Asset Managers Have Turned Against Emerging Markets; Should You?

One would expect that the “hot money” of retail investors, which tends to buy high and sell low, would be quick to pull the trigger and chase higher performer assets. And they did. Emerging markets stock mutual funds shed 0.4% of assets in the week-ended Tuesday Feb 15., emerging markets stock ETFs redeemed 2.1% of assets, or $3.1 billion
But according to what the mutual fund companies tell us, their professional and experienced managers on the other hand would have the discipline to examine whether or not 8 weeks of data justify a major change in their investment strategy. They might be expected to take a closer look at whether the political instability of the headlines or the signs of inflation really warrant the wide divergence in performance of the last 8 weeks. Perhaps it might represent a chance to rebalance at attractive prices.
According to a New York Times article it seems that those investment “professionals” are as fickle as the most trigger happy individual investor.....

read the rest here

Wednesday Notes

The VXX and VXZ keep moving

the volatility of volatility is increasing. Right now the SPY is only .7% but VXX is up 5.8% and VXZ is up 2%. This means the delta (hedge ratio) or the movement in the ETNs relative to the move in the underlying is increasing as well. Of course this parallels the moves in the VIX
VIX Posts Biggest Two-Day Increase Since May as S&P 500 Tumbles
Illinois Non Taxable Munis

Is the state of Illinois close to junky ? The Wsj reports the taxable bond issue to go to market today will yiled around 2.4% above treasuries for the 2019 maturity , Based on etfs (hyg,ief,lqd) inv grade corps are +1.16% junk + 3.20%. Investor demand seems strong particularly from abroad...maybe they know something. And as I have noted it is possible to lock in the spread without locking in to current long term rtes. Purchasing a bear etn for the appropriate maturity/duration hedges out the interest rate risk and locks in the spreads.

Dumb Money chasing Performance ?

Recent data on mutual fund flows for the beginning of the year has shown (surprise) money flowing from bonds into stocks chasing past performance. And in the bond areas the money has flowed into higher risk areas of the credit market including emerging market bonds and high yield bonds. So much for the argument from some observers than investors in 2010 went from stocks to bonds in order to reduce their risk, It seems more likely they were simply chasing performance.

And as for recent flows retail money has clearly been flowing most out of emerging markets. Barron's noted on feb 17:

I'm Quoted in the WSJ Commenting on Bond Funds

I'm quotes in a Feb 8 article in the WSj on "go anywhere" bond funds

Lawrence Weinman, a fee-only financial adviser in Los Angeles, says go-anywhere bond funds may wring out a bit more return, but may be taking more risk in the process. "The problem with go-anywhere bond funds is they can do anything; they can add on all the risks that I try to control—credit risk, duration maturity risk, currency risk," he says. Some can take on equity exposure with convertible bonds or invest overseas without hedging, he says.
"You're betting on the management being able to do that. I'm pretty skeptical in terms of persistent manager skill," he says.

How to Play the Yiekd Curve With ETNs

In addition to the ETNs that focus on particular parts of the yield curve which I reviewed in my previous article, iPath has introduced instruments that allow investors to take positions on the shape of the yield curve. Specifically, these instruments allow one to take a view on the spread between 2 year and 10 year Treasuries. Institutional investors and traders have long taken positions on this relationship through futures and swaps but these instruments offer the simplest and most direct means for smaller investors to do so. The two iPath ETNs are ticker symbol STPP which increases value when the yield curve steepens (the differential between 10yr and 2 year rates increases) while the ETN with the ticker FLAT increases in value when the curve flattens

read the rest here

Interesting ETNs for Fixed Income Management

Since August, Barclays iPath has introduced two sets of ETNs that make available to smaller investors bond portfolio management tools which were previously only available through the use of futures or swaps markets. They allow investors to take positions on the particular parts of the yield curve or on the shape of the yield curve. 

read the rest on seekingalpha

as expected

see previous (jan 13 post)

wsj Jan 27'

Gold Slumps to Four Month Low

wsj jan 25

ETF Investors Slowed Gold Investments in 2010 


and first of many stories of this type large medium and small:


wsj  jan 26

Small Gold Trader Makes Big Splash

Daniel Shak's Aggressive Bet Grabbed Sizable Chunk of Contracts, But Prices Fell and Wager Went Bad

Food Riots, Increased Fear of Inflation , Sovereign Debt Crisis and Continued Currency Crisis...But Why Isn't Gold Going Up ?

