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Wednesday, April 29, 2015

What Goes Around Comes Around...and the Patient Long Term Investor Gets Rewarded

Seems in the fickle world of active managers performance chasing is alive and well. Long term asset allocating investors will get a lift as their allocation to Europe performs well and will be trimming their positions rebalancing  as the performance chasers pile in. Via Bloomberg

Europe gets the nod as the best place to invest for the first time since at least 2009 in a Bloomberg survey of financial professionals, unseating the U.S.
Thirty-five percent of those surveyed in the Bloomberg Markets Global Poll said the euro zone would be among the one or two markets offering investors the best opportunities over the next 12 months.
It was the first time that Europe came out on top since the survey of traders, analysts, money managers and executives who are Bloomberg customers began asking that question in October 2009. The U.S., with a 33 percent share, fell to second, the first time it’s not been No. 1 since November 2010. 
Here is a one year chart of VGK, the Europe ETF vs SPY the S+P 500..think there is some performance chasing going on by those surveyed above ?
Total return year to date: Europe 9.9% (VGK) S+P 500 3.3%
The article notes the following:
Russia, Brazil and China were seen as markets to avoid over the next 12 months, with investors saying the Chinese economy is in the worst shape in two and a half years.
Looking at the chart below of FXI the China ETF vs the S+P 500 I am not so sure the next survey will have the same results. FXI is up 26.6% year to date.

Thursday, April 23, 2015

Should Dual US/Israeli/Citizens move their investment accounts to Israel ?

There are 2 fundamental principles to investments which are essential to successful long term success: controlling taxes and expenses. Based on those 2 criteria alone the case for US/Israel dual citizens maintaining their investment accounts with US brokerage firms is a very strong one.

Beware the dreaded PFIC
PFIC Passive Foreign Investment Company is the biggest potential pitfall for US Citizens investing in non US mutual funds. A summary of the PFIC rules is here more information is available on the IRS website.

The bottom line for investors is that foreign mutual funds including Israeli funds and  ETNS (teudat sal) fall in the category of PFICs. As a consequence investors face far higher taxes and more complicated reporting requirements when investing in Israeli mutual funds. This is the case even if the Israeli fund invests in the same strategy as the alternative US fund.

The tax paid on the Israeli mutual fund that is a PFIC can be more than twice the tax compared to US  funds which are not PFICs. Also investments in PFICs require additional reporting to the IRS which may create additional expenses.

The lowest cost investment alternative to create a diversified portfolio is through US based exchange traded funds (ETFs). These can be purchased in a self directed account at minimal cost at a discount brokerage firm or through a managed account of ETFs offered through investment advisors/asset managers.

Can I purchase US exchange traded funds in an Israeli account ?  Yes, one can purchase US ETFs in Israeli brokerage accounts or find an asset manager that manages a portfolio of US exchange traded funds. However, not all Israeli brokerage firms will open accounts for dual US/Israeli citizens because of the paperwork/reporting requirements.

Generally speaking the expenses associated with investment accounts and asset management are significantly higher in Israel than the United States. There ae a few discount brokers in Israel that do have fees and commissions lower than those charged by the major banks’ investment departments asset management services are generally higher in Israel than can be found in the United Staes..

Individual stocks and bonds purchased outside of the US do not create PFIC issues.

As a dual US/Israeli citizen can I open a US brokerage account ? Yes, although there are many US brokerage accounts that are no longer interested in opening accounts for US citizens residing abroad there are others that will. However, many US mutual funds will not accept investments from non US residents…that is not the case for exchange traded funds.

Special Tax Status for New Immigrants to Israel (Olim Chadashim)
New immigrants are exempt for ten years from Israeli taxes on foreign passive (investment) income and capital gains including those on assets acquired after the date of immigration. Such income of course is subject to US taxes. Returning Israelis that fall into the category of “toshav chozair” receive such beneftits for ten years.
Additionally proper tax sensitive management of the account can reduce potential Israeli tax liabilities at the end of that ten year period.  This exemption gives a significant tax advantage Israeli tax liabilities at the end of the exemption period.

