Asset Allocation Strategies

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>>> Gundlach: We're running our economy 'like we're not interested in maintaining global reserve currency status'


Yahoo Finance

Julia La Roche

August 24, 2021


https://finance.yahoo.com/news/jeffrey-gundlach-view-on-the-us-dollar-decline-154813067.html


Billionaire bond investor Jeffrey Gundlach, the founder and CEO of $137 billion DoubleLine Capital, says his number one conviction over several years is that the U.S. dollar will decline as a consequence of current economic policies, resulting in the U.S. losing its sole reserve currency status.

"My number one conviction looking forward a number of years — I'm not talking about the next few months at all, I'm talking about several years — is that the dollar is going to go down," Gundlach told Yahoo Finance Live in an exclusive interview on Monday afternoon.

It's Gundlach's view that the "places to be in the long-term" are emerging markets and "non-U.S entities." While Gundlach has already rotated into European equities, the investor expects to "aggressively rotate into emerging markets," but notes it's "too early for that right now."

"So the dollar is going down is another reason why ultimately — we touched on gold — I think ultimately gold is going to go a lot higher, but it's really in hibernation right now," he added.

The 61-year-old "Bond King" later highlighted that the United States' status of the global reserve currency is in jeopardy.

"[The] U.S. has enjoyed the status of sole reserve currency globally for decades, and it's an incredible benefit," Gundlach said.

He pointed that in the aftermath of the global coronavirus pandemic and lockdowns, China's economy has been "the strongest economy in the world by far." While U.S. GDP has "bounced back with a lot of consumption, a lot of that consumption is going to China," he added.

"That's one of the reasons why China has such a strong economy. So, what we're seeing in the United States is starting to fall behind in economic growth. That's not a new thing. That's been going on for a generation, the U.S. falling behind," Gundlach said.

The investor also pointed out that estimates for when China's economy will be the largest "keep getting pulled forward," noting some economists' projections show China's economy will surpass the U.S. by 2028.

"We have debt-to-GDP that is fueling the majority of our so-called economic growth. So, is it really economic growth when you borrow money or print money, send checks to people who turn around and buy goods on Amazon in addition to maybe paying down debt and speculating and these goods come in from China?" Gundlach said.

He added: "We're running our economy in a way that is almost like we're not interested in maintaining global reserve currency status or the largest military or global call it superiority or control. As long as we continue to run these policies, and we're running them more and more aggressively, we're not pulling back on them in any way, we are looking at a road map that is clearly headed towards the U.S. losing its sole reserve currency status."

According to Gundlach, with the current economic policies in place, it's "almost certain" the U.S. dollar should be going down.

"The value of the dollar is so high because we enjoy global reserve currency status, and we don't really respect it enough. We take it for granted, I guess. We seem to take a lot of things for granted these days in the United States relative to how we thought about things in prior decades and generations. And, I believe we are setting the stage for us to, unfortunately… experience the consequences of our actions the way we have been running a non-serious economic program now, really since 1980, but it's really accelerated so much in the past decade and there's no signs of it abetting," he said.

It's Gundlach's view that the U.S. dollar has "already peaked" when the U.S. Dollar Index hit 103.

"I believe the dollar will take out the lows of the past down cycle. The dollar has been in a series of declining highs for decades — it goes back to the '80s. For that reason, I think when we get to the next break to the lower level, the dollar will go past the most recent low of around 80 and even take out the low of 70. So, I think there's easily 25% downside in the U.S. dollar."

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>>> Fed Minutes Show Most Officials See Taper Starting This Year


Bloomberg

By Craig Torres

August 18, 2021


https://www.bloomberg.com/news/articles/2021-08-18/fed-minutes-show-most-officials-see-inflation-goal-in-hand


Most participants saw standard on price stability achieved

Fed releases minutes of its policy meeting held in late July


Most Federal Reserve officials agreed last month they could start slowing the pace of bond purchases later this year, judging that enough progress had been made toward their inflation goal, while gains had been made toward their employment objective.

“Various participants commented that economic and financial conditions would likely warrant a reduction in coming months,” minutes of the Federal Open Market Committee’s July 27-28 gathering, released Wednesday, said. “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year.”

The minutes also showed that most participants “judged that it could be appropriate to start reducing the pace of asset purchases this year.”

