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Thursday, December 18, 2014

A Black Swan from "Black Gold"

If there was one thing that could not be found among the myriad forecasts for the financial/commodity markets for 2015 it would have been the near 50% drop in oil prices since five year lows:

And if one would have presented the scenario of such a drop in oil prices to analysts and asked them to enumerate the impact on the financial markets. Some predictions would have been relatively easy.'

VDE (energy stocks)

But of course there have been some very very large moves in parts of the financial markets that probably would not have immediately come to mind among analysts. And given the rapidity of the moves it seems clear many were caught by surprise.

Emerging Markets

The massive impact of the decline in oil prices on the Russian currency and economy has been well reported...the impact on emerging market debt and equity indices perhaps less.


I have mentioned before a preference for emerging asia (etf GMF) vs the overall emerging market ETFs like IEMG because of the large exposure to Russia and commodity exporting Latin America. The difference in performance between the two is apparent below.



Emerging market debt indices and thus ETFs have a very high weighting in Rusian debt. And the damage is apparent below in both the local currency emergigng market ETF and the US $ denominated etf (EMB). It is quite interesting that the last time there was a major selloff related to Russian bonds it was in 1998 it primarily involved hedge funds (including the demise of Long Term Capital(LTCM). This time around "mom and pop" retail investors as well as pension funds and others are investors in Russian debt through ETFs or through actively managed mutual funds such as the Pimoc fund reported on in the WSJ which has lost 9% this month.



High Yield Bonds

Companies related to energy particularly oil shale production (fracking) have made up a large proportion of recent high yield debt issuance. Energy related bonds make up 15% of the high yield bond indices. Many of these fracking companies are unable to produce oil profitably at current price levels under $50. Hence fear of future defaults and large drops in emerging market ETFs. Here is HYG the broadest high yield bond ETF.


Even more adversely affected has been HYLD an actively managed high yield bond ETF which has a 30% weighting in energy.


Another area that has sold off is limited partnerships most of them involved in the energy industry. Here below is AMLP the mlp index instrument.

There are several factors that have contributed to make these moves quite large,

  • Time of year as I noted in my previous post end of year markets are prone to low liquidity and volatile trading.
  • Large investment in relatively illiquid markets. The "search for yield" and growth of ETFs and other instruments to allow relatively easy access to what were small sectors of the financial markets has been a two edged sword. On the one hand the investment options have expanded for investors. On the other hand massive amounts of money has moved into what are potentially very illiquid markets...especially when everyone tries to get out at the same time. MLPs , emerging market bonds and high yield bonds all fall into this category,.

The future direction of energy prices is no doubt uncertain and the implications of movements in energy prices will likely have more unexpected consequences in the future,

Bloomberg has a great set of graphics related to the energy markets here


Wednesday, December 10, 2014

A Note on The Markets This Time of Year

By this time of year the senior portfolio managers and traders are off to Vail, the Alps, Palm Beach, Fiji or other luxurious vacation retreats. Many have received the bonus and are just interested in holding onto their gains for the year.

Left on the trading desks are the younger less experienced folk. They have the following  instructions

1, Don't initiate any new positions no matter how many opportunities you may see,
2. If you are a dealer get rid of anything sold to you in the market as soon as possible.
3. Execute if securities fall to levels left by the boss or in the case of short positions rise to the specified level
4 Make every effort NOT to disturb the boss on vacation unless the securities held in the portfolio start dropping sharply..or in the case of short positions rising sharply.

Enjoy your holiday even though your vacation will be far shorter than mine.

The net result markets: are extremely volatile and moves. They  can be intense particularly on the downside especially when reversing the trend during most of the year.. Any picking through "values " in the market will come in January

In the currency markets one can see this in the Euro/Dollar Exchange Rate

Euro per $

Of course the biggest example is Oil:

In the equity markets one can see the fallout in lower energy stocks (VDE) below.

VDE Energy Stock Index

In the bond market the impact can be seen in the high yield bond market whose biggest industry representation is in energy.

