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Bursting of the Bond Bubble
Our April newsletter focused on the extreme overvaluation in the bond market. I argued that money market funds (or cash) were likely to outperform bonds and bond funds over the next decade. In May I applied the same logic to US stock prices and the inherent fallacy in the prevailing TINA (there is no alternative to stocks) hypothesis. Although stocks are likely to outperform bonds over the next decade, both asset classes remain seriously overvalued. In a world of overvalued assets, zero return looks much better than large potential losses even when that means foregoing transitory
Risk Communicates Signals that Something Important is at Stake
The equity markets hit new all-time highs again this past quarter. However, we believe this rally is largely due to Ben Bernanke?s policy of Quantitative Easing (QE) which presently equates to the purchase of $85 billion in U.S. government debt every month. Through the Federal Reserve?s policies our government has effectively printed trillions of dollars since the financial crisis began, arguably inflating a host of asset prices including the stock market.
Time to Kick the Ick Factor for Energy and Materials
Basic materials have been the biggest loser of an asset class for 2012 as well as thus far in 2013. Everything tangible, from gold and copper to coal and steel, has acquired an ick factor that makes the asset class nearly uninvestable. Shares of companies in these categories are trading at values not seen since 2009 market lows. We are beginning to see some very important developments that might make the group more palatable. In fact, we believe that metals, mining and energy could again become Wall Street darlings.
Fantasy versus Factors
by Michael Nairne,
Investors who wish to earn market-beating returns have a choice. They can indulge in the fantastical quest for alpha via high-cost active managers or they can construct factor tilts in their equity allocations via low-cost exchange traded or enhanced index funds. It doesnt take a PhD in mathematics to determine which route is more likely to take an investor to higher performance.
The Purgatory of Low Returns
by James Montier of GMO,
This might just be the cruelest time to be an asset allocator. Normally we find ourselves in situations in which at least something is cheap; for instance when large swathes of risk assets have been expensive, safe haven assets have generally been cheap, or at least reasonable (and vice versa). This was typified by the opportunity set we witnessed in 2007.
Middle East/Africa: Regional Economic Review Q2 2013
by Team of Thomas White International,
Moderate growth is anticipated in Middle-East and North Africa (MENA) region as the International Monetary Fund (IMF) notes that economic expansion in the oil exporting countries has slowed down due to subdued global oil demand. While oil importing countries are expected to make a slight recovery, nations in transition are facing complex socio-political issues, which could further delay their recovery.
Brazilians Demonstrate Their Right to be Heard
Brazilians have demonstrated their right to be heard. The unprecedented chain of events that started with complaints about inflation (bus and subway tariffs) has led to mass protests over corruption, lack of public services, and taxes. As a result of the tension and uncertainty in the past few weeks, some investors have lost confidence in Brazils market. After talking with our analysts on the ground there I wanted to share some perspective on the situation.
Closed-end Fund Review
Following a quarter in which the average closed-end fund was up 4.31%, the universe of 595 funds was lower by 5.60% on a share price total return basis during the second quarter (both figures from Morningstar). For many funds, most of the weakness occurred during the month of June (when the average fund was lower by 6.09% on a share price total return basis, according to Morningstar).
Weekly Market Commentary
After having had a tremendous first half of the year, what direction might the market take into the next few quarters? On the one hand, trend analysis has indeed turned positive and would suggest that the throttle is in full go mode. However, we know from historical and economic analysis that markets cannot sustain linear acceleration indefinitely, and that even the most robust trend is susceptible either to linear reversion or cyclical unraveling.
Calming Downand Changing Focus
Markets are calming and investors seem to be focusing on fundamentals againa nice change from recent history. The bar is relatively low for earnings season but focus will be on the commentary surrounding releases. We believe more sideways movement in both US equities and Treasury yields could prevail over the next couple of months, with summer months muting action; but remain optimistic about stocks longer-term. Likewise, Japan could tread water until new elections are held, but we believe the eurozone provides opportunities that should be looked into at the expense of investments in China.