U.S. central bankers next meet September 21-22. While the record shows that they don’t yet have agreement on the timing or pace of tapering asset purchases, most had reached consensus on keeping the composition of any reduction in Treasury and mortgage-backed securities purchases proportional.

“The FOMC minutes again reveal a wide spread of opinion on the question of the timing, speed and structure of the upcoming tapering,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd. said after the release.

The minutes showed split views on the durability of faster inflation as well as on key areas of policy making.

Inflation Debate

While the recent surge in consumer prices has grabbed policy makers’ attention and prompted wide agreement on pulling back on asset purchases, “several” meeting participants were still worried that inflation could slump back into the pre-pandemic trend of running below the 2% target.

On the labor front, officials saw progress -- yet the late-July discussion also showed uncertainty over both near- and medium-term labor market slack, given the job destruction tied to the pandemic.

Policy choices going forward are also likely to be influenced by new appointees to the Fed Board as the Biden administration moves to fill as many as four positions by early 2022.

“Several participants emphasized that employment remained well below its pre-pandemic level and that a robust labor market, supported by a continuation of accommodative monetary policy, would allow further progress toward” labor-market goals, the minutes said. “Several participants also commented that price increases concentrated in a small number of categories were unlikely to change underlying inflation dynamics sufficiently to overcome the possibility of a persistent downward bias in inflation.”

Stocks Slide

Treasuries advanced after the release, though remained down for the session, with 10-year yields at 1.28% as of 3:47 p.m. in New York, compared with about 1.29% before the release. The S&P 500 Index of equities slumped 0.8%.

Fed policy makers have differed publicly in the weeks since the meeting over when the central bank should start tapering, with some, like Minneapolis Fed President Neel Kashkari, wanting to a see a “few more” strong jobs reports and others, such as Boston Fed President Eric Rosengren, saying he’s open to announcing plans for a reduction at the next meeting if employment figures come in well.

“Many participants saw potential benefits” in ending the Fed’s bond buying before targets were hit for raising interest rates, the minutes showed. Policy makers also discussed the importance of disassociating moves on asset purchases from a decision on an eventual rate hike.

St. Louis Fed President James Bullard said Wednesday that he would like to see the tapering of the asset-purchase program done by the first quarter of 2022 -- a much faster pace than prior wind-downs.

Fed’s Kashkari Wants ‘Few More’ Strong Job Reports Before Taper

On the composition of bond-buying purchases, “most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS proportionally.”

The minutes indicate that officials still see room for labor-market improvement. Job gains have been strong, averaging 617,000 a month through July. The unemployment rate stood at 5.4% last month, but broader measures still show slack.

The employment-to-population ratio for workers between 25 and 54 years old was 77.8% last month compared to 80.5% at the start of 2020, while Hispanic and Black unemployment rates remain high at 6.6% and 8.2%.

The recovery has been strong with both supply and demand imbalances pushing prices higher. The Fed’s inflation indicator rose at a 4% pace for the 12 months ending June compared with the Fed’s 2% target.

The minutes showed that “most participants” remarked that their standard for progress had been achieved with respect to the price stability goal.

Fed officials cut their benchmark lending rate to zero in March 2020 and announced they would buy $200 billion of agency mortgage-backed securities and $500 billion of Treasuries to support market functioning. By December 2020, they realigned their guidance saying they would purchase $80 billion a month in Treasuries and $40 billion a month on mortgage securities “until substantial further progress has been made toward its maximum employment and price stability goals.”

The asset purchases have lowered longer-term interest rates and helped fuel a rise in housing prices and other financial assets, with one-month gains in home price indices breaking records while stock indexes trade around record highs.

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Rickards - >>> A Disaster


BY JAMES RICKARDS

AUGUST 2, 2021


https://dailyreckoning.com/a-disaster/


A Disaster


Last week, the U.S. Commerce Department reported second-quarter GDP for the U.S. rose at a 6.5% annualized rate.

From 2009 to 2019 (the recovery from the 2008 global financial crisis), the average annual growth in GDP for the U.S. was 2.2%. So, in comparison with the previous recovery, 6.5% seems like exceptionally strong growth.