HYG high yield bond index

Thursday, November 27, 2014

Europe Positive Headlines

A post here earlier this week  reviewed the positive possibilities for European stocks.

A series of positive news items from Europe today from Bloomberg

Economic sentimentin the euro area unexpectedly increased in November, a sign theEuropean Central Bank’s bid to boost growth and inflation is starting to hit home with companies and consumers.

German unemployment fell and the jobless rate reached a record low as businesses and investors become more confident that Europe’s largest economy will keep growing.

DAX Revival Draws Believers After 11 Days Without Decline
German stocks, up 16 percent since mid-October and rallying for 11 straight days, have further to run, according to the options market.
Contracts (DAX) that pay off shouldGermany’s benchmark DAX Index continue its advance cost the most since January relative to bearish ones, three-month data compiled by Bloomberg show. The German gauge has rallied 6.9 percent this month, almost twice as much as the Euro Stoxx 50 Index.
Investors have flocked to German stocks as they speculate theEuropean Central Bank will boost stimulus, further weakening the euro. Exports make up more than 80 percent of revenue for Siemens AG and Daimler AG, while Bayer AG and BASF SE get at least 44 percent of their sales outside Europe. The DAX also rallied as stronger-than-forecast data in Germany and the U.S. signaled an improving global economy.
“The best bang for buck in markets now are German blue-chip exporting companies with exposure to global growth,” said Lorne Baring, who helps oversee $500 million at B Capital SA in Geneva. “Global growth will be OK, and the ECB’s comments didn’t hurt. A weaker euro will help them.”

The Expensive Poorly Performing Investment Once Available Only to the Mega Rich Now Available to Main Street

Maybe you should take a pass on this one

Hedge Funds Lose Money for Everyone, Not Just the Rich

Hedge funds have lagged behind stocks while still charging fees of up to 2 percent of assets and 20 percent of gains. For the rich and their advisers, "the sex appeal of hedge funds has worn off," says Kobak, now head of Main Line Group Wealth Management.
Guess what the hedge fund firms are doing now?
Hunting for new, less skeptical customers. 
While only those with at least $1 million are allowed to invest in hedge funds, anyone can buy a mutual fund with a hedge fund strategy. Unfortunately, these “alternative” funds come with the same disadvantages hedge funds have: high fees, inconsistent performance and strategies that take a PhD to decipher.
By starting alternative funds, mutual fund companies get a chance to bring in revenue they’re losing to cheap index funds and exchange-traded funds. 

Tuesday, November 25, 2014

Europe Lowers Interest Rates...Time For European Stocks to Catch Up ?

The WSJ and the FT have published  with analyses of the implications of policies of "easy money"/
lower  interest rates in Europe. The WSJ notes that the policy is at least partly in response to evidence that seems to indicate the low rate policy has "worked" US economic growth is back on track and at this point the predicted inflation has not come about. Certainly the low rates have fuelled rises in the prices of financial assets with the ubiquitous "bubble" terminology in the words of many.

What are the implications for investors ? the WSJ writes

Though the moves toward easier money in Europe and Asia are good for investors, they come with multiple risks. They could perpetuate or spark asset bubbles, or stoke too much inflation if taken too far. Also, they don’t address structural problems that policy makers in each economy are struggling to fix.Though the moves toward easier money in Europe and Asia are good for investors, they come with multiple risks. They could perpetuate or spark asset bubbles, or stoke too much inflation if taken too far. Also, they don’t address structural problems that policy makers in each economy are struggling to fix.

The FT writes that many analysts looking at the results of aggressive lowering of rates did to the US equity market as well as the low valuations of European stocks and see potential for a strong move upwards in European stocks.

European equities are not an obvious buy for US investors, who see their own economy forging ahead, corporate earnings beating expectations and a stronger dollar.
Yet with company earnings for the eurozone not as bad as expected, some believe the sector is now undervalued, creating pockets of opportunity in the continent....


