11:44 AM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | A year or two ago I reconnected with a friend from highschool on Facebook. He has turned out to be extremely liberal in his political thinking and regularly posts links and status updates consistent with his beliefs. He has been very pro-union in some of his posts and has been keenly interested in the goings on in Wisconsin these days despite living in another state. He feels very strongly about his beliefs to the point I would say of being entrenched.
This week's John Mauldin post devoted some space to the various entitlement issues and the notion of congress figuring out how to cut $61 billion in expenses versus a $1.6 trillion problem. As I read this and thought about my friend's posts I had a moment of clarity or perhaps better stated as a moment of simplicity which is that for so many of the country's problems the math doesn't work.
All of the reasons that someone might be pro-union might be 100% correct but the math doesn't work. Cutting $61 billion is expenses might be a win of some sort but in the full context of the problem does not itself represent any progress toward a solution. The retirement savings quandary that now exists (referring to the ridiculously low average savings that people have) can be thought of in one way as not understanding the math needed to make it work.
To the union issue, that there is not enough money for workers to get everything they have previously bargained for, that return assumptions are way too high and that the unions have dirty hands (as well as management) in the failures that have occurred would, I believe, be a conversation that my friend could not hear. If union leaders negotiated some sort of dollar figure 15 years ago (making up an example) that has proven out to be wildly unsustainable what should happen? I am not intending to make a political argument here. I can't say that a union doesn't deserve something they successfully negotiated for but if the math doesn't work then that means the math doesn't work.
In simplistic terms the math appears to be breaking down with all sorts of different things which makes debating these things along political or ideological lines futile. An analogy that is related to our fire department; for several years the community has been having a heated debate about whether or not to become a fire district (an entity with taxing authority) or remain donation based. One bone of contention is how much of a tax would be imposed. Related to the potential tax is what sort of service the community wants. On bit of advice that has been pretty consistent along these lines has been not to ask what service is wanted but how much people want to pay. We can have everything but the more service (really I mean paid personnel and new equipment) the more we will all pay. It is quite simple in that regard.
Well, we can have all the medicare, social security and union benefits we want. It's just that the more we want the more we will have to pay. I'm not arguing for more taxes from a belief standpoint, simply pointing out that there is a deficiency that exists. We either pay more or we get less. To the extent this holds water for you it argues all the more for staying on your own mat (self sufficiency). For me this means saving a lot, living below my means and having a job that I want to keep well past typical retirement age. For you, self sufficient could mean something completely different but either way we cannot rely on other people to get the math right, we need make sure that if nothing else our own math works.
Visit My Website!
| |
0 Comment | Add Comment(s) | US_Economy, Recession, Budget_Deficit, Taxes, |
|
The Red Hot Energy Sector
Monday, March 07 2011 | 02:06 PM
Bill Carrigan
Founder,
GETTINGTECHNICAL.COM | I acquired the shares of Encana, Suncor and Precision Drilling six months ago when the TSX Energy Index was in mid 2010 one of the worst performing sectors. At that time the “hot” sectors were Gold, Heath Care and Telecom. There were no investment sheep in the energy complex last summer and so I helped myself to the all-you-can-eat energy buffet. How the energy sector is enjoying a bullish stampede thanks to the crude risk premium due to the uncertain outlook for the larger crude producing Arab states.
I have always believed that when the sheep are hungry you should feed them. Now so far I see no reason to sell all of my energy positions but, I am reducing and moving the proceeds into another sector that the investment sheep are avoiding – the TSX Financial Sector. The sheep are avoiding the obvious crude risk losers like the airlines, transport companies, non-essential retail stores and travel to include fast food, hotels, theme parks and gaming. I think the Canadian Banks are winners either way if the crude risk trade either ON or OFF. Either way I like the Baa, Baa, Banks.
Visit My Website!
| |
0 Comment | Add Comment(s) | Energy, Indexing, Oil_Prices, Trading, |
|
Say What?
Tuesday, March 01 2011 | 10:22 AM
Vinny Catalano CFA
President & Global Investment Strategist,
BLUE MARBLE RESEARCH | 
Yesterday, I had the opportunity to be a guest on Bloomberg radio's "Taking Stock" program and NDTV (New Delhi Television) Profit's program discussing the current market and economic environment. A key focus explored was one of the two major themes of my recently concluded Market Forecast series (10 events, 10 cities, 34 expert panelists, 920 attendees, in 6 weeks): once the the US economy is taken off stimulus steroids, will it achieve a private sector led sustainable expansion (what economists lovingly refer to as "escape velocity")? The answer will almost certainly disappoint you.