Of course, champagne corks were flying at The New York Times and other mainstream media outlets because Q2 output has regained 2019 levels. But the recession was over in April 2020. It’s now August 2021, and they’re celebrating that we’re back to 2019 levels? That’s a pathetic rebound and really nothing to celebrate.

Let’s take a closer look at the numbers…

Less Than Meets the Eye

First, most analysts and media projected the Q2 number to be 7.5% or 8.0%, so it fell below expectations. Second, the Federal Reserve Bank of Atlanta GDPNow tracker for Q2 GDP fell from 13% in April, to 10% in May, and then 7.5% in June.

With allowance for noise, this means that growth weakened considerably over the course of the quarter. It also means if growth was stronger in April and May, and if growth for the quarter overall was 6.5%, then June must have been well below 6.5%. It’s simple math.

That means Q3 is off to a weak start. With the Delta variant of the virus out there, the situation is even worse. Finally, there was some highly troubling data in the fine print that comes along with the headline number.

Imports were healthy because Americans have been on a bit of a buying binge, using government handout checks. But exports were awful, a reflection of the fact that the rest of the world is not doing nearly as well as the U.S. Simply put, foreigners are not buying our goods because they’re in bad shape themselves.

Most dramatically, personal income fell 30% on an annualized basis. This is a measure of private income that does not include government handouts. Most of this 30% drop was based on revisions to prior data, which had been updated by the Commerce Department using more reliable surveys.

Statistical adjustments aside, the bottom line is that private income (both wages and proprietor allocations) has been flat for eight months going back to October 2020.

Not a Recovery, But a Disaster

That’s not a recovery; that’s a disaster. It makes the forecast more dire because one-by-one the government subsidies are running out.

The U.S. economy fell about 35% (annualized) in the first half of 2020 and then staged a strong comeback, rising 33.4% in the third quarter of 2020 with a more modest 4.3% gain in the fourth quarter.

For the full-year 2020, the economy fell by the greatest amount since 1946, but the second-half recovery kept that from being far worse.

Why wasn’t the 2020 economy much worse? The answer is that a huge number of financial rescue programs were put in place, backed up by tens of trillions of dollars of either money printing or deficit spending.

The Fed expanded its balance sheet by over $4 trillion in the immediate aftermath of the collapse. Congress approved trillions of dollars of checks sent directly to the American people. Unemployment benefits were extended and increased. Student loan repayments were deferred. Payroll Protection Plan loans were made to small businesses (and most were later forgiven).

The Gravy Train Has Stopped

But expanded unemployment benefits are mostly done. The Payroll Protection Plan loans are over. No additional checks are going to be mass-mailed, as happened last February and December.

With government handouts mostly over, private income stagnant and exports falling, it’s not clear what will drive GDP growth at all in the second half of 2021. To top it all off, the rent eviction moratorium is over.

One of the most effective and least reported programs was the moratorium on evictions of renters. This was a federal program, although there were many local equivalents.

Once renters knew they could not be evicted, they stopped paying rent. The program was so widespread that 14.7% of all renters in America now owe back rent. That moratorium expired as of last Saturday. What happens next?

It would be one thing if the renters had put the monthly rent money in escrow so that it would be available when the moratorium expired. That’s unlikely to have happened for more than a few of the six million families covered by the program.

A three or four-month moratorium on eviction starting in April 2020 might have made some sense. But running the program for 15 months with no plan for a smooth exit has led to another crack-up for an economy still not up to speed.

Landlords Have Bills to Pay Too

People naturally sympathize with the renters who were affected by COVID. However, little consideration is given to landlords. Many landlords have mortgages and had to pay principal and interest to banks, plus maintenance and property taxes while their tenants were paying no rent.

Now those landlords want to collect the back rent in order to get caught up on their own obligations. Many tenants just don’t have the money. What comes next is a wave of evictions.

This will put an enormous number of Americans out on the street looking for new places to live without much money in their pockets. It could also lead to a depressed housing market in certain cities as a surge of rental properties comes on the market while people are fleeing the cities to move to suburbs or more attractive states like Florida.

This will be one more headwind for the economy, as both tenants struggle with housing costs and landlords struggle with a surplus of property for rent. It’s one more example of the unintended consequences of government intervention.