China's Very Relative Malaise
In his latest piece, Francois Sicart, Founder and Chairman of Tocqueville Asset Management, looks at Chinas Very Relative Malaise, an observation which he describes as a vaguely uneasy feeling that seemed to be shared by most (Chinese) but not always for the same reasons.
ECRI Recession Watch: Weekly Update
ECRI posts its proprietary indicators on a one-week delayed basis to the general public, but last year the company switched its focus to a version of the Big Four Economic Indicators Ive been tracking for the past year. In recent months, however, those indicators have slipped below the fold, replaced by the mixed bag of whatever Indicator du Jour might look recessionary, as in the "Yo-Yo Years" commentary.
Beware Of The Valuations On The Best Consumer Discretionary Dividend Growth Stocks
by Chuck Carnevale of F.A.S.T. Graphs,
The Consumer Discretionary sector consists of businesses that sell nonessential, and therefore, discretionary goods and services. Companies in this sector include retailers, media companies, consumer services companies, consumer durables and apparel companies, automobiles and components companies. Since so much of what this sector offers is discretionary items, companies in the sector tend to do best when the economy is strongest. Unfortunately, as we will soon see, so do the prices of their stocks tend to perform best when the market is performing best.
Safeguarding Leveraged Credit Portfolios Amid Heightened Interest-Rate Volatility
by Team of Guggenheim Investments,
While rapidly deteriorating credit quality and excessive market leverage were the chief culprits behind the end of the previous credit rally in 2007, neither factor is currently a significant concern in the leveraged credit market. Interest-rate risk, specifically the markets uncertainty regarding future monetary policy, precipitated the recent market sell-off and will likely continue to shape the performance of high yield bonds and bank loans in the near term.
ENERGY MLPs: A Suitable and Sustainable Asset Class
Greater capitalization. More liquidity. The energy MLP market has grown steadily, with good reason: our constant demand for energy. While oil prices go up and down, volume has stayed consistent. Production is increasing. And the infrastructure is needed to support it. Add some risk, and you’ve got an investment which could fit in a diversified portfolio.
So the Bulls Returned...
by Blaine Rollins of 361 Capital,
So the Bulls returned to Equities on a holiday shortened week with plenty of news and data to outrun. The Egyptians threw out their President and the Portuguese gave a thumbs down to their government. But dovish comments out of Draghi/ECB, strong data out of Japan, and a 3rd strong month of Non-Farm Payroll growth pushed the Russell 2000 to all-time highs as the rest of the market jumped into its slipstream.
Letters to the Editor
by Various,
A reader responds to Mitchell Eichen and John Longos article, The Practical Application of Behavioral Finance, which appeared last week, and a reader responds to Geoff Considines article, ?The Greatest Anomaly in Finance: Understanding and Exploiting the Outperformance of Low-Beta Stocks, which appeared on February 14, 2012.
Second Quarter Market Commentary
by Mark Oelschlager of Oak Associates,
The market posted another positive quarter, with the S&P 500 returning almost 3%. In recent years, Q2 has witnessed a growth problem, in which softening economic data prompted investors to sell stocks. But this year that did not happen, as the data actually improved. While new job creation is less than some would like to see, there has been a clear acceleration over the past six months.
Investors Dump Emerging Markets Stocks
Investors sold off bond mutual funds and ETFs at a record pace in June, while equity sell-offs were much more limited, with almost all of the selling occurring in the emerging market space. Surprisingly, despite a decline in price, US and developed equity ETFs had inflows in June. And investors in leveraged ETFs turned aggressively bullish last week, despite the recent sell-off. Read this investor insight by TrimTabs Asset Management to learn why these signs should be unsettling for contrarians.