To listen to the "Taking Stock" segment, click here.
To view the NDTV segment, click here.
Visit My Website!
| |
0 Comment | Add Comment(s) | Stimulus, Interview, US_Unemployment, Escape_Velocity, Sustainability, |
|
Jobless Claims Fall As Oil Prices Rise
Thursday, February 24 2011 | 04:02 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | Today's weekly update on new jobless claims offers a fresh reason for hope, but the crowd isn't likely to take the bait. The back and forth in this series in recent months has given rise to false hopes several times in the last few months that job growth is poised for better days. Is it different this time? Last week's tally of new filings for unemployment benefits dipped to 391,000 on a seasonally adjusted basis, the Labor Department reports. That's the lowest since the summer of 2008. But just when things are starting to perk up (maybe) for the labor market, it's all a moot point suddenly, thanks to the upheaval in Libya and the resulting spike in oil prices.
Yes, one could argue that the rise in jobless claims in previous weeks was a temporary blip. Maybe it was related to harsh winter weather. But as our chart below suggests, the rough patch seems to be passing.
“The labor market has been on the upswing,” opines Millan Mulraine, a senior U.S. strategist at TD Securities Inc. “As the pace of layoffs continues to decline, it is an indication that not only are businesses not firing as fast they used to, but they may in fact begin hiring.”
But just when the data may have been poised for a round of improvement, Middle East turmoil intervenes and throws a sizable wrench in the revival machine. Oil prices in New York are trading just over $100 a barrel this morning, the first visit to the land of triple digits since September 2008. The Libya mess may or may not have legs, but for the moment there's a lot more uncertainty in the world. Last week's news on jobs is a touch dated.
Visit My Website!
| |
0 Comment | Add Comment(s) | Libya, Middle_East, Oil_Prices, US_Unemployment, |
|
Beyond the Sound Bite: An Interview with Meir Statman
Wednesday, February 16 2011 | 11:39 AM
Vinny Catalano CFA
President & Global Investment Strategist,
BLUE MARBLE RESEARCH | Do investors really know what they want?
Well known among those in the CFA Institute and CFA society circles, the highly regarded behavioral scientist shares his thoughts and insights from his most recent book, "What Investors Really Want". Benefits (utilitarian, expressive, and emotional), cognitive errors, human nature, and rational investing are touched on in this most interesting and informative interview. Who knows, by exploring the mind of the market you may find yourself looking in the mirror.
To listen to the 15 minutes 04 second interview, click here.
Visit My Website!
| |
0 Comment | Add Comment(s) | Behavioral_Finance, Interview, |
|
The Power of Mean Reversion
Monday, February 14 2011 | 01:53 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | The more you look at it, the larger it looms. Yes, rebalancing is an old idea—buy low, sell high. But it's forever new for at least two critical reasons. One is simply bound up with the recognition that rebalancing works, or at least it has a long history of working by enhancing return while keeping a lid on risk. But it's not always clear what constitutes "optimal" rebalancing, or even if such a state of financial nirvana exists. That keeps analysts turning over rocks in search of progress.
As for real-world results, much depends on the definition of rebalancing. Factors such as timing, the composition of portfolio assets, and the rules that guide rebalancing activity vary quite a bit. Accordingly, so too does the degree of risk from rebalancing strategies. Yet it's also true that rebalancing in one form or another is behind a number of the new-fangled attempts to mint alpha.
The rise of rules-based indexing products in particular rely on rebalancing, even if that's not always clear. Some products emphasize technical signals, for example, that offer insight on when to rebalance. Other funds focus on changes in accounting-based metrics, such as sales, earnings, etc. But at the heart of many strategies is a common denominator: rebalancing.
Some of this bleeds over into other risk factors, which can blur the lines for deciding where rebalancing's influence ends and something else begins. But no matter how you dress it up, rebalancing is the foundation for most strategies that have a decent chance of delivering alpha over the long haul. The lesson applies to many strategies within a given asset class, and it's true for most multi-asset class strategies.
