Believers in a new era are more sanguine. "Emerging markets get a lot of performance-chasing," concedes Lawrence Weinman, a Los Angeles investment adviser. "But I do think that beneath the hot money flows there is a growing realization that the relative economic growth in the world just won't be in the States." Weinman says the investors he works with are changing their allocation models to commit more to China, Brazil, India, and other fast-growing markets.
One stock that I have followed closely is a company called Lululemon [LULU 44.13In the introductory part of his book he explains that he will be showing a long term investing, not a trading strategy so I doubt the illustration is presented as an example of how to make "fast money" shorting a stock and buying it back within 24 hours. And of course the beauty of a book like this is that there is no way to track particular recommendations. I also have no opinion of LULU stock ,-0.53 (-1.19%)
], a company that makes athletic apparel for yoga, dance, running, and other activities for men and women. I am shorting the stock, and as I write this chapter, Lululemon is selling for about $26 per share. The stock is down a little more than $1, or 4 percent, in a 24-hour period.
Shares of lululemon athletica (Nasdaq: LULU) have surged more than 6% today following a tout and recommendation from Jim
Cramer on CNBC's Mad Money last night.
The pundit admitted that he may have gotten this one wrong before, pointing out that since reporting what Cramer called a "fabulous, knock-out, thing-of-beauty quarter" on September 10, shares have been on fire (up 28%).
It seems inconsistent to me that the same people that argue the most that the US economy is headed the way of Europe seem to think inflation is coming soon. I think they forget the quantity theory of money equation from the monetary from their macoeconomics 101 class (or never took it) This is despite the fact that many who think inflation is coming around the corner are arch conservatives and the major advocate of this view in recent history was Milton Friedman. The basic equaltion is this:
MV= PT (the Fisher Equation)
Each variable denotes the following:
M = Money Supply
V = Velocity of Circulation (the number of times money changes hands)
P = Average Price Level
T = Volume of Transactions of Goods and Services.... merely raising the money supply by taking interest rates low is not sufficient to cause inflation.
He would look at velocity, the number of times a dollar turns over in a given year, to gauge demand for money. "To keep prices stable, the Fed must see to it that the quantity of money changes in such a way to offset movements in velocity and output," he wrote in this newspaper in 2003.
When velocity is stable, the Fed should keep money growth steady. When velocity swings widely, the Fed shouldn't be passive. Velocity rose sharply from 1990 to 1997 and then plummeted; the Fed offset that and kept inflation stable, he said with praise. Velocity has been falling—which means each dollar the Fed prints has less oomph. POINT: For QE.
...were Friedman alive today, he would balk at the notion that the Fed is out of ammunition. He would remind us that in the early-to-mid-1930s, when the economic environment was far worse and short-term interest rates were near the zero bound, monetary policy easily generated a recovery. Therefore, the Fed could do likewise today.Friedman would likely make the case today for more aggressive monetary action. It is time for "Helicopter Ben" to earn his nickname.
With 10 year tips at a real yield of around 1.1% and then year treasury bonds at around 2.95%, replacing tips with conventional treasuries means that inflation will have to remain below 1.85% over the life of the bond for the position to prove attractive. This is the implied inflation forecast in the treasury/tips yield curve. Historically an implied inflation forecast like this embedded in the treasury/tips differential has been considered a buy rather than a sell signal.for tips.
A combination of low interest rates and growing fears of rising prices enabled the U.S. government to sell inflation-protected Treasury bonds with a negative yield for the first time ever on Monday.That means if inflation doesn't appear as investors expect, they could end up paying to lend money to the government.
The Treasury sold $10 billion of five-year Treasury inflation protected securities, or TIPS, at an auction on Monday with a yield of negative 0.55%.
The negative yield on five-year TIPS owes partly to the fact that nominal five-year Treasurys yield just 1.18%, which is barely higher than consumer price inflation for the past year.The difference between regular Treasury yields and TIPS yields, often called the "breakeven inflation rate," is a rough measure of the market's inflation expectations for the future. That breakeven inflation rate has grown since the Fed made it clear it was going to restart its bond buying, an effort known as quantitative easing.
Paul Vigna discusses Monday's markets and why the yield for TIPS went negative for the first time ever.In the case of five-year TIPS, the negative yield suggests inflation expectations of about
1.70%—hardly runaway inflation, but better than deflation.
The Treasury Department has ramped up TIPS supply since the start of this year, aiming to improve the market's size while getting a better handle on its large debt-sale program. TIPS account for around 7% of the overall Treasury market at $8.48 trillion.