Of course, the stock market is still in bubble-land and in denial about all of this technical data. That won’t last. The stock market may continue to float for another month or two, but by October, a severe correction may be in the cards as new data make it impossible to ignore reality.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> This underperforming part of the stock market should be a red flag to investors


Yahoo Finance

Brian Sozzi

July 15, 2021


https://finance.yahoo.com/news/this-underperforming-part-of-the-stock-market-should-be-a-red-flag-to-investors-172603429.html


While the S&P 500 and Dow Jones Industrial Average have continued to power to new highs seemingly everyday this summer, the small-cap Russell 2000 Index has been OK with sitting the dance out completely.

After peaking in March, strategists at Renaissance Macro Research note the Russell 2000 Index is now at new year-to-date relative lows versus the S&P 500. Over the last six months, the Russell 2000 Index — which houses smaller U.S. focused companies — is up a mere 1.9%. The S&P 500 and Dow have rallied to the tune of 15% and 10%, respectively.

"The divergence is notable, and we are starting to see bearish interval signals develop," says RenMac strategist Jeff deGraaf.

Underneath the hood of the Russell 2000, the trends are perhaps even more alarming.

Only 62% of Russell 2000 issues are trading above their 200-day moving average, RenMac notes. Roughly 27% of small-cap pharma and biotech stocks — which tend to dominate the Russell 2000 — are above their 200-day moving averages.

The relative underperformance of the Russell 2000 Index could be viewed as a red flag for market bulls.

In effect, the message from the small-caps may be that U.S. economic growth is poised to slow into the end of the year amid the spreading COVID-19 Delta variant and elevated inflation. Whereas these macro effects would initially harm profits at smaller companies the most, bottom lines at bigger companies that comprise the S&P 500 would hardly be immune (and by extension, neither would-be investors).

For now, RenMac's deGraaf believes it's safe to long the Russell's underwhelming posture. But the index warrants greater attention among investors moving forward.

"We’ll need to see further internal deterioration and a break below absolute support before turning outright bearish on the index. Until then, the way we would be playing this neutral outlook in small-caps is by focusing on owning relative breakouts and leadership while cutting loose relative breakdowns. We also see opportunity for pair trading large-cap longs vs small-cap shorts," deGraaf says.

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Equal Weighting + Reverse Indexing the S+P 500 -


>>> S&P ETF Fortunes Reverse In 2021


ETF.com

Jessica Ferringer

June 23, 2021


https://finance.yahoo.com/news/p-etf-fortunes-reverse-2021-163000936.html


While FAANG stocks have lost much of the bite that drove the S&P 500 outperformance last year, that doesn’t mean S&P 500 ETFs are being held hostage by a handful of tech stocks.

ETFs with alternative strategies that don't mirror market cap weighting are outperforming the traditional S&P 500 Index. This reverse indexing, if you will, is having a significant impact on returns this year.

The SPDR S&P 500 Trust (SPY) is the largest ETF by assets under management, with more than $353 billion in assets. One alternative to the market-cap-weighted SPY is the Arrow Reverse Cap 500 ETF (YPS). This fund weights holdings inversely to their market cap, allocating more weight to the smaller members of the index.

What Drives Performance

By using our ETF Comparison Tool, we can see that the difference in weighting schemes can have a significant impact on portfolio characteristics for each ETF.

The market-cap-weighted SPY leans heavily toward technology, at more than 33% of the portfolio. Meanwhile, YPS has the greater exposure to financials, with tech making up just 12% of the portfolio.

The difference in the number of holdings between the two funds can be explained through their investment strategies. Per SPY’s prospectus, “minor mis-weighting generally is permitted” if transaction costs would exceed the expected impact.

YPS has a similar disclaimer within its prospectus, noting that the fund will generally use a replication strategy, but may use a representative sampling strategy. This means the fund can invest in a sample of the securities of the index as long as the fund remains aligned with the risk, return and other characteristics of the index as a whole.

This can lead to a discrepancy in the number of holdings compared to the index, especially for the smallest holdings, with minimal impact on returns.

SPY Vs. YPS 2020

But performance is where the rubber meets the road, and a look at the last two years is a tale of two different return sets. With these differences in portfolio composition, it is not surprising that SPY outperformed YPS in 2020 by more than 10%.

The largest names in the index, such as Apple, Microsoft and Amazon, vastly outperformed the S&P 500.