Analysts at Barclays believe European equities could rally “significantly” if the European Central Bank embarks on full-blown quantitative easing, which they believe is not yet priced into stocks. They predict European markets, not including the UK, will grow at the most rapid rate of any other major market next year with a total return of 18 per cent, compared twith just 5 per cent in the US and 9 per cent for global and emerging markets.
Jack Ablin, chief investment officer at BMO private bank, is optimistic QE can help the eurozone.
“QE was effective in the US and if we see the ECB act, that should be cause for optimism,” he says, estimating that developed world equities trade at a 25 per cent discount to the US market.

But, as the article notes, the dilemma for US investors is that those low rates that might push up equity prices will also likely mean a lower Euro so that for dollar based investors a good deal of the gain on equities will be lost in the adverse currency movement.

As I noted in a previous article even individual investors have a vehicle  ETF HEDJ which lets them hold European stocks but hedge the currency risk. Apparently investors are incrreasingly looking at this instrument
The most popular exchange traded funds this year include the WisdomTree Europe Hedged Equity, which saw some of its largest daily net inflows in November, according to data from

And even without the currency hedge: 

Some believe European equities have further to rise than the euro has to fall, making them still worth buying even without a hedge. A rule of thumb investors use is that a 10 per cent fall in the euro against the dollar boosts earnings per share for European companies by 10 per cent.

One should of course be cautious about drawing too many conclusions from short term data it is often the case that the moves immediately after major economic events point a way towards long term movements.They often mark inflection points. This may be the case with regard to Europe. The weaker Euro trend continues. European stocks have rebounded quite a bit since October and accelerated more since the ECBs November 21st announcement of a bond buying program but still significantly lag US stocks.

Here are some one year charts

Unhedged Eurozone ETF FEZ

Currency Hedged Euro ETF  HEDJ

Germany (EWG) unhedged

And the Euro/US $ Exchange Rate

What's Been Going on Since Stock Connect Started Last Week

The beginning of stock connect and the announcement of lower interest rates in China has put a significant wind behind Chinese stocks especially the A shares.

Here is ASHR which holds only A shares

And here is GXC which includes all Chinese shares except A shares.

Sunday, November 16, 2014

More on China

Friday, November 14, 2014

More on Stock Connect in China

via Bloomberg

China will waive capital-gains taxes for foreign stock investors using the Shanghai-Hong Kong (HSCEI) bourse link, clarifying its rules three days before the program’s debut provides unprecedented access to mainland shares.
Institutions already investing in Chinese markets through the so-called QFII and RQFII programs will also get a “temporary” tax waiver starting Nov. 17, the Ministry of Finance said in a statement today, without giving a time frame for the exemption. Chinese individuals who buy Hong Kong equities through the link get a three-year exemption, while mainland companies using the connect will be charged tax.
International money managers have been seeking to resolve confusion over the tax policy before the bourse link gives them a new route to access China’s $4.2 trillion stock market. MSCI Inc., which kept mainland shares out of its global indexes in June, said the lack of clarity was one of investors’ biggest concerns.

“It’s positive news for the market and foreign investors,” Zhang Gang, a strategist at Central China Securities Co. in Shanghai, said by phone. “The stock connect can start in a stable manner on Monday.”

Thursday, November 13, 2014

Stock Connect: A Major Change for Chinese and World Equities

On November 17 an important change in the Chinese stock market will take place which will likely have very important long term consequences for not only the Chinese stock market but for the global equities market. Stock Connect will give non Chinese investors access to onshore Chines A Shares and allow mainland Chinese investors access to shares trading ont he Hong Kong exchange.

