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International Retrospective and Outlook
The ratio of the MSCI Emerging Markets Index divided by the MSCI World Index (an index of developed markets) is at its lowest level in 10 years, and developed markets have dramatically outperformed since 2010. If we believe most trends eventually reverse course, we may be close to a period of outperformance for emerging markets.
US Bond Market Week in Review: A Look at the Coincident, Leading and Long Leading Indicators
by Hale Stewart,
The Fed wouldn’t have raised rates if they didn’t have confidence that the US economy would be able to handle higher rates. So, let’s take a look at coincident, leading and long leading data to get an idea for the strength of the US economy now, but, more importantly, in the next 12-18 months.
The 2015 Festivus Airing of Grievances
by Paul Kasriel of The Econtrarian,
Well, it’s that time of the year again for the airing of grievances. And, although I don’t have a lot of problems with you people this year, rest assured, I have a few. The first one has to do with the continued misconception that the purpose and measure of effectiveness of central bank quantitative easing (QE) is related to a decline in bond yields. If falling bond yields are an indicator of an easing monetary policy, then how would one explain the contractions in industrial production almost month after month from October 1929 through June 1931 in the face of declining bond yields?
What’s the Canary in the Financial Coal Mine Saying?
Credit spreads, which measure the relationship between bonds of different credit ratings, are arguably one of the most overlooked tools in financial market analysis. That is a shame because reversals in the momentum of credit spreads offer reliable signals of changes in the fortunes of bonds, stocks and commodities. Current evidence suggests some of these relationships have reached a critical juncture point, which means further deterioration in junk bonds and their connection with higher quality ones could lead to a crisis prone 2016.
Seeing the Silver Lining for Fixed Income in Fed Move
As we look ahead to 2016, we finally have entered this long-anticipated rising-rate environment. However, it’s likely to be slow and steady, and certainly not something we believe should cause major portfolio dislocations for fixed income investors.
What Comes Next?
by Scott Brown of Raymond James,
The Federal Reserve has now raised short-term interest rates for the first time in nine and a half years. In the policy statement, the Fed signaled that policy will still be accommodative, that future action will be data-dependent, and that the pace of rate increase is likely to be gradual. None of that should be a surprise.
Reversing the Speculative Effect of QE Overnight
by John Hussman of Hussman Funds,
In recent quarters, I’ve remained adamant that the immediate first step of the Federal Reserve in normalizing monetary policy should have been to reduce the size of its balance sheet. The Fed’s failure to prioritize that first step, in the apparent desire to maintain an aggrandized role in the U.S. financial markets, has significantly increased the risk of a collapse from the speculative extremes the Fed has created in recent years. Given the increasing risk-aversion evident in market internals, we doubt that even a reversal of last week’s rate hike would materially reduce that prospect.
The Seven Fat Years of ZIRP
by John Mauldin of Mauldin Economics,
In today’s letter we are going to examine the problematic credit markets, and I want to focus on something that is happening off the radar screen: the continuing rise of credit in private lending. I predicted the rise of private credit back in 2007 and said that it would become a major force in the world, but I got strange looks from audiences when I talked about the arcane subject of private credit. Today the shadow banking system is taking significant market share from traditional banking.
The Fed Awakens: A New Hike
On Wednesday, Chair Yellen announced that, for the first time in seven years, easy money will become slightly less easy. The target rate will be set at between 0.25 and 0.50 percent, which doesn’t sound like much, but it’s important that the Fed ease into this cycle cautiously and gradually. Plus, this comes at a time when fellow industrialized nations and economic areas around the globe are considering further monetary easing measures.
Positioning Portfolios After Fed Rate Liftoff
With a positive backdrop for credit risk, we favor investment-grade corporate bonds and MBS, while some areas of high yield also present opportunities.
We believe a modest but positive duration stance remains appropriate, with 2016 likely to provide additional opportunities to buy longer dated bonds.
Currency risk presents some opportunity, but it is no longer as simple as expecting the U.S. dollar to appreciate versus all other currencies.
Inflation risk will likely increase next year as commodity prices ultimately bottom and wages perk up.
High Yield: Flows Over Fundamentals
by Anthony Valeri of LPL Financial,
High-yield bond selling, or the threat of selling, has sparked one of the worst sell-offs in the high-yield bond market since the summer of 2011 and the peak of European debt fears. The origin of high-yield weakness has come from the lowest-rated tiers of the high-yield market but has infected the broader market. Last week’s redemption freeze by an $800 million high-yield strategy, and news of a similar halt by a smaller fund over the weekend of December 12–13, 2015, intensified pressure on the high-yield bond market.