Financials, on the other hand, underperformed the broad market, as companies such as banks were battered by falling interest rates, punishing YPS more so than SPY because of weightings.

SPY Vs YPS 2021 YTD

However, 2021 has been a different story so far. Compared to YPS, SPY is underperforming this year as tech stocks have struggled. Some of the same companies that led the market last year are this year’s laggards.

Apple Inc. currently the largest holding in the S&P 500, has struggled to eke out a positive return for much of the year even though the broad index is up double digits. And as last year’s tech rally drove up the weighting to these holdings, it has further amplified the negative impact these names had on the portfolio as these companies have struggled.

Market Cap Matters

In addition to sector differences, performance has also been driven by market cap. Midcap names tend to be more sensitive to investor sentiment about the U.S. economy. On the other hand, the larger, multinational companies that make up a large portion of the S&P 500 are more sensitive to global growth expectations.

As the weighted average market cap of YPS is only slightly higher than that of many U.S. midcap ETFs, it stands to reason that this weighting methodology would do well in environments like the one we are in.

The U.S. is reopening faster than international countries, and the expected growth of the U.S. economy is projected to be faster than that of the rest of the world. That benefits midcap and small cap companies that derive the majority of their revenue in the U.S.

Another Way To Skin The S&P 500

In addition to market cap weighting and reverse market cap weighting, another way for investors to play this segment of the market is to use an equal-weight ETF such as the Invesco S&P 500 Equal Weight ETF (RSP) .

As the name suggests, this ETF gives equal weight to all constituents regardless of market cap. This reduces the exposure to the largest cap names but avoids tilting the portfolio toward the smaller cap names. RSP, too, is outperforming SPY.

Performance this year has been in between that of SPY and YPS, which is to be expected, as the weighting methodology ensures that neither larger nor smaller names are given precedence.

The Big Picture

Comparing these three ETFs since common inception, SPY still comes out ahead, even in light of its recent underperformance.

Though certain time periods might prove to be friendlier to alternative weighting methodologies, SPY’s performance so far remains on top over the long term, though data is limited since YPS’ launched less than four years ago.

SPY’s Clear Benefit: Cost

Though each weighting methodology has its pros and cons, SPY’s dominance in terms of AUM gives it one clear benefit. The ETF has an expense ratio of 0.09%—less than half the cost of the other options. And since it is so heavily traded, with an average daily volume of nearly $26 billion, the average spread is essentially 0.00%.

Compare that to YPS, with an expense ratio of 0.29% and average spread of 0.21%, and RSP, with an expense ratio of 0.20% and average spread of 0.01%, and you can see how SPY benefits from its sheer size.

Investors can control cost, which should be as much of a factor in investment selection as last year’s returns.

For more information on S&P 500 ETFs, check out our S&P 500 ETFs channel.

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>>> Rickards: They’re Wrong About Inflation


BY JAMES RICKARDS

JUNE 23, 2021


https://dailyreckoning.com/rickards-theyre-wrong-about-inflation/


Rickards: They’re Wrong About Inflation

Sometimes new data can shed light on an uncertain situation, especially in financial markets. Other times it simply adds to the confusion. Such was the case with the most recent U.S. employment report released June 4 for the month of May.

The analyst world was glued to their news feeds, anxiously awaiting the latest report. The result was — bafflement.

The report showed job gains of 559,000. That’s a strong number, but it was below expectations. The market was looking for 670,000 jobs or higher. While strong April gains were revised up slightly, the stronger March gains had earlier been revised down by 131,000 jobs over the course of April and May.

The overall impact of the March-April-May data was a cooling off in new job creation.

The unemployment rate for May declined from 6.1% to 5.8%. That sounds like good news until you notice that the reason for the decline was not strong job creation but rather a decline in labor force participation.

That statistic declined from 61.7% to 61.6%; not a material drop, but still part of a long-term decline that has moved labor force participation back to levels not seen since the 1970s.

Simply put, the overall size of the labor force shrank.

The Glass Half Empty

You can be unemployed in the traditional meaning of the term without being counted as unemployed by the Labor Department. The difference has to do with whether you are actively looking for a job or not. Only the former are officially counted as unemployed. The problem is that the ranks of the latter are growing.