(Reuters) - A long-awaited trading link between Hong Kong and Shanghai will launch on Nov. 17, a crucial step towards opening China's capital markets that will give foreign and Chinese individual investors unprecedented access to each others' stock exchanges.
The announcement by Hong Kong and Chinese regulators on Monday comes as China is making a big push to widen the use of the yuan, with Canada and Malaysia becoming the latest addition to a growing list of trading hubs for the currency.
The so-called Stock Connect trading scheme could boost the average daily value of stock trading in Hong Kong by about 38 percent by 2015, French bank BNP Paribas estimates, and may ultimately lead to the creation of the world's third largest stock exchange.
The project will at the same time provide a channel for Chinese savers to start moving some of the $8 trillion of private wealth currently in deposits into overseas stocks.
This graphic from the WSJ article on the subject  is a useful overview of the changes

The consequence of this change  is to give foreign investors more than their limited access to stocks listed on the Shanghai market (A shares) and Chinese investors access to shares of Chinese companies traded on the Hong Kong exchange (H shares which are included in the Hang Seng Index). Many companies dual list.
The long term impact of this change is potentially far greater than the near term impact. China’s “economic footprint” is far larger than it’s representation in global stock indices and in the portfolios of global investors. That is because of the limits of accessibility to the Chinese market. A shares have not been included in the emerging market indices. The stock connect will have important long term implications as this analysis in the FT by a Goldman Sachs researcher explains:

The long-term implications for the Chinese market are tremendous. Foreign ownership of A shares, which stands at less than 5 per cent of free float through the current quota systems, will increase as these stocks are added to global equity indices.
There will also be changes to fund allocations, as China is under-represented in global equity benchmarks. It contributes more than 12 per cent of global GDP and a similar share of world trade, but has a weighting of just over 2 per cent in the MSCI All Country World Index. The inclusion of A shares in global equity benchmarks could trigger as much as $21bn of incremental fund allocations to China by 2016.
In the long term, Stock Connect will integrate A shares with Hong Kong shares to create the world’s second-largest market by value. Size aside, it is a market of increased relevance to global investors who are seeking more exposure to China. The integration of A shares into global indices will allow investors to capture China’s growth more broadly and access opportunities that are only available in domestic markets at present. It will also allow international investors to refine their exposure from large-cap oil, telecom and banks towards sectors offering more focused exposure to domestic consumption such as health care and media.
Stock Connect is a big step forwards in further liberalising China’s A share market, creating unprecedented opportunities for investors worldwide. It is also an important component of China’s market reforms including renminbi internationalisation, which will elevate the country’s standing in the global economy

A Bloomberg article gives an idea of the implications of the addition of A shares to the major emerging markets index 
…A-shares could eventually be a 10 percent weighting in the MSCI Emerging Markets Index, according to MSCI. The index has $1.4 trillion of assets that use it as a benchmark. That means over $100 billion worth of demand could come from being included in that one index, albeit incrementally. 

The impact on the MSCI all world index would be to near double the weighting of China from under 2% to a bit under 4%

ETFs and Stock Connect
There are around half a dozen ETFs that invest in A shares. They have been established in partnership with Hong Kong brokers who have been permitted to buy A shares (qualified foreign institutional investors: QFII) An indication of potential interest in this sector is that over 15 ETFs in this sector are currently under registration but not listed.The largest and most liquid of these is ASHR 
ASHR has traded higher all year and has gotten a further lift as the stock connect date has approached moving up 8% in the last 3 months.

But the underlying index still trades at a p/e of 8.9, a significant discount to the overall emerging markets as well as of course the US. So on both a valuation basis and the long term prospects of large inflows there may well be significant long term opportunities in this sector.

Monday, October 27, 2014

The Most Important Fundamental Factor Than Should Affect High Yield Bond Prices Looks Positive

Ultimately the most important risk factor that should be reflected in high yield bond prices compared to investment grade bonds is the risk of default. Effectively high yield bond investors are being paid higher interest because they are taking higher default risk (i.e. not getting paid back).

On that front the recent report from Moody's rating agency is good news for high yield bond investors. As Barrons reports 

High-Yield Default Rate Down To 1.7%, Should Stay Low – Moody’s

Of all the things that make high-yield bonds prone to the occasional market shock, defaults really aren’t one of them for the moment or for the foreseeable future. A Moody’s report out today says the default rate among U.S. companies with speculative-grade ratings fell to a mere 1.7% at the end of the third quarter. That’s near a six-year low and down from 1.9% a quarter earlier, and it’s well below the market’s 4.4% long-term average since 1993. The Federal Reserve’s ultra-low-rate policies since the financial crisis have enabled even the junkiest of junk-rated companies to refinance debt and issue new debt at uncommonly low interest rates...