For the latter, efforts at earning alpha by dynamically managing a set of betas range from the routine to rocket science. But you don't need to a Ph.D. in engineering to earn a modest premium over a passive asset allocation. What you do need is a fair amount of backbone to buy out-of-favor asset classes and sell the winners. That's a dangerous pursuit with individual securities, but history and a small library of empirical research suggests this is a worthy strategy for most investors at the asset class level.
As a review of the possibilities, consider how the major asset classes stack up against one another in recent history and how those returns compare to some simple forecast-free rebalancing strategies (see table below). Note the wide range of return results over the past five years within markets, ranging from a 1% annualized return for a broad mix of commodities up to nearly 10% a year for emerging market stocks. Holding all asset classes in a passive, unmanaged mix in weights that approximate their respective market values earned 4.6% a year (BIR Global Market Index). If you rebalanced this mix every December 31 back to the allocation from the previous year, you earned more: 5.7% . Equally weighting the same portfolio by rebalancing to equal weights every December 31 did even better, delivering 6.7% a year. By comparison, the U.S. stock market returned an annual 2.5% over the past five years, based on the Russell 3000.
The lesson is that by diversifying broadly and dynamically managing the mix in a simple but straightforward manner, you can earn competitive results. That's hardly a secret. As I explain in some detail in Dynamic Asset Allocation, the finance literature has been telling us no less in recent decades.
Results will vary, of course, although a fair amount of the variation is under your control. If you can stomach more than average risk, you might consider an aggressive rebalancing strategy. Instead of mindlessly rebalancing on pre-set calendar dates, you can be more opportunistic by taking advantage of volatility as it comes. Rebalancing in the fall of 2008, for instance, rather than waiting for the markets to calm down. You might also rebalance in something more than mild form, or more frequently, or allocate among a more granular definition of asset classes.
In fact, the possibilities are endless for boosting the rebalancing bonus, but so too are the risks. Earning higher returns by systematically adjusting asset weights isn't a free lunch. You have to be willing to assume a higher risk than the average investor. The main hazard is linked to mean reversion in prices. History shows that this phenomenon tends to persist over time, particularly with broad asset classes. But there's always a question of whether it'll prevail the next time, or how soon prices will revert to their mean after a large change in the market. Such questions help explain why most investors find it hard to rebalance when market volatility is high. But that's why the expected return from rebalancing looks so rewarding.
Visit My Website!
| |
0 Comment | Add Comment(s) | Indexing, Rebalancing, Mean_Reversion, |
|
How To Implement An Effective Rebalancing Plan
Monday, February 07 2011 | 03:52 PM
Michael Johnston
Managing Director,
ETF DATABASE | With all the media coverage of the leveraged ETF controversy that has been brewing over the past several months, it is becoming increasingly difficult to separate the facts from the fiction. As firm after firm bans the use of these funds, a growing number of investors are unable to utilize leveraged ETFs. For those who do retain the ability to use these funds, the horror stories of return erosion and flood of lawsuits might cause even the most sophisticated investors to steer clear. But while the dangers of leveraged ETFs (if used by those who fail to understand their risk profile) are very real, the potential upsides can be equally spectacular.
Of the countless misconceptions about leveraged ETFs, perhaps the most damaging is the notion that the returns on these products become wildly unpredictable when held over multiple trading sessions, due to the daily compounding of returns. While this can occur in certain markets, investors can implement a fairly simple process to ensure that leveraged funds will track the target multiple of their benchmark over longer time periods.
Most traders move in and out of leveraged ETF positions within a single trading session, as the objectives that they use these funds to accomplish are short-term in nature. But an increasing number of advisors have begun using leveraged ETFs over extended time periods to generate amplified returns on trends that may not play out in a single trading session. Since leveraged ETFs compound daily returns, returns over multiple trading sessions can often result in unpredictable returns, particularly in seesawing markets. But by using a relatively simple rebalancing plan, advisors can increase the likelihood that returns on leveraged ETFs will closely correspond to an intended multiple of the related index.
Leveraged ETFs 101
Leveraged ETFs use complex financial instruments, such as swaps and futures, to magnify the daily returns on a benchmark. For example, the ProShares Ultra S&P 500 (SSO) seeks to provide daily returns corresponding to 200% of the daily return on the S&P 500 Index. If the S&P 500 rises 1% for a single trading session, SSO should be expected to rise by about 2% (and it often does, as demonstrated in this feature).