There are always some in the prime-age working population (ages 25 – 54) who are not looking for jobs because they are homemakers, students, early retirees, or are undergoing various life transitions. Still, the percentage of potential workers who have dropped out of the labor force is disturbingly high.

Some have given up looking for jobs because they’re sure they can’t find any that match their skills or interests. Others are content to collect the generous unemployment benefits the government keeps handing out. Some are still living in fear of COVID and don’t want to return to the workplace.

I’m not passing judgment; I’m just making the point that a low unemployment rate doesn’t mean much when it’s driven by a low labor force participation rate.

We have an army of perhaps ten-to-twenty million prime-age workers who don’t have jobs and aren’t looking. As long as that slack in the labor market is out there, the official unemployment rate doesn’t tell the whole story.

So, the bottom line on the May employment report was, meh. It wasn’t horrible, and it wasn’t great. It did point to persistent slack in labor markets and possible slowing growth. It did not point to inflation or anything close.

The Inflation Narrative

Since late last summer, the main driver of rates has been an inflation narrative. The narrative is straightforward:

The economy is recovering. Unemployment is declining. Employers can’t find enough workers. Wages are going up to attract help. Stimulus spending is coming by the trillions of dollars. The Fed is printing money. The economy is pushing up against capacity constraints.

Add it all up, and inflation is right around the corner. Therefore, rates must go up. And when rates go up, the price of gold goes down.

Markets have adopted this narrative. The yield-to-maturity on the 10-year Treasury note went from 0.508% on August 4, 2020 (about when gold peaked) to 1.745% on March 31, 2021. Gold prices went from over $2,021 per ounce to $1,686 per ounce over the same period. That’s a 16.5% drop in gold prices.

What if every part of the economic narrative is wrong?

The Numbers

The economy was bound to recover from the pandemic recession of 2020, the worst since 1946. But, it appears the recovery is now running out of steam. For the record, the economy was weak before the pandemic hit.

What if that weak growth trendline is now returning to form?

The unemployment rate is declining, but real unemployment is not. We still have 7.6 million fewer jobs than before the pandemic, not counting the 10 million or more prime-age workers out of the labor force as described above.

It’s true that wages are going up in some service industries such as restaurants and that workers are hard for some businesses to find. (McDonald’s is now offering $35,000 per year plus benefits and training for entry-level hires).

Still, overall wage levels are not rising significantly, and slack in the labor market is producing a powerful disinflationary overhang.

It’s the Velocity, Stupid

Money printing is practically irrelevant because the velocity (or turnover) of money is still declining. What good is new money if the banks just give it back to the Fed as excess reserves, so the money is never spent or lent?

Fiscal policy and handouts are not producing stimulus because debt levels are so high (the U.S. debt-to-GDP level is now 130%, the highest ever). Americans respond with precautionary savings and deleveraging.

Data shows that 75% of the government handouts have either been saved or used to pay down debt (economically the same as saving). Only 25% have been used for consumption. That’s a pathetic amount of bang-for-the-buck.

We are seeing some supply-chain disruption and capacity constraints, especially in semiconductors, which affects automobile manufacturing. Still, manufacturers have not been able to pass through those constraints in the form of higher consumer prices.

Inflation remains low once base effects from last year’s deflation are stripped out. Those base effects will disappear in the third quarter when the year-over-year comparison looks at the 2020 recovery rather than the recession.

Inflation is dead in the water.

I know that analysis puts me in the minority, but that’s OK; I’m used to that. I was also in the minority when I predicted Brexit and that Trump would win the 2016 election. The bottom line is, the consensus is often wrong.

Look to the Bond Market

The bond market already senses this, and so does gold. Rates peaked on March 31 and have been coming down since, albeit with the usual volatility. The rate on the 10-year Treasury note is 1.487% as of this writing, some 0.20% below the peak.

That’s a huge drop given how low rates are overall. The bond market is signaling that the inflation narrative is wrong.

Gold is saying the same thing. Gold hit an interim bottom of $1,678 per ounce on March 8, 2021, and has been trending up ever since. Gold is trading at $1,774 per ounce today and had a recent interim high of $1,918 per ounce on June 1, 2021.

Again, gold is signaling that the narrative is wrong, growth is slowing, and rates are coming down. That makes gold more attractive to asset allocators because gold competes with notes for investor dollars.