(None of this is to be considered authoritative tax advice or recommendation of specific securities or investment strategies you should consult the appropriate professional(s) for advice taking into consideration your specific circumstances)
Mr. Weinman offers a full range of services related to investments for dual US/Israeli citizens and can be reached at

Saturday, April 18, 2015

If You Think These Two News Items are Unrelated....You Probably Haven't Worked in The Financial markets


Bloomberg Terminals Suffer Widespread Failures

The bigger fear on European trading desks was that regulators may determine that Bloomberg’s dominance is actually a systemic risk, in need of some regulatory fix, on top of other recent technology additions.
“We recognize that Bloomberg is a monopoly, and we probably lean on them too hard, but it’s a hard nut to crack,” the head of a credit trading desk at a large bank said on Friday, speaking on the condition of anonymity.....
One sales trader, based in Geneva, said his company had a few dozen Bloomberg terminals and used them mainly for buying and sellingexchange-traded funds and credit and for research. None of the firm’s terminals were able to connect for about 2 hours 20 minutes but worked later in the day, he said.
When asked what problems the failure created, the trader said: “Problems? Simple: No prices. Nothing. So you can’t do anything at all.”
He said that simply switching to a Thomson Reuters terminal was not an option for some. “People are used to going through ’Berg and so it’s confusing for a lot of us who never use Reuters,” he said.
It was hard to immediately determine the failure’s effect on specific financial markets. Some traders said that the failure encouraged the negative sentiment that pushed stock prices around the world lower.


Friday, April 17, 2015

The Best, Most Honest Explanation I Have Ever Seen in the WSJ (or anywhere else in the financial media) About Short Term Market Movements

WSJ money beat today

"Every once in a while, equity markets lurch, leaving investors stumped. Where’s the kerbstone that tripped them up?
Sometimes there isn’t one. The market just trod on its own shoelaces. That could well be what happened in Europe on Friday morning as Europe’s leading indices dropped between 1% and 2% amid a dearth of the sort of news that generally triggers big market moves. And Germany’s 10-year bond yields lurched ever closer to negative territory. U.S. stock futures were down 0.67% at 7.35 a.m. EDT."

On the other hand you can find this at cnbc  "explaining" today's move

Tuesday, April 14, 2015

All Emerging Markets are Not the Same

I have questioned several times in posts on emerging markets that the "asset class" is not a very useful one as it includes markets with extremely divergent characteristics.

The most important distinction in the emerging markets groups is between Latin American and Asia. Asian economies have strong current accounts positions many of them in surpluses, benefit from lower commodity prices, and have displayed strong economic growth. While the Latin American countries the largest of which are Brazil and Mexico are dependent on commodity exports and have weaker national accounts.

The recent run up in shares in China and Hong Kong has further increased the performance differential between Emerging Asia, total Emerging Market Indices and Latin America.. Over the last  3 years Emerging Asia (ticker GMF) has produced a total return of 36.9%, total emerging markets 11.3% and Latin America (ticker ILF) -28%

Graph below shows growth of $100,000

3 Year Returns Growth of $100,000 Emerging Asia (gold) Overall Emerging Markets (blue) and Latin America (green)

What about the long term future ? A recent bloomberg article reports on longer term projections for global economic growth. The forecasts see a growing share of global GDP for Asia most notably China and India. Other Asian economies are expected to grow strongly while growth in Latin America will remain slow.

Get ready for a new economic order. In the world 15 years from now, the U.S. will be far less dominant, several emerging markets will catapult into prominence, and some of the largest European economies will be slipping behind.  
That's according to the U.S. Department of Agriculture's latest macroeconomic projections that go out to 2030, displayed in the chart below. The U.S. will just barely remain the global leader, with $24.8 trillion in annual output. The gray bar represents the $16.8 trillion gross domestic product projected for 2015, and the green bar shows how much bigger the economy is expected to be 15 years from now. The country, worth 25 percent of the world economy in 2006 and 23 percent in 2015, will see its share decline to 20 percent. 
China's GDP will grow to more than twice its size today, helping the Asian powerhouse to almost entirely close its gap with the U.S. 

India, ranked eighth for 2015, will climb past Brazil, the United Kingdom, France, Germany and Japan to take third place in the world ranking. The International Monetary Fund calls India "the bright spot in the global landscape." The country will have the largest workforce in the world within the next 15 years, the IMF notes, and among the youngest.