Because leveraged ETFs seek to amplify daily returns, these funds reset their exposure on a daily basis. It is for this reason that when held for multiple trading sessions, the return on the leveraged ETF may deviate from the multiple of the return on the underlying index, particularly in oscillating markets. A leveraged ETF increases its exposure as its price rises and decreases its exposure as its price falls, leading to potentially undesirable results in a volatile, non-trending market.
Not Rocket Science
Many analysts and journalists convey leveraged ETFs as a mysterious black box that implements strategies beyond the grasp of most investors to generate erratic, unpredictable returns. In reality, the concept behind leveraged ETFs is easy to understand, and the consistency with which the funds achieve their stated objectives is rather impressive. Leveraged ETFs reset their market exposure on a daily basis, meaning that they are generally intended to be short term investments.
How To Optimize Leveraged ETF Returns
Some coverage on leveraged ETFs is correct: the effects on a portfolio in certain markets can be devastating if used incorrectly. But if used correctly, these ETFs can be powerful tools that can allow advisors to “double down” (or triple down) on anticipated movements in a benchmark. Advisors shouldn’t necessarily be scared of investing in leveraged ETFs for multiple sessions, but they should do so only if prepared to monitor the performance closely and potentially implement a rebalancing plan.
Leveraged ETFs are appropriate only for a relatively exclusive universe of investors for two primary reasons. The first is that since these funds are designed to amplify returns, they are likely to significantly increase the volatility of any portfolio that includes them, which may be inappropriate for risk-averse investors. Second, these ETFs require daily monitoring, since their performance over multiple trading sessions depends not only on the change in the related benchmark, but on the path of that index during the relevant period. Investors without the time or resources to monitor leveraged ETF investments on a daily basis should stay away from these products. The “set it and forget it” approach may work for long-term buy-and-holding, but it won’t work with leveraged investing.
Rebalancing Plans
As discussed above, leveraged ETFs operate with daily returns in mind, so bull funds must increase their exposure as the underlying index rises and decrease exposure as the markets fall. As a result, in seesawing markets leveraged funds will tend to return less than the multiple on the underlying benchmark when held for multiple periods, because a losing session will come on the heels of an increase in exposure and vice versa.
Consider this hypothetical example:
Period Index Value Daily Index Return 3x Leveraged ETF Price Leveraged ETF Return
Day 0 $100.00 ___ n/a ___ $100.00 ___ n/a
Day 1 $106.00 ___ 6.0% ___ $118.00 ___ 18.0%
Day 2 $100.70 ___ -5.0% ___ $100.30 ___ 0.3%
Day 3 $105.74 ___ 5.0% ___ $115.35 ___ 15.3%
Day 4 $102.56 ___ -3.0% ___ $104.96 ___ 5.0%
Day 5 $106.67 ___ 4.0% ___ $117.56 ___ 17.6%
Day 6 $101.33 ___ -5.0% ___ $99.93 ___ -0.1%
Day 7 $110.45 ___ 9.0% ___ $126.91 ___ 26.9%
Day 8 $106.03 ___ -4.0% ___ $111.68 ___ 11.7%
Day 9 $114.52 ___ 8.0% ___ $138.48 ___ 38.5%
Day 10 $110.00 ___ -3.9% ___ $122.11 ___ 22.1%
As shown above, the market rises 10% over a 10-day period, but a hypothetical 3x leveraged ETF tracking the benchmark would only rise 22.1%, or about 2.2x the return on the index. Depending on the level of volatility and period in question, returns on leveraged funds can deviate even further from the multiple on the underlying benchmark (note that on Day 6 the leveraged ETF had actually generated a negative return when the underlying index is up).
Again, since leveraged ETFs operate with daily returns in mind, their performance over multiple trading sessions can digress from the multiple on the underlying benchmark.
Rebalancing Is The Key
Contrary to popular belief, leveraged ETFs can be used to generate amplified returns over an extended period of time. But they can’t do it alone. (i.e., a “set it and forget it” approach won’t do the trick.) By implementing relatively simple rebalancing strategies, leveraged ETF investors can more closely approximate an amplified return on leveraged ETFs over multiple trading sessions.