Sunday, October 26, 2014

This One is A Little Perplexing


Global turbulence triggers flight from EM equities

Global market turbulence has triggered the biggest outflows from emerging market equities in more than a year.
Investors removed $9bn from stocks and shares across Africa, Latin America, eastern Europe and Asia in October, according to figures from the Washington-based Institute of International Finance, which tracks all cross-border investment into developing countries by non-residents.
But here are returns for October
GMF emerging asia  +2.1% (blue)
VWO overall emerging markets  +1.4%(green)
SPY S+P 500 +1.1% (gold)
One month growth of $100,000 total return
This comparison is interesting flows into emerging markets (top) and price movements for VWO (bottom) seems to be evidence of quite a bit of performance chasing buying high and selling low

Thursday, October 23, 2014

WSJ on The Rebound of the High Yield Bond Market

Junk Bonds Rally

Plunge in Yields on Government Debt Fuels Resurgence

Junk bonds have bounced back after their steepest decline in more than a year as investors once again push aside concerns about overheated prices in pursuit of higher-yielding investments.
Portfolio managers are snapping up speculative-grade debt after a selloff that last week took the yield of a major index above 5% for the first time since the “taper tantrum” of mid-2013. Yields rise when prices fall
Have performance chasing individual investors been selling while professional investors have been buying ? The article notes:
Some $19.2 billion has been withdrawn from U.S.-based high-yield bond funds and exchange-traded funds, according to fund tracker Lipper. The record annual outflow was $7.1 billion in 2005.

Wednesday, October 22, 2014

WSJ on Those One Decision Stocks

I promise I didnt read today's paper yesterday before writing yesterday's post.

From the WSJ

Clouds Darken for America’s Blue-Chip Stocks

Coke, IBM, Others Find Once-Reliable Formulas Leave Them Too Big to Change Direction Quickly

The approach was time-tested and hard to beat: Put your money in blue chips, decades-old companies that could be counted on to perform through thick and thin.
But now the market’s stalwarts are showing their age. Steady has become stagnant as companies once considered among the market’s most reliable post poor growth, quarter after woeful quarter.
The list of stumbling stars is remarkable: AT&T Inc., which on Wednesday lowered its revenue forecastCoca-Cola Co. , whichposted flat salesInternational Business Machines Corp. , whichthrew out its profit forecastWal-Mart Stores Inc., whose same-store sales haven’t increased in the U.S. since 2012; General Electric Co. , whose stock price hasn’t topped $30 since the financial crisis.

There are No One Decision Stocks

Occasionally I peruse what goes on at places like Seeking Alpha where individual investors produce homegrown stock analysis and recommenstations.

A craze over there for a long time has been "dividend growth stocks" often household name companies which are seen as guaranteed to produce a growing stream of income often with the extra imprimatur than Warren Buffett owns them. If the price's temporary market movement and besides there's that dividend.. And of course as the name implies the many individuals posting and reading there think it is relatively easy to generate alpha--better than maket returns on a risk adjusted basis. And since there is no systematic way to track the stock picks generated by the many that write on the site there would be no way to test if anyone actually is successful in doing so.

Earnings reports over the last few days show that investing is seldom if ever so simple.

 I am certainly a believer that price can deviate from value...certainly there is no economic rationale for the price fluctuations we have seen in the overall market of the past couple of weeks. And no doubt many stocks have been knocked down in prices that don't reflect value during that selling.I also do not in any way consider myself a stock picker...

But sometimes price does reflect underlying fundamentals (in the long term it does) and sometimes there are changes that can impact the long term prospects for a company.