Demand for TIPS has surged in recent weeks as many investors sought to hedge risks related to the Federal Reserve's expected plan to buy bonds, known as quantitative easing. Some fear the plan will stimulate longer-term inflation as it tries to bolster the struggling U.S. economy. The value of TIPS rises along with increases in consumer prices, while inflation erodes the return on conventional bonds.
Top fund managers at Vanguard Group Inc. and Pacific Investment Management Co., two of the world's top five investors of TIPS, expect TIPS sales next year to hit $120 billion. That thought is echoed by Michael Pond, co-head of U.S. rates strategy at Barclays Capital Inc., the world's largest dealer of TIPS.
Sales have already jumped to $76 billion so far this year, up from $58 billion for all of 2009.
"The Treasury would like a viable and liquid TIPS program because having a reasonable sized TIPS issuance program gives the government inflation-fighting credibility, plus a liquid real time measure of inflation expectations," said Mihir Worah, who manages the $18.7 billion Real Return Fund at Newport Beach, Calif.-based Pimco, a unit of Allianz SE.
Kenneth Volpert, who co-manages $32.4 billion in Vanguard Inflation-Protected Securities Fund, the world's largest TIPS fund, said that the more auctions, the more trading and liquidity will be in the market, which will help increase TIPS's allure with a wider audience.
Individual investors are still the main TIPS players. But this year, institutional investors—including foreign central banks, mutual funds and hedge funds—have become more actively involved. The growing market offers both fresh trading opportunities and diversification for portfolios dominated by conventional fixed-income securities.
| from Financial Advisor Magazine my bolds and comment in blue | |||
| Brokers Flee Brokerages As Declining Assets Show Broken Model |
...More than 7,300 brokers have left the four biggest full-service brokerages -- Morgan Stanley Smith Barney, Merrill Lynch, Wells Fargo Advisors and UBS Wealth Management Americas -- from the beginning of 2009 through June, according to financial services research firm Aite Group LLC in Boston and company filings.
Losing Assets
Some brokers have fled internal clashes from mergers during the financial crisis: Bank of America Corp. rescued Merrill Lynch four months before the Smith Barney deal. Others have been recruited by discounters such as Charles Schwab Corp. to join their networks of independent firms.....
While lacking the clout of big brokerages, independent firms boast of one advantage with clients: no conflicts of interest. Brokers at Merrill Lynch, for instance, are pressured to sell funds managed or approved by the firm because they pay a higher commission than those run by other companies, says Paul De Rosa, who worked at the brokerage for 26 years before co-founding his own firm, Gateway Advisory LLC, in Westfield, N.J., in January.
De Rosa set up Gateway Advisory as a registered investment advisor, which has a fiduciary duty to put its clients’ financial interest first when giving advice, according to U.S. Securities and Exchange Commission rules. RIA firms must also disclose conflicts. To avoid them, RIAs like Gateway typically shun commissions and charge a flat fee of less than 1% of assets under management regardless of the funds they recommend.
Emerging nations: a beacon of opportunity
By Jerome Booth
Published: October 25 2010 19:19 | Last updated: October 25 2010 19:19
If you are looking for a market bubble do not look to emerging markets. The US and Europe remain a huge super-bubble. Emerging markets, by contrast, are safe. Putting one’s head in the sand and denying this reality has the attraction of plentiful company, but constitutes the opposite of prudence. Remember, lemmings also like to crowd together and the collective name for them is a “suicide”.
Unlike Europe and the US, emerging markets do not have a credit crunch, in essence a multi-year, very painful, deleveraging – that is, wealth destruction. But if you have not experienced 30 years of rising financial leverage, the past 10 to excess, you cannot get a credit crunch. Emerging markets are in a very different cycle to the developed world now, with inflationary not deflationary pressures....
although I have a preference for emerging markets equities over debt I share some of the reasoning here:
The size of the emerging debt market is thus driven by demand, which is growing in an iterative way because of behavioural constraints. I am a big believer in GDP weighting – cap-weighted indices of publicly listed securities (typically misnamed “investible”) are a very poor representation of global investment opportunities. A better measure of global economic activity – and hence the full universe of investment opportunities – is past income – GDP, and that implies 50 per cent allocations to emerging markets.
Also the largest problem in the institutional investment industry arguably is misaligned incentives, which causes massive herding. It is the combination of these two deficiencies, combined with prejudice about emerging markets and inexcusably deficient concepts of risk and uncertainty that lead to gradual allocation.