By their very nature, bull leveraged ETFs increase exposure following increases in the benchmark index and decrease exposure when the index declines (as shown above). In order to achieve leveraged results beyond the short term, however, investors want to do the exact opposite. As the underlying index increases, advisors should reduce exposure by selling shares. As the index declines, advisors should increase exposure by purchasing additional shares. Consider the implementation of such a strategy assuming the same 10-day period:
Beginning ETF Investment Daily Index Return Ending ETF Value Daily Gain (Loss) Cash Withdrawal (Investment) Ending ETF Investment
$100.00 6.0% ___ $118.00 ___ $18.00 ___ $12.00 ___ $106.00
$106.00 (5.0%) ___ $90.10 ___ ($15.90) ___ ($10.60) ___ $100.70
$100.70 5.0% ___ $115.81 ___ $15.11 ___ $10.07 ___ $105.74
$105.74 (3.0%) ___ $96.22 ___ ($9.53) ___ ($6.34) ___ $102.56
$102.56 4.0% ___ $114.87 ___ $12.31 ___ $8.21 ___ $106.67
$106.67 (5.0%) ___ $90.67 ___ ($16.00) ___ ($10.67) ___ $101.33
$101.33 9.0% ___ $128.69 ___ $27.36 ___ $18.24 ___ $110.45
$110.45 (4.0%) ___ $97.20 ___ ($13.25) ___ ($8.84) ___ $106.03
$106.03 8.0% ___ $131.48 ___ $25.45 ___ $16.97 ___ $114.52
$114.52 (3.9%) ___ $100.98 ___ ($13.54) ___ ($9.02) ___ $110.00
Total Cash Flows $20.00
After the leveraged ETF rises on day 1, investors could reduce the position in the fund by pulling out two-thirds of the daily gain. After a decline on day 2, an additional cash infusion (again, equal to two-thirds of the daily loss) is required.
The strategy summarized above rebalances on a daily basis such that the ending exposure in the leveraged ETF is equal to the value of the index on that day. (Note that the far right column on the above table is equal to the second column on the first table.) After 10 days of volatile market returns, the investment in the leveraged ETF has increased from $100 to $110, and the advisor has taken a net amount of $20 from the investment, summing to a total return of $30, exactly equal to 3x the return on the index over the period.
The obvious oversight in this example is fees and expenses that would be incurred by such frequent rebalancing. This example is extreme in the sense that it implements a daily rebalancing strategy. The less frequent the rebalancing, the greater the tracking error and the lower the fees. In reality, it may be more sensible to set a “trigger point” at which point leveraged ETFs should be rebalanced (i.e., a deviation between the returns on the index and the return on the ETF). Unfortunately, there is no way around a trade-off between expenses and tracking accuracy when dealing with leveraged ETFs.
Visit my website
| |
0 Comment | Add Comment(s) | Leveraged_ETFs, Rebalancing, Indexing, |
|
January ETF Flows: Hot Start to 2011
Friday, February 04 2011 | 04:35 PM
Michael Johnston
Managing Director,
ETF DATABASE | In 2010 the ETF industry stumbled coming out of the gate, as more than $17 billion flowed out of exchange-traded products in the first month of the year. This year’s January figures showed an opposite result, as the latest data released by the National Stock Exchange shows that U.S.-listed ETPs took in more than $10 billion last month. The industry finished the month with $1.02 trillion in assets, an increase of about 1% over the prior month.
Reversing the trend of recent years, money flowed into domestic equity funds (inflows of almost $10 billion) and out of international stock ETFs (outflows of $1.3 billion) in January. Commodity ETFs also bled assets as investors fled physically-backed gold products, while fixed income funds saw big inflows.
After taking in more than $40 billion in 2010, Vanguard picked up where it left off in 2011 by leading all issuers with $4.2 billion in inflows. Not far behind was PowerShares, which surged higher thanks to big inflows into its flagship QQQQ (the fund raked in $2.5 billion of the firm’s total $3.2 billion during the month). iShares saw its market share drop under 44% after monthly outflows totaled more than $3 billion. First Trust continued an impressive run with nearly $500 million in January inflows. The firm’s ETF assets are up nearly 200% since last January, and market share has doubled over that period.