I am not a stock picker in my approach but the recent news on IBM, McDonalds and Coke seems to point towards some real change in prospects

For IBM the problems seem most daunting . As Andrew Ross Sorkin reports in the NYT dealbook. IBM may gave known how to keep shareholders happy through dividends and buybacks...but it took its eye off the ball in terms of building the business.

The company’s revenue hasn’t grown in years. Indeed, IBM’s revenue is about the same as it was in 2008.
But all along, IBM has been buying up its own shares as if they were a hot item. Since 2000, IBM spent some $108 billion on its own shares, according to its most recent annual report. It also paid out $30 billion in dividends. To help finance this share-buying spree, IBM loaded up on debt.
While the company spent $138 billion on its shares and dividend payments, it spent just $59 billion on its own business through capital expenditures and $32 billion on acquisitions. (To be fair, Ms. Rometty has been following a goal set by her predecessor, Samuel J. Palmisano, to return $20 a share to stockholders by 2015. Ms. Rometty abandoned it only on Monday.)
All of which is to say that IBM has arguably been spending its money on the wrong things: shareholders, rather than building its own business.
Mr Buffett as Sorkin notes has been a big fan of IBM because of its stock buybacks and dividend growth investors have their eyes on the dividend. But as Buffett in his latest letter to investors  has noted (quoted by Sorkin)
“In the end, the success of our IBM investment will be determined primarily by its future earnings.”
The question for Ms. Rometty is whether she can figure out how to turn around IBM — not just its numbers, but also the company itself.
Both McDondalds (MCD) and Coke (KO) seem to be facing trends in consumer tastes away from their core products. More disturbing to long term investors is that the CEOs of both companies seem to be surprised by the developments and arent too clear on what they will be doing to turn things around.
Here's a great graphic from the WSJ illustrating the dilemma for both

Here is the WSJ on MCD  and here on KO I wont review the ugly details here.

One sign that is not very positive for KO is the CEOs statement that a cost cutting program will be implemented to improve profitability. Given the size of the companies revenues there would have to be massive cuts in expenses to have much impact on earnings. In my experience citing cost cutting to generate a major improvement in earnings is a sign that management doesnt have any real ideas on how to grow the company.

In any case these three examples point out that stock picking is never as simple as it looks, there are no one decisions stocks....and most investors are likely better off with a diversified portfolio of passive ETFs and/or index funds.

Tuesday, October 21, 2014

High Yield Bonds Individual Investors Selling and Professional Investors Buying Again ?

Two recent reports in the FT note the large swings in high yield bond markets, particularly in the high yield bond ETFs which offer an easy way for retail investors and traders to invest in the high yield market. The result is often high volatility and large moves in the prices of these bonds. Recent weeks have shown a large selloff, as occurred in August (graph below is of HYG the largest high yield bond ETF). At that time the selloff driven by retail investors and short term traders pushed prices down to levels that many professional portfolio managers saw as attractive. Many are expressing similar views in reaction to the recent selloff.

Ft Reports:(Oct 17) Junk bonds caught in flight from risk

A sell-off in US stocks this week hit the junk bond markets as investors shunned the riskier securities amid fears about the outlook for the global economy.....
Markets have stabilised after mutual funds and ETFs investing in junk bonds experienced record outflows.

Renewed selling this week has highlighted some of the potential pitfalls faced by holders of the securities – which are sold by companies with fragile balance sheets and a higher probability of default – in a risk-averse environment.
Investors withdrew a further $549m from high-yield funds and ETFs in the week ended October 15. That brings this year’s total outflows to $5.5bn.
However, the junk bond market still has many supporters. Mark Haefele, global chief investment officer at UBS Wealth Management, said the sell-off boosted the attractiveness on the debt.
With spreads on the bonds versus comparable US Treasuries at about 500bp and default rates still expected to remain low, total return on junk bonds could rebound and reach the 5-6 per cent mark in the coming six months, he said.
High-yield market analyst Marty Fridson estimated that, after being extremely overvalued for most of the year, the high-yield market had swung to “moderately undervalued”.
And this month Pimco said fundamentals remained compelling – given its view “for a lower-growth global economy and subdued interest rates over the foreseeable future – an outlook we call the New Neutral – the case for high-yield bonds is a compelling one, both as a tactical and strategic allocation”.