The Practical Application of Behavioral Finance
From the Dot-Com bubble onward, traditional investment models have repeatedly disappointed those who relied on them. When compared to mathematically based models, behavioral finance provides a superior foundation. Here is an alternative investment paradigm, grounded in behavioral finance, that is practical and effective over time periods that are relevant for a significant portion of investors.
Riding Out Recent Volatility
Major central bank policy turns are naturally going to cause some market dislocations. Hasenstab says its pretty clear the Fed couldnt continue printing money forever, and while some investors are panicking about what the end of the Feds easy money policy will mean, Fed tapering doesnt equate to Fed tightening.
The New, Old Normal
We believe the recent volatility will be relatively short lived and provides an opportunity for investors who need to adjust their portfolios to do sowith long-term goals in mind. The risks associated with fixed income have been illustrated over the past couple of weeks and rising yields have caused equity volatility and a pullback. But we remain optimistic about US equities as well as developed international markets; particularly relative to emerging markets.
Currency Wars: A Case for the U.S. Dollar
In recent years, the U.S. dollar has tended to lose value when the global economy improves, as investors are more willing to take risks. We believe that pattern has changed and that the U.S. dollar will outperform the Japanese yen, the euro and the British pound over the medium term, even if the global economy continues to improve. In our view, current conditions justify a material deviation in currency exposure compared with certain global fixed income benchmarks, such as the Barclays Global Aggregate Bond Index.
The Fed's Dirty Little Secret: QE Does Not Work
Today I hope to dispel the myth that the Fed?s massive quantitative easing (QE) policy has driven long-term interest rates lower. I will argue that the opposite is true and demonstrate that the yield on the 10-year Treasury note has actually risen during QE-1, QE-2 and QE-3. This flies in the face of most market commentators.
How Not to Invest in Dividend Stocks: Seven Mistakes Investors Commonly Make
by David Ruff of Forward Management,
While investors may assume that dividend investing is relatively straightforward, they commonly make mistakes that may undercut the potential income and total return of their investments.
Letters to the Editor
by Various,
Adam Apt responds in the latest exchange of letters on the topic of socially responsible investing. A reader responds to Geoff Considines article, A Better Alternative to Cap-Weighted Bond Indices, which appeared June 11. A reader responds to Wade Pfaus article, Retirement Income Designations ? Which Should You Choose?, which appeared last week.
The Fear Factor in US Equities
Fear is a powerful motivator. Whether its a saber-toothed tiger or investment risks, its hard to stay calm when confronted with a perceived threat. Fear of a 2008 2009 downturn repeat, even in spite of strong performance in the US equity market in the first half of the year, has kept many investors sidelined. Grant Bowers believes fear itself could be the biggest issue holding back many investors right now, noting that in his view, short-term volatility aside, the recent US market rally is based on supportive fundamentals which he thinks should have staying power.
Tapering the Taper Talk
by Peter Schiff of Euro Pacific Capital,
As usual the Federal Reserve media reaction machine has fallen for a poorly executed head fake. It has been fooled by this move many times in the past and for its efforts it has tackled nothing but air. Yet right on cue, it took the bait once more. Somehow the takeaway from Wednesdays release of the June Fed statement and the Bernanke press conference is that the Central bank is likely to begin scaling back, or "tapering," its $85 billion per month quantitative easing program sometime later this year, and that the program may be completely wound down by the middle of next year.
ECRI Recession Watch: Weekly Update
Ultimately my opinion remains unchanged: The ECRIs credibility depends on major downward revisions to the key economic indicators -- especially the July annual revisions to GDP -- that will be sufficient to validate their early recession call. Of course, the July revisions will be quite controversial this year, with some major accounting changes and revisions in annual GDP back to 1929. So if we dont get the downward revisions to support ECRI, they can always question the accounting changes in the revision process.
Efficient Pension Investing
by Jared Gross of PIMCO,
Adapting the Sharpe ratio to pension portfolios can help plan sponsors choose among a multitude of investment options designed to achieve the same goal. In our experience, the most significant efficiency gains have come from shifting from intermediate bonds to long-term bonds and introducing lower-volatility substitutes to equities.