Looking on a global basis it would seem that the world is far closer to the gloom and doom scenario of the gold bugs that at any time in the last 2 years (or more)

• Surging prices in the commodities that fuel actual inflation: oil, food, and base metals.
• As a consequence food related riots and demonstrations in the thrid world: so far India, Bangladesh,Algeria and Tunisia(top photo)
• High inflation in Brazil (8%) and elsewhere in Latin America due to strong currency and high commodity prices.go
• Sovereign debt crisis in Europe currently focused on Portugal .
• As a consequence of that debt crisis a weakening trend for the Euro.

Yet just as these crises are identifying gold has barely budged while other commodities have surged. Below th is a chart for the last three months (click to enlarge for gld (gold in green) +1%, FXE (euro etf red)-5.9%,USO (oil etf black) +7.8%,DBA(agriculture blue)+11%.,DBB(base metals yellow)

Why is this happening ?

The Gold rally hasn't really been based on economic analysis. Those with an economics bent can't see a rationale for owning gold: it neither has any actual use (other than jewelry) and doesnt pay interest. The only rationale for holding it is the prospect of being able to sell it to someone else at a higher price.


On the other hand the commodites that actually have something to do with real economic activity (food, base metals and energy) are responding to real economic forces be they growth in the developing world or short term events that cause shortages such as weather. Doubtless once these get moving based on fundamentals a momentum factor kicks in here as well, But unlike gold there is an economic rationale.

The "analysis" that spurred the price rise were more a mantra than an analysis. Gold has historically been a poor inflation hedge. The rest of the rationale for gold rested on a provincial analysis of the conditions only in the United States but looked at globally they seem pretty thin. A readoned analysis would show they argue far more for holding other commodities as well as that paper money  hated by gold bugs...the US dollar than for holding gold.

• Basic commodities are a far small part of US consumers outlays and thus inflation than in the rest of the world, labor costand housing s are a far bigger components of inflation and they are not going up any time soon.
• If one is looking for apocalyptic  political instability with riors in the streets  it is  already happening in Europe and the third world if such instability leads to a flight to gold why wouldnt riots in Greece, France and Britain cause that to happen.
• The US certainly faces a long term crisis because of tis debt but that criisis is at a far more advanced stage in Europe. Shouldn't such a debt crisis lead to european purchases of gold ?
• Because of the European debt crisis the Euro is undergoing weakness. If the rationale response to a crisis with a major currency is to sell the paper currency and buy gold why is the money flowing from the dollar and other paper currencies instead.
• With the prospect of the US economy strengthening US interest rates have moved up a bit making the marginal cost of holding gold a bit higher. Looking around the world that cost is even higher. Money has been flowing into Brazil where 7% interest rates and an appreciating currency make holding gold not such an attractive proposition. In a global economy all of these are alternatives.

Looking at the above developments and the lack of movement in gold it's hard not to conclude that in the final analysis the gold rally has been a pure momentum play. In other words once things got going Gold kept going up because it was going up and more and more people bought for that reason far more than any "analysis" of gold's fundamentals.

There definitely is a momentum factor in markets particularly commodity markets (there certainly is some of that, along with fundamentals driving the other commodities) we also know that such momentum plays are pretty ugly especially for those not nimble enough to get in and out early. One would expect that will be the case for retail investors.

Once the momentum slows even without sharp declines the "fast money" of professional commodity players will move out and into the commodities that seem to have momemntum. After all why hold gold if sugar,copper,oil and even stocks have upward momentum all of these are traded in the futures markets by professional commodities traders. The retail investor looking at gold as a binary buy/sell decision will likely hang on longer suffering more pain on the way down.

The FT reports

But investors are stoking the commodities bull run with some big bets. Money flows into commodities have been huge. Barclays Capital estimates $60bn was injected into commodities in 2010. Some observers believe speculative trading has sent prices to excessively high levels, making a sharp recoil likely should the fragile economic optimism fade.
Figures from the Commodity Futures Trading Commission, the US regulator, reveal very bullish bets among money managers such as hedge funds.
In late December they owned a record net “long”, or buying, position in crude oil futures and options on the New York Mercantile Exchange. In September the same types of traders held record net longs in corn.
As well as hedge funds analysing global economic trends, money managers include trend followers who use computer programs to ride market momentum and “high-frequency” traders who move in and out of positions in microseconds. Electronic traders helped send volumes last year in energy, metals and agricultural commodities at the CME, the largest US futures exchange, to a record.

Could we be on the verge of that dreaded point in the gold market when the music stops and everyone runs for the door at the same time ? It could well be.

(I can't wait to see the comments on this one)