After losing more than $16 billion in January 2010, SPY saw solid inflows of $1.5 billion last month to inch up to more than $93 billion in total. Meanwhile, the second largest ETF continued to bleed assets, as $2.3 billion flowed out of GLD. The physically-backed gold SPDR has now experienced four consecutive months of outflows. And GLD continued to lose ground to its iShares competitor: The COMEX Gold Trust (IAU) also saw outflows, but of only about $300 million. iShares cut the expense ratio on IAU to 25 basis points last summer, and the fund has been gaining ground on its much larger rival ever since.
VWO Tops EEM
In another closely-watched head-to-head battle, Vanguard finally gained the upper hand in the emerging markets ETF space. VWO surpassed iShares EEM in terms of total assets for the first time; both funds track the MSCI Emerging Markets Index but VWO has a clear edge in expenses (27 basis points compared to 69 bps for EEM). VWO, now the third largest U.S.-listed ETF, took in $1.7 billion while EEM bled nearly $7 billion.
In addition to GLD and EEM, other funds experiencing major outflows included the Russell 2000 Index Fund (IWM, $1.9 billion) and Vanguard’s MSCI Total Market ETF (VTI, $818 billion). Five ETFs took in at least $1 billion last month, including SPY, QQQQ, VWO, the iShares MSCI Brazil Index Fund (EWZ) and Dow Jones Industrial Average ETF (DIA).
Several of the newer additions to the ETF lineup appear to be gaining considerable traction. Vanguard’s S&P 500 ETF (VOO) took in about $360 million, or nearly 150% of December assets. Also posting a big relative gain was WisdomTree’s Commodity Currency ETF (CCX), which raked in $91 million to push total AUM to $116 million.
Though the ETF industry remains top-heavy, the smaller and more targeted products out there continue to gain ground. In aggregate, the 20 largest exchange-traded products account for about 47% of total assets, but these same 20 behemoths saw outflows of about $3 billion last month.
Visit my website
| |
0 Comment | Add Comment(s) | Indexing, ETFs, |
|
Beyond the Sound Bite: An Interview with Robert Arnott
Friday, February 04 2011 | 04:31 PM
Vinny Catalano CFA
President & Global Investment Strategist,
BLUE MARBLE RESEARCH | To most investors, including many investment professionals, indexes are constructs designed to track a defined area of the economy, usually via financial assets. Yet, "indexing as an investment concept" is far more prevalent than most realize.
In my interview with the co-author of " The Fundamental Index" and Chairman, Founder of Research Affiliates, we explore such areas as efficient indexing, the market inefficiencies that result from cap weighted indexes, and RAFI, the Research Affiliates Fundamental Index approach to investing. For those interested in understanding an investing methodology that large institutional investors such as PIMCO utilize, this interview will open the door to a fascinating and largely under-appreciated segment of the financial markets.
Beyond the Sound Bite podcast interviews can be found at the Blue Marble Research media blog. To listen to this interview,
Check out the interview here!
Visit my website
| |
0 Comment | Add Comment(s) | Interview, Indexing, |
|
Did Snow Freeze Job Growth Last Month?
Friday, February 04 2011 | 04:29 PM
James Picerno
Editor,
CAPITALSPECTATOR.COM | There’s mixed news on the labor front today, according to this morning’s payrolls report for January from the Labor Department. The unemployment rate fell to 9.0% last month from 9.4% in December—that’s good. But January’s private sector growth in nonfarm payrolls rose by a slim 50,000, down sharply from December’s revised 139,000 gain—that’s bad. Analysts say that snow kept a lid on stronger job growth. Perhaps, but the crowd is stuck singing a familiar refrain once again: Next month’s job report will be better.
“Job growth is also much stronger than the payrolls suggest,” says Eric Green, a strategist at TD Securities, via MarketWatch.com. He predicts that “payrolls will be much higher next month, and so will unemployment.”
Ward McCarthy, chief financial economist at Jefferies & Co, agrees. “This looks like quite a firm report once you get those frozen-out workers off the tables,” he tells Bloomberg.
Meantime, the Labor Department revised the last two years of employment data, but the changes don’t improve the profile of sluggish job growth of late. As the chart below reminds, private-sector payroll increases have been modest at best. Unfortunately, the trend seems to be weakening. The revised numbers show that last month’s net change in private payrolls was the smallest since last May.