Emerging Markets: Reasons for Optimism
by Team of Janus Henderson Investors,
Emerging market equities are lagging developed markets this year. However, the underperformance creates an opportunity in our view, and does little to change our long-term outlook for emerging markets, where we believe some of the strongest growth opportunities lie.
Fed Zombification
The enthusiasm of our culture for Zombies is estimated to contribute a tidy $5 billion dollar a year to GDP, and that doesnt even include the too-big-to-die zombie banks. In my opinion, the acute interest in zombies and horror (and escapism in general) says something about our countrys mental health.
Letter to the Editor
by Various,
Adam Kanzer responds to several letters to the editor that appeared last week. Those letters were in response to his article, Exposing False Claims about Socially Responsible Investing, which appeared June 4. Kanzers article was in response to Adam Apts article, Measuring the Cost of Socially Responsible Investing, which appeared May 21.
Newsletter June 2013
Do you remember hiding under the sheets listening to radio when your parents thought you were asleep? If so, I have an unbelievable collection of all the old-time radio shows we listened to when we were kids, if you have about six months? spare time. Find your favorite, click on it, and it lists literally hundreds of episodes you can re-live.
Submerging Markets: What the Emerging Market Selloff is Telling Us
Investing at its most basic level is about one thing: the return you seek on your investment and the risk you take to get that return. I often emphasize that the biggest risk to investors is volatility, because its the occasional shakiness of markets or market segments that causes investors (whether they manage their money or have someone else do it for them) to react emotionally instead of logically. That plays out every day in markets around the world.
Recent Volatility in the Foreign Exchange Market and the Strengthening Yen
by Team of Nomura Asset Management,
There are two issues underlying the increased currency market volatility; depreciation of the Yen may have resulted in worldwide competitive devaluation and concern about early tapering of quantitative easing (QE) in the U.S. appears to have triggered currency depreciation for countries that are running current account deficits.
ECRI Recession Watch: New Update
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) is at 131.3, up slightly from last weeks 131.0 (revised from 130.9). The WLI annualized growth indicator (WLIg) rose to 6.6% from 6.4% last week (revised from 6.3%)....
Two weeks ago the company took a new approach to its recession call in its most recent publicly available commentary on the ECRI website: What Wealth Effect?
More...
Gundlach ? Dont Sell Your Bonds
by Robert Huebscher,
Dont sell your bonds just yet, according to Jeffrey Gundlach. Global economic growth is slowing, he said, and the U.S. will be competing for a larger slice of a shrinking worldwide pie. A weaker economy dims the prospects for higher interest rates. The benchmark 10-year Treasury yield ? currently 2.08% ? will be 1.70% by the end of the year, according to Gundlach, providing profits for holders of long-term bonds.
May Flowers Bring Best Equity Market Since 1997 as Bonds Wilt
The S&P 500 has opened 2013 with its best year-through-May return since 1997. U.S. Treasury prices, in contrast, plunged last month on talks of Fed tapering. Dont expect the reflation in bond yields to continue in the near term, as the Fed continues to struggle in its current war against deflation. Fundamental business activity not quantitative easing is the wellspring of sustained economic growth, creating lasting sales and profits. For investors, the two biggest self-defeating fears continue to be 1) the fear of buying equities and 2) the fear of buying bonds.
Risk Parity - New Thinking or New Packaging?
by Chris Maxey, Ryan Davis of Fortigent,
Ever since Harry Markowitz brought forth the notion of mean-variance optimization in 1952, academics and practitioners alike have sought ways to build more robust asset allocation methodologies. Recently, the most talked about approach in the institutional world is risk parity, which seeks to focus on risk as its primary input. Risk parity is intuitively appealing, but suffers many pitfalls that investors need to consider.
Results 6,051–6,100
of 6,533 found.