Rising Interest Rates, Part 2: Exploring the Gap
In part 1 of this series, I explored what interest rates would look like if they returned to their natural level and determined they would be approximately 5 percent on a nominal basis (assuming 2-percent inflation). As the Federal Reserve (Fed) has determined that 2 percent is the target inflation rate, this approximation of the natural rate seems reasonable. Current interest rates, however, are well below 3 percent, resulting in an obvious gap between where the rate is now and where it should be.
High Yield: A Challenge and an Opportunity
Liquidity in the high-yield market has been a challenge over the past several quarters, as several structural factors have adversely affected traditional sources of liquidity. Historically, counterparties like banks and brokers served as market-makers, allocating capital to provide down bids in periods of market distress, as they did in 2002 and 2008/09.
Navigating the Current Rate Environment
Low interest rates globally have been an important driver of asset price returns over the past few years and are very much on investors’ minds today. In our conversations with financial advisers, many questions come up: How long can we expect the low-rate environment to continue? What has led rates to be so low in the first place? What are the consequences of global central banks’ quantitative easing (“QE”) policies? Have we definitively slain the specter of inflation?
Did a Frozen Fund Lead Last Week's Outflows in High Yield?
The circumstances of two large leveraged debt funds do not mean that investors with exposure to traditional high-yield funds are subject to the same outcomes.
While we believe risk premiums should be higher for illiquidity and other risks, any technically-driven sell-off due to large redemptions could present a buying opportunity.
Last week’s events are further evidence that disciplined credit selection based on strong fundamental analysis will be a key driver of manager performance over the coming year.
Impact Of The First Hike - This Time Might Really Be Different
by Chun Wang of The Leuthold Group,
This rate hike might really be different as it occurs in an environment where, despite strong job growth, the business cycle has already turned contractionary, disinflation is still dominant, and various risky assets are showing late-stage characteristics. In other words, we are in unchartered territory. Expect the unexpected.
What Does the High-Yield Sell-Off Mean for Stocks?
by Burt White of LPL Financial,
High-yield bond weakness has led investors to fear that a recession or bear market may be forthcoming. Widening of high-yield bond spreads (the spread between yields on high-yield bonds and comparable U.S. Treasuries) preceded the start of the stock market downturns in 2000 and 2008, causing many to ask if the latest bout of high-yield weakness portends another downturn. Here we try to answer that question by looking at characteristics unique to the high-yield bond market and prior periods of similar high-yield weakness.
Fed Set To Pull Trigger Tomorrow - A Good Thing Or Bad?
The Fed Open Market Committee (FOMC) which sets US monetary policy convened in Washington this morning for its last meeting of 2015. It is widely expected that the Committee will vote to hike the key Fed Funds rate for the first time in almost a decade before the meeting concludes tomorrow.
Why Dividend-Paying Stocks are Riskier than You Think
by Larry Swedroe,
As advisors shift allocations from bonds to high-dividend stocks, they are exposing their clients to equity market risk. But they are also increasing interest-rate risk. Investors in two of the biggest dividend ETFs – SDY and VIG – are among the most exposed to the surging demand for dividend-paying stocks.
Positioning Portfolios for the Next Tightening Cycle
Credit is trading at much more attractive spread levels relative to past hiking cycles, reinforcing our view that credit risk can perform well following liftoff.
Opportunities may present themselves to add duration risk further out the curve while the potential pullback in the dollar could create an opening to add currency risk.
Performance of inflation risk is mixed, with underperformance accelerating throughout the tightening cycle as the Fed lowers market expectations of future inflation.
Dear Ms. Yellen, I Don’t Care What You Do
by Andy Martin,
Rising interest rates are nothing to fear. Total returns will be positive, not negative, if we have a similar rate trajectory that we had in the last bear market in bonds. Bonds should continue to be a staple in investors’ portfolios – and in greater, not lesser percentages as our population ages and interest rates increase.
The Risk and Opportunity in Peer-to-Peer Investing
by Michael Kitces,
In today’s low-interest-rate environment, advisors must add value to fixed-income allocations. Unfortunately, some of the higher yielding segments of the fixed-income markets – such as peer-to-peer (P2P) investing – don’t fit into the typical financial advisor investment platforms. But that will soon change.
Panic, Punts and Reality
The biggest single college football play of 2015 happened in Ann Arbor, MI, on October 17th. The ball was at mid-field, it was fourth down with two yards to go and there were only 10 seconds left in the game. The Michigan Wolverines were beating the Michigan State Spartans, 23-21.