A pension fund manager told me recently: yes, he agreed that GDP weighting was sensible and he was massively underweight, and yes, the industry suffered from herding where everyone was watching their peers, but he still had to be in the herd, though he could be at the edge of the herd. The result is that institutional investors invest a fraction of what they think is appropriate in emerging debt until their peers catch up and the result is gradual allocation over a period of many years. This is currently happening with many different types of investor peer groups all over the globe. Hence we have a gradual structural shift, not a temporary reversible move.
Kaminsky brings more than two decades of experience to his low-risk, high-return system, demystifying Wall Street for novice and seasoned investors alike. Between 1999 and 2008, Kaminsky’s team at Neuberger Berman grew record-breaking returns far above the S&P benchmark. And they didn’t do it by magic. They did it by constructing a specificstrategy and sticking to it, regardless of the investing climate. It is a strategy that anyone can learn and apply, step-by-step, in any market.
With Kaminsky’s expert guidance, you’ll learn how to be more disciplined and vigilant with your investments, maximizing your returns in a minimum amount of time. You’ll not only make money in most markets, but you’ll lose much less money when those around you are losing their shirts. And you’ll be able to strengthen and protect your assets—particularly in the slow-growth decade ahead—with the confidence and know-how that drives Wall Street’s smartest investors to the top of their game.
Yes, you can beat the market—when you’re Smarter Than the Street.
Biographical note
Gary Kaminsky is the cohost of CNBC’s "The
Strategy Session" and has been one of Wall Street’s
savviest money managers for the last two decades.
He worked at Neuberger Berman, LLC, where Team
Kaminsky’s assets grew from $2 billion to $13
billion during Wall Street’s lost decade.
While investors may be engaging in a great deal of performance chasing here there may be some good rationales for these flows, provided they represent a long term change in asset allocation rather than simply a short term portfolio shift. US investors both institutional and individual have long showed a "home bias" keeping too much of their investments in US stocks. US stocks make up around 44% of world market capitalization so those investing in only US stocks are missing a measure of diversification. This is the case even taking into account that many of the largest US corporations generate much of their income from abroad.Fund managers have regained risk appetite, but still lack conviction about positive momentum in U.S. stocks, according to survey results released Tuesday by Bank of America Merrill Lynch.
The survey found that asset manager risk tolerance jumped this month by the biggest margin since April 2009, with the proportion of fund managers "overweight" on stocks tripling to 27%, from just 10% in September. However, the drive for stocks is being driven by global emerging markets. Nearly half of asset managers are sitting heavy in emerging-market equities, according to the survey.
Among diversified global equity ETFs, which primarily invest worldwide equity securities but can include shares of U.S. companies, the Vanguard Emerging Markets Stock ETF has expanded the most. Inflows into the ETF have raised total assets by $15.7 billion, or 39%, this year. The iShares MSCI Emerging Markets Index Fund has taken in close to $4 billion, or 8.2%, in assets. Meanwhile, the SPDR S&P 500 ETF, a fund that mirrors the U.S. benchmark index, has shed $5.6 billion in funds, or 6.7% in assets.
The trend has to do with outperformance of non-U.S. stocks, but also is "a recognition of what came to light during the 2008 financial crisis, that the financial system in developed countries is not necessarily any better or less risky than in emerging markets," said Gregg Wolper, senior analyst at Morningstar. "Add in concerns with dollar weakness and it's reason to look elsewhere."
An Alternative to Market Capitalization Weighted Indices for Global Markets
The MSCI GDP Weighted Indices are designed to reflect the size of a country’s economy rather than the size of its equity market by using country weights based on a country’s gross domestic product (GDP). Some investment professionals prefer to weight countries in a regional index by GDP rather than by market capitalization because:
Largest Absolute Weight Difference Between the Standard Market Capitalization Weighted MSCI ACWI and its GDP-Weighted Equivalent
- GDP figures tend to be more stable over time compared to equity markets’ performance-related peaks and troughs
- GDP weighted asset allocation tends to have higher exposure to countries with above average economic growth, such as emerging markets
- GDP weighted indices may underweight countries with relatively high valuation, compared to market-cap weight indices.
Data as of June 1, 2009
Country Market-cap Weighted GDP Weighted Weight Difference(GDP-Market Cap) China 2.39% 9.26% 6.87% Germany 2.95% 6.31% 3.36% Italy 1.08% 3.99% 2.91% Russia 0.83% 2.32% 1.49% Spain 1.31% 2.75% 1.44% India 1.00% 2.42% 1.42% Switzerland 2.93% 0.93% -2.01% Canada 4.57% 2.52% -2.05% United Kingdom 8.11% 4.10% -4.01% United States 44.39% 26.76% -17.63%
The largest overweight countries in the MSCI ACWI GDP Weighted Index are classified as emerging markets, such as China, Brazil, India, Russia and Mexico, which are some of the fastest growing economies but have market capitalization weights that are smaller than their economic weights.