Monday, April 6, 2015

Performance Chasers`: Individual Investors...and Many of Their Advisors Too

Etf,com has reported in flows in and out of ETFs

The flows into ETFs over good evidence that investors are performance chasers and because of this they seldom get the returns of the asset classes they invest in...because they buy high and sell low.
This is likely the case with the currency hedged European stock ETFs.. HEDJ the fund that was top on the inflow chart below more than doubled its assets under management during the quarter. HEDJ has gained 23.6% over the past 12 months and 20.1% year to date. This means less than half the investors in HEDJ have captured all of these returns. Whatever the future outlook for HEDJ these investors have missed a good part if not most of the returns for at least the rest of the year.

And when the trend reverses,if past behavior is indicative of behavior investor in the past, they will sell out at best with only a portion of the long term returns,if not sell at a loss.

Top Gainers Q1 2015
TickerFundIssuerFlows ($M)AUM ($M)Turnover
HEDJWisdomTree Europe Hedged EquityWisdomTree10,141.7117,313.7822,382.36
DBEFDeutsche X-trackers MSCI EAFE Hedged Equity ETFDeutsche Bank5,109.657,235.478,018.95
VTIVanguard Total Stock MarketVanguard3,180.6554,752.3120,703.77
VOOVanguard S&P 500Vanguard2,971.2930,637.0322,959.84
LQDiShares iBoxx $ Investment Grade Corporate BondBlackRock2,728.9322,417.5119,319.74
DXJWisdomTree Japan Hedged EquityWisdomTree2,482.3115,782.4918,712.83
HYGiShares iBoxx $ High Yield Corporate BondBlackRock2,149.8216,711.8439,471.40
IEFAiShares Core MSCI EAFEBlackRock2,034.025,418.034,306.25
HEFAiShares Currency Hedged MSCI EAFEBlackRock1,991.482,123.692,362.75
USOUnited States OilUS Commodity Funds1,763.622,792.2839,175.59

 The market chasing of investors can be seen in the flows into international equities overall. Particularly disconcerting to individual investors is the indication that not only do individual investors follow the unwise strategy of performance chasing...if they pay an investment advisor he seems likely to be doing exactly the same thing, Quite ironic since the benefit of using an advisor should be to prevent the behavior so prevalent among individual investors...buying high and selling low.:
Allocation Shift?
International equities gathered about $42.5 billion in the first quarter, nearly half of it in currency-hedged strategies.

At the same time, U.S. equities recorded net outflows of more than $11 billion. The least-popular fund was the SPDR S&P 500 ETF (SPY | A-98), which bled almost $31 billion in assets. While SPY is a trading vehicle, and its flows are often quite exaggerated relative to the rest of the market, it nonetheless is something of a weather vane when it comes to reading investor sentiment.

Indeed, many financial advisors are moving to reallocate away from U.S. stocks following more than a decade of U.S. outperformance relative to a variety of foreign markets, not least Europe's.

Biggest Losers Q1 2015
TickerFundIssuerFlowsAUM ($M)Turnover
SPYSPDR S&P 500SSgA-30,958.95185,413.711,700,430.71
EEMiShares MSCI Emerging MarketsBlackRock-3,166.1429,574.92135,500.34
XLFFinancial Select SPDRSSgA-2,653.3918,043.4553,904.75
QQQPowerShares QQQInvesco PowerShares-2,651.4838,600.08210,737.84
IVViShares Core S&P 500BlackRock-2,362.6068,742.6160,847.35
XLPConsumer Staples Select SPDRSSgA-1,754.248,261.7826,904.59
IYWiShares U.S. TechnologyBlackRock-1,688.953,000.434,544.27
XLIIndustrial Select SPDRSSgA-1,389.787,763.8135,897.54
ACWIiShares MSCI ACWIBlackRock-1,258.276,311.557,079.25
IYFiShares U.S. FinancialsBlackRock-1,231.981,255.043,398.67

Saturday, April 4, 2015

Financial Markets First Quarter 2015 Review

US equity generated minimal returns for the first quarter.  Non US markets however showed the highest performance of recent years benefitting from the impact of a stronger US dollar. In the US bond markets, the absence of any change in interest rate policy meant continued strong performance of longer term bonds while investment grade and high yield corporate bonds outperformed treasuries