The Slippery Welcome Mat for Rising Rates,
The commencement of a policy-rate-hike cycle by the US Federal Reserve has both symbolic and material significance for the US economy and financial system. Gradually unwinding unconventional, ultra-accommodative monetary policies sets in motion the repricing of assets and other long-delayed adjustments in economic, financial and currency markets. Comparing economic and financial outcomes with prior rate-hike cycles provides clues as to the possible outcomes this time around, but they have little predictive power.
On My Radar: El-Erian’s 2016 Outlook & The T Junction
I spent a few days earlier in the week in Scottsdale, Arizona. I was invited to present on portfolio positioning and best execution at the 20th annual IMN Global Indexing and ETF Conference. One of the big highlights for me was El-Erian’s keynote presentation.
Today, I share with you my notes from El-Erian’s speech. He is humble, balanced and brilliant. I have listened to my recording of his presentation several times. Stop-start-rewind-replay-rinse-repeat. Fun for me and well worth the effort.
In short, he puts the odds for a good outcome at 50/50 saying he, “hates to say that."
Deja Vu: The Fed's Real "Policy Error" Was To Encourage Years of Speculation
by John Hussman of Hussman Funds,
Over the past several years, yield-seeking investors, starved for any “pickup” in yield over Treasury securities, have piled into the junk debt and leveraged loan markets. Just as equity valuations have been driven to the second most extreme point in history (and the single most extreme point in history for the median stock, where valuations are well-beyond 2000 levels), risk premiums on speculative debt were compressed to razor-thin levels. By 2014, the spread between junk bond yields and Treasury yields had fallen to less than 2.4%.
Intelligent Design Sustainable Income
The AND principle means building in desirable features without the trade-offs that conventional thinking considers inevitable. Case in point: an equity income index holding liquid, quality stocks with high dividend yields. (1) The AND principle holds that creative product design can surmount some trade-offs that conventional thinking considers unavoidable.Simple investment strategies are easier to govern than complex ones and may be less likely to result in catastrophic outcomes. A simple new design demondemonstrates that income-oriented indices need not trade off yield for capacity & quality.
2016 Fixed Income Outlook: New Episode, Same Show
by Anthony Valeri of LPL Financial,
We expect a limited return environment may persist in 2016 and the year as a whole may look similar to 2015. High valuations, steady economic growth, and the lingering threat of Federal Reserve (Fed) rate hikes may keep pressure on bond prices in 2016. We do not envision a recession developing, which we believe is ultimately needed for a sustained move higher in bond prices.
Eurozone 2016 Economic and Capital Market Outlook
Six years after the financial crisis, the Eurozone continues to face major challenges in restoring economic growth. Our investment thesis has been that the structural problems facing the European Union are real impediments to sustained economic growth and until they are addressed, sustained growth is elusive. While that does not mean that there are not investment opportunities in Europe, it does mean that as one of three major capital markets in the world, investors need to be careful.
GMO Quarterly Letter
by Ben Inker, Jeremy Grantham of GMO,
In a new quarterly letter to GMO's institutional clients, co-head of asset allocation Ben Inker examines whether emerging-market equities might be a "value trap," and if U.S. equities are "deserving of trading at a premium P/E to the rest of the world" ("Just How Bad Is Emerging, and How Good Is the U.S.?"). In part two of the letter, chief investment strategist Jeremy Grantham provides "a list of propositions that are widely accepted by an educated business audience ... but totally wrong. ...
Understanding Covered Call CEFs
by Roger Nusbaum of AdvisorShares,
Barron’s recently had a favorable write up on closed end funds that one way or another use a covered call strategy as a means of providing income. Where the article focused on CEFs, the yields can be quite high because of the leverage that CEFs often use as well as returning capital, when necessary to maintain a payout. It is also worth noting that there are traditional funds that sell calls and ETFs that sell calls and puts too for that matter.
An Evolving Investment Landscape May Benefit Equities
Equity markets were volatile last week, losing ground early before rebounding.
Sentiment soured over a more modest easing announcement than expected
by the European Central Bank (ECB). OPEC’s decision to leave oil production
unchanged triggered a drop in energy prices, which also acted as a drag on
equities. Additionally, a weak manufacturing report contributed to the gloomy
tone. However, a strong jobs report on Friday seemed to pave the way for the
Fed to raise rates this month and allowed equity prices to rally strongly.
Results 8,951–9,000
of 11,878 found.