However, the list of over weighted countries also includes some developed markets, such as Germany and Italy.
The US and the UK have the largest disparity in size between their substantial market cap weights and their smaller economic weights.
Key Benefits
- Alternative Approach to Capturing the Country Factor
- Relevant Benchmark for GDP Weighted Asset Allocation
- Broad Country Coverage
October 20, 2010
An Investment for the Experienced
By JOHN F. WASIK
DEPENDING on whom you talk to, structured products are either clever ways of hedging specific portfolio risks or another demon from Wall Street.
As vehicles that use derivatives to protect or enhance an underlying stock, bond or index, structured products are sold by nearly every major bank and brokerage house — and more than $34 billion of them were sold in the United States in 2009.
Yet they are not for investors who don’t fully understand them, because they are riddled with complexity, are mostly opaque and have lost money for investors in the past.
“These are complicated investments, and people should know what they’re buying,” said Tom Balcom, a fee-only adviser with Ibis Wealth Management in Boca Raton, Fla. He said he had “yet to put more than 35 percent of a client’s portfolio in structured products,” adding, “If you don’t understand what these products are, stay away from them.”
Sean O’Toole, 43, who owns and operates an event-marketing agency in Fort Lauderdale, Fla., worked with Mr. Balcom to add structured products to his portfolio.seems Mr. Balcom is ok with his clients buying structured products for less than 35% of their portfolios
“I’m not betting the farm,” Mr. O’Toole said. “I like diversification. I’d rather be over-conservative if we see another double dip.”
An ultracautious investor concerned about the prospect of another huge stock market decline, Mr. O’Toole has two-thirds of his portfolio in cash and one-third managed by Ibis in structured products like buffered return enhanced notes, which put a cap on the potential gain in return for protection against a market decline. He pays no commission for the vehicles and a 1 percent annual asset management fee to Mr. Balcom.(of course the large markups on these products is not visible to the investor)
Before Mr. O’Toole bought structured products, he had experience with options strategies, an essential prerequisite for anyone interested in structured products.He should have kept to those liquid transparent options imo.
While structured products are not household names, they are hot sellers, and sales growth is estimated to be about 24 percent this year, according to structuredretailproducts.com, a service that monitors the industry.
Banks continue to market them aggressively as well. Structured note offerings are up 58 percent this year (through August), according to Bloomberg. The global market for these vehicles exceeds $1.6 trillion.could that be because institutional investors burned in the past by these investments have been shying away ?After all it is much easier to sell a big structure note to an institutional investor (as in the good old days) then to sell large numbers of small ones to individuals.
But the numerous disadvantages of structured products make them ill-suited for investors who want low-cost, government-guaranteed or liquid investments.
Once you invest your money, you are essentially locked in for the duration of the contract. Brokers may say they can buy them back, but often little or no secondary market exists for many of them. They may charge you another commission to do so and not guarantee the price you initially paid. Despite their many promises of principal or downside protection, investors can still lose money. Investors in principal-protected notes issued by Lehman Brothers, which filed for the largest bankruptcy in history on September 2008, found out the hard way that they held unsecured Lehman debt. Their principal was not protected, and most lost all of their investment.
Structured products have been linked to an estimated $1 billion in investor losses in the Lehman notes alone. UBS, the Swiss bank and brokerage firm, was one of the largest sellers of the notes and is being sued by investors and regulators in the United States and Britain...
Other structured investment vehicles like reverse convertibles and equity-linked notes are also the subjects of state investigations and investor lawsuits.
Don’t be cowed by the daunting calculus employed to hedge risk and produce returns. A competent adviser should be able to explain — and clearly illustrate — all risks (credit, market and liquidity), conflicts and expenses like commissions, underwriting fees, bid/ask spreads and embedded derivatives costs.....
If you don’t get a clear explanation or are uncomfortable tying up your assets in a virtually illiquid product, move on. These products don’t lend themselves to comparison and you can’t monitor them like you would a stock or mutual fund.
Most structured notes are “a hot mess,” said Janet Tavakoli, president of Tavakoli Structured Finance in Chicago and author of several books about them. “Most professionals can’t analyze them. When I have done it, I find these notes are loaded with hidden fees and hidden risks.”
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| EDV 25+ Yr Tresury etf |
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| FIVZ 5-7 Year Treasury ETF |