The FT also reported (Oct 20) that fickle retail investors as well as short term traders can produce large swings in the high yield market as they trade in and out of high yield bond ETFs

Embedded Investors turn to junk ETFs amid sell-off

Investors are increasingly turning to exchange traded funds to dip in and out of junk bonds in times of market stress, according to new research from Fitch Ratings....

Such ETFs give investors the ability to dart cheaply and easily in and out of assets that would be more difficult for them to obtain in the so-called “cash market”.
Fitch’s analysis finds that trading activity in junk, or high-yield, bond ETFs increased sharply during 2013’s “taper tantrum” as well as three shorter periods of market volatility in January, July and then in September and October of this year.
The research suggests investors may be using ETFs as a convenient way to express changing views on low-rated corporate debt at a time when liquidity, or ease of trading, in the cash market is believed to have deteriorated....

The amount of junk bonds traded rose to $8.6bn on October 15, up from a daily average this year of $5.6bn, according to Trace data.
The amount of shares traded of BlackRock’s high-yield corporate bond ETF, known as HYG, reached more than $1bn on the same day, up from an average $5.6m.

More on HEDJ Currency Hedged Europe ETF

 I wrote recently about the strategy of investing in Europe through a currency hedged ETF ticker HEDJ

At ETF,COM an analysis makes the following points:’s important not to become mired in euro pessimism. The important issue for tactical ETF asset allocators is to understand the risks and the opportunities. Heightened central bank activity always creates both. From that perspective, consider a more hopeful investment outlook:
  • The eurozone is not an economic island. Contrary to sagging wages in the West, Asian incomes have been on a tear over the last decade. The OECD forecasts that 80 percent of the growth in middle class spending globally through 2030 will be driven by Asia. European consumer companies are ideally positioned to benefit from this trend, ...
  • Valuations matter. The Eurozone has been accused of “turning Japanese.” While it’s true that the new, dismal normal of the eurozone is sluggish growth and more frequent recessionary relapse, the probability of eurozone stock markets following the Japanese experience is extremely low. Why? Simply because valuation is the best predictor of longer-term returns. During Japan’s epic decline, equity valuations started from lofty levels, and debt was concentrated in the corporate sector. Those conditions are not present in the eurozone today....
  • Currency depreciation has gloriously arrived. ...With major policy divergence between the Fed and the ECB, a new era of currency depreciation is upon us (see Hahn’s April 2014 piece on, “Position Now For a Weaker Euro”). Looking toward next year, the benefits of a weaker euro and, potentially less austerity, will feed through into the data and show up as improved profits. 

Sunday, October 19, 2014

Here's An Interesting One

Alibaba IPO..the largest IPO of all time was on September 19
All time high on the S+P 500 September 19

Alibaba closed at a bit under 94 on its first day of closed on Oct 17 at $88.85

Blackrock Also Sees Opportunities in High Yield Bonds

From Blackrock

The Sell-Off Continues, But an Opportunity Appears

October 15, 2014

by Russ Koesterich

of BlackRock

  • In recent weeks, investors have been contending with two trends: anxiety over a change in Fed policy and evidence of a slowdown in the global economy.
  • While global growth is likely to remain below historic norms, it is not collapsing. This suggests that investors should be positioned for a slow growth environment, not another recession.
  • This, in turn, implies taking some selective risk in asset classes that have become less expensive as a result of the sell-off.
  • One example of an asset that warrants another look: U.S. high yield bonds......
At the same time, the current environment presents the opportunity to take another look at asset classes that had sold off and now look more attractive. One such asset class that had come under pressure, but is now looking relatively appealing, is high yield bonds. The yield difference between high yield bonds and higher-quality, lower-yielding U.S. Treasuries (known as the spread), has widened out to the highest level in a year. This indicates high yield bonds offer better value and yields now than just a few weeks ago. Given that corporate America remains strong and default rates low, high yield now looks likely to provide a reasonable level of income relative to the rest of the fixed income market