US Equity Markets
After several years of extremely strong performance despite high valuations, US stocks took a breather during the first quarter of 2015. Although interest rates did not rise considerably sectors most sensitive to interest rates had declines. Most notable were utilities which attracted investors as “bond equivalents” and reached their highest valuations in history. Those yield seeking investors found that stocks are not bonds and saw a decline of 4.5% in the quarter.
After a period of underperformance, small cap stocks outperformed large caps. This is attributable to the high dependence of large cap multinational corporations on sales abroad which have declined in dollar terms as the dollar has strengthened. Small cap companies tend to be domestically oriented, hence the better performance. Those multinationals have just begun to report quarterly earnings affected by the recent sharp fall in the Euro meaning the factors affecting the small cap/large cap performance differential has a high likelihood of continuing.
Selected US Stock ETFs (Total Return)
1Q 2015
1 year
3 year
S+P 500
Total US Stock Market
US Large Cap Value
US Small Cap Value

Non US Markets
The patient investors who maintained their asset allocation to non US stocks have begun to be rewarded as the lower valuation non US stocks have begun to outperform.
Developed market stocks showed the best performance. European corporations have seen the benefits of a lower Euro which makes exports more competitive. Signs of economic recovery, aided by exports and lower interest rates have pointed towards a bottoming of the recessionary conditions in most of Europe
 Despite the ongoing crisis in Greece there has been little or no spillover to the other “PIIGS” (Portugal, Italy, Ireland (Greece) and Spain)...another broad generalization that was more fashion than substance. Although a grexit …Greek exit from the Euro remains a possibility few see it as a likely scenario for the others in the group.
The most dramatic development in the developed markets has certainly been the Euro which fell over 10% during the first quarter. The fundamental economic factor behind this move is the aggressive monetary easing by the European Central Bank while the US has ended its easing policy and will—sometime—begin raising rates. The interest rate differential in favor of the US dollar is likely to continue and serve as a factor favoring the dollar vs the Euro.
 Additionally longer term flows such as changed in the composition of foreign currency reserves by Central Banks, hedging activity by US multinational corporations, and equity investor flows all work in favor of the dollar vs the Euro although short term reversals of the long term trend are certainly to be anticipated.
European equities had a strong performance in Euro terms. But the combination of stronger European equity markets and a weaker dollar provided extremely favorable environment for those who combined European stock positions with a hedge against a weaker dollar . The hedged European stock returned 18.3% for the quarter vs. 5.5% for the unhedged
Emerging Markets
Emerging markets also benefited from investors seeking stocks at lower valuations than US stocks. Stronger economic performance and simulative monetary politics in China helped as well. Even at “slower “rate of economic growth of 7% it still represents a large differential to the US, Europe and Japan. Emerging markets tend to attract a large amount of performance chasing investors so with the markets in an early stage of recovery flows could continue into these stocks.
I have written before that the categories “emerging markets” and BRICS (Brazil Russia India China) are not very useful investing categories.  Latin Americas largest market: Brazil along with Russia, Mexico and Venezuela are extremely dependent on oil export and are thus hard hit by the oil price drops. The stronger dollar/weaker local currency combination hurts these countries because so much of the government and private sector debt is denominated in dollars.
Thus it is not surprising to see the gaps in equity performance with overall emerging markets up .7% over the past year, overall emerging markets +.7% and Latin America unchanged.
Selected International Stock ETFs
1Q 2015
1 year
3 year
Total World Ex US
Total Developed Markets
Europe Unhedged
Europe Hedged
Total Emerging Markets
Emerging Asia

US Credit Markets
Although the Federal Reserve has ended its quantitative easing policy and has indicated next move in interest rates will be higher the timing of that rate rise and its part remains uncertain. Longer term treasury bonds remain volatile but have still outperformed short term bonds. Long term Investors might not see ten year treasury bonds at yield of 2% or below as very attractive but plenty of short term players are willing to reap profits from short term declines in interest rates of by leveraging their positions by borrowing short term and buying long term bonds.
The selloff in high yield bonds ended during the quarter as oil prices, although lower, stabilized. Investors benefitted and captured the yield differential. Investment grade bond investors also benefited from the yield differential between such bonds and treasuries.
1Q 2015
1 year
3 year
Total US Bond Market
Short Term Corporate Bonds
Short Term US Govt Bonds
Short Term High Yield Bonds
Long Term US Government Bonds