The leading sources for the deceleration in overall private-sector job growth last month: an acceleration in the loss of construction jobs and a dramatic slowdown in the rise of services employment.
Spring can't come too quickly for the labor market, but until stronger numbers arrive maybe it's prudent to keep expectations in check. "One might be tempted to read something positive also from the fall in the unemployment rate from 9.4% to 9%," notes Rob Carnell of ING via The Guardian today. But there's still reason to stay cautious, he adds. "Despite a 117,000 gain in employment measured by the household survey in Jan, most of this fall in the unemployment rate was the result of a further 507,000 decline in the civilian labor force, which contributed most of the 622,000 decline in 'unemployment' this month. Moreover, adding to the sense that all is not entirely well with the US labor force, the average duration of unemployment continues to drift higher."
Visit my website
| |
0 Comment | Add Comment(s) | US_Economy, Job_Growth, US_Unemployment, |
|
Cheeseburgers, KFC & Copper
Friday, February 04 2011 | 04:25 PM
Bill Carrigan
Founder,
GETTINGTECHNICAL.COM | No doubt we have to credit the Chinese growth story for the big 2010 gains in the North American stock markets. The broadest measure of U.S. equities, the Dow Jones Total Stock Market Index (formerly the Wilshire 5000) gained 15.34% in 2010, or approximately $2.3 trillion in market capitalization. The index has gained 44.99% since 2008. Most notable was the index gain of 23.35% during the third and fourth quarters.
Investors in the commodity space were the big winners with the price of crude, gold, silver, cotton, copper, uranium and potash all soaring in response to the China story.
Our chart displays two direct beneficiaries of the China story – the big fast food players McDonalds (MCD) and YUM Brands (YUM). Look at the price action over the past several weeks – down is the face of a late December rally the took most of the broader stock indices to 52-week highs. Clearly these Chinese consumer bellwethers are predicting a Chinese slowdown – if you love the copper / Chinese story MCD & YUM may give you indigestion.
Visit My Website!
| |
0 Comment | Add Comment(s) | China, Commodities, Indexing, |
|
It Turns Out It Would Be Really Easy to Issue Foreign Bond ETFs
Friday, February 04 2011 | 04:20 PM
Roger Nusbaum
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA) | For a while I've been writing about the importance of foreign fixed income exposure in a diversified portfolio, how we integrate this space into our client portfolios and how easy it would be for ETF providers to make real inroads here in offering exposure. What exits now are some broad based funds that are usually heavy in Japan because Japan has issued the most debt (kind of market cap weighted by total debt issued). There are a couple of emerging market bond ETFs that are better holds, IMO.
Well it turns out that iShares offers a lot of foreign bond ETFs in other markets. For example in Canada iShares offers seven ETFs that own Canadian bonds. iShares UK offers more funds than can be counted in GBP and euros in all sorts of fixed income categories. I am aware of one other iShares site, that being for Hong Kong but there are no bond ETFs available on that site.
It might be a case where the company may not want to commit the capital to seeding US versions of these funds which would be reasonable given that embracing truly new segments of the market can be difficult for many investors (there are many advisors who still use an OEF equivalent of SPY, IWM and EFA). The solution here might be some sort of blurring of the lines between exchanges such that anyone so inclined could buy the iShares DEX Universe Bond Index Fund which has ticker XBB in Toronto but apparently no pink sheet symbol for US trading.
This would of course be a big evolutionary step but not completely unprecedented, it is pretty easy to buy Canadian common stocks through Schwab and they are about the worst for accessing foreign stocks and of course Fidelity, Interactive Brokers and eTrade offer access. There are different rules for funds but it seems to me to be a legal solution that if implemented intelligently would be much less capital intensive than seeding a bunch of new funds.
In my opinion this is something that is going to evolve such that the access is made available one way or another. For now it may be a demand issue in that I think there is failure to recognize the need by too many people but the exposure is important even if people are slow to realize.
On a possibly related note, IndexUniverse reported that iShares had filed in the US for a foreign preferred stock ETF that is 73% Canadian issues.
Visit my website
| |
0 Comment | Add Comment(s) | Foreign_Bonds, Diversification, ETFs, |
|
|
|
|
|