Saturday, October 18, 2014

WSj Gives some "Market Analysis and Current"Professionals' Forecasts But Also Includes the Greatest Market Forecast of All Time

 From the article
"It comes as little surprise to Wall Street veterans that the selloff began just after leading strategists at the major investment banks had upgraded their year-end stock market forecasts yet again.
In September, 15 top strategists had raised their year-end target for the S&P 500 to an average of 2010. At the end of last year, they were forecasting 1934. But in just over a month since the upgrades, the S&P has instead tumbled from 2000 to 1887."

The author offers this "insight" for investors
If this is merely a regular correction in the course of a regular economic expansion, the answer may be: Not much further.
Corrections of 5% to 20% are a normal part of the stock market. ...
But it is plausible that this correction might be the start of something much worse.
But the aurthor does make not of the most accurate stock market forecast of all time:
Legendary Wall Street mogul J.P. Morgan once asked for a stock-market forecast, confidently predicted that share prices would fluctuate. And he’s been right ever since

Friday, October 17, 2014

What Is Going on with Etf HYLD Advisorshares Short Term High Yield ?

I have written several times about HYLD advisorshares short term high yield  bond fund. I has sold off sharply in the last few weeks even in advance of the recent stock market selloff. It has also underperformed other high yield bond ETFs as of late. However even with the sharp decline in price (see below) the high yield on the fund is relatively low. The ytd total return is -2% and over the past 12 months the fund is +.1%

 The fund is composed of higher yielding bonds which are considered to have higher credit risk. In periods of panic High Yeild bonds will decline more than treasury bonds and investment grade corporate bonds. The recent readjustments at the major fund manager PIMCO likely led to some large sales of bonds in their portfolio and dislocations in the high yield bond market.

However HYLD has performed worse than other ETFs in its category. I would attribute that to 3 factors all of which should be monitored
  • A concentration in holdings in the energy sector at a time of large declines in energy prices.A bloomberg video report mentions specific losses in energy related high yield bonds.
  • Inclusion in the portfolio of some dividend paying stocks mostly in the energy industry into the portfolio.
  • A lower dividend paid in September vs previous months. The manager attributes this to a missed payment on a bond they held. The bond has been sold at a loss and the impact of that on the portfolio is already reflected in price and asset value. Also many of the stocks held in the portfolio pay dividends quarterly so many of those dividends were paid after last month’s dividend payment on the 27 of September.

At present I don’t see much reason for changes in the fund that is part of the strategic bond allocation. The main long term risk factor for this sector is cashflow to pay interest and principal on the bonds. As the fund adjusts its portfolio the yield on its bonds should increase. Of course the fund is not for the faint of heart and investors should weight that in consideration of the decision as to whether to hold the fund, it likely should be only part of a bond allocation that includes investment grade corporate and US treasury bonds.

My communications with the fund manager indicates their expectation(there are no guarantees) that future dividends will be at the rate of previous months which is around $.45 a share which makes the yield on an annual basis of close to 9% annualized based on current prices. I am in contact with the fund manager on a regular basis.

I am monitoring the HYLD carefully particularly around the next dividend date which is in the latter part of the month. Another disappointment with the dividend would be a reason to reassess an allocation to HYLD.

The fund manager Peritus recently published an update on their blog as to theirviews. The article emphasizes that they concentrate on prospects for cashflow in dividends and interest payments rather than short term price performance. They include the following graph from JP Morgan indicating historical and forecasted default rates

They note that recent price movements have moved the spread of high yield over treasury bonds to over 5%. That has likely increased with the fall in treasury yields of the last few days. The manager views the volatility as an opportunity to make new purchases and has added bonds with yields higher than the spread indicated by the indexes.

Pertius expresses confidence in its holdings in the energy sector despire recent large declines in oil prices.