Stocks are forward-looking in theory, but they do an awful job of getting the forecast right in practice. Stocks missed the coming crashes of 2000, 2007 and 2020. They’ll miss the next crash too (until it’s too late to get out whole).

Bonds and gold are much better indicators of where the economy is going.

The signals are clear. The economy is slowing, labor markets are weak, disinflation and even deflation are on the horizon, rates are going down, and gold prices are at a great entry price.

Reality is catching up with the narrative. If you understand what’s going on, you’re more informed than the “experts.”

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Fed Shocks Stocks With Blow to Dreams of Value Investor Nirvana


Bloomberg

By Katherine Greifeld and Vildana Hajric

June 18, 2021


https://www.bloomberg.com/news/articles/2021-06-18/fed-shocks-stocks-with-blow-to-dreams-of-value-investor-nirvana?srnd=premium


Hawkish Fed tilt delivered ‘gut check’ to value trade: Lerner
Large-caps best equal-weighted index by most since January
All it took was a few dots from the Federal Reserve to put the nascent value-stock revival in doubt.

Cyclical companies tied to reopening and reflation bore the brunt of the reversal, posting some of the worst returns of the year this week, while the Nasdaq 100 emerged -- as it did in 2020 -- as a beneficiary. Volatility broke out in equities following Wednesday’s Fed decision, where policy makers projected raising interest rates twice by the end of 2023. The tech rally was accompanied by a violent flattening of the 5-year to 30-year Treasury yield curve, which narrowed by the most since 2011 on a weekly basis.

Fueling the action is the idea that the Fed -- contrary to the narrative of the last few months -- won’t actually allow the U.S. economy to run too hot for too long. That drove long-term inflation expectations lower, delivering a harsh blow to cyclical sectors, with financials and energy bringing up the rear. It also sent value-investing diehards back into retreat, just six months into what was thought to be their long-awaited renaissance.

“You’re getting a bit of a gut check for the value trade. You have these sectors that have really outperformed, it was an area of the market that got crowded and you saw that tech became under-loved,” said Keith Lerner, the chief market strategist at Truist Advisory Services. “That means you get more vulnerable to unexpected news -- even though it was a marginal shift from the Fed -- I think that was a catalyst to exacerbate the rotation.”

Nasdaq 100 advances for five straight weeks

The Nasdaq 100 rose 0.4% en route to its longest weekly winning streak since last August. Every other major stock benchmark fell, with the Dow Jones Industrial Average -- populated primarily by value names -- dropped 3.5% in its worst weekly showing since January.

That shifting appetite is evident in exchange-traded fund flows as well. The $170 billion Invesco QQQ Trust Series 1 ETF (ticker QQQ) absorbed $3.9 billion through Thursday, on pace for its best week of inflows since September. Meanwhile, the $82 billion Vanguard Value ETF (ticker VTV) suffered its biggest one-day outflow since January in the wake of the Fed meeting.

The reversal to mega-cap tech companies narrowed the number of potential market winners. That was illustrated this week by the outperformance of capitalization-weighted versus equal-weighted indexes, which was the biggest since September. Such concentrations were the rule in 2020 and threaten to end a brief revival in the fortunes of active stock managers, who feast when rally participation is broad.

In the first half of 2020, fears of rapidly rising inflation knocked tech stocks from their top spot as investors fretted that higher yields would sully growth names. Meanwhile, energy and financials boomed as bets built that red-hot economic growth would breathe life into cyclical sectors.

Tech-heavy QQQ is on pace for best week of inflows since September
That worked for a while, but the calculus abruptly shifted on Wednesday. St. Louis Fed President James Bullard accelerated the move on Friday, backing an even-earlier liftoff than current Fed projections, seeing the central bank beginning to hike rates in late 2022.

“At the long-end, bond yields tumbled lower as bond traders unwound their reflationary, curve-steepening bets,” said Candice Bangsund, vice president and portfolio manager at Montreal-based Fiera Capital Corp. “Investors are once again questioning the outlook for inflation and growth given the Fed’s expedited timeline for rate hikes, with performance leadership rotating from cyclical-value.”

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>>> Gundlach: The Fed has been manipulating markets for a long time


Yahoo Finance

Julia La Roche

May 17, 2021


https://finance.yahoo.com/news/gundlach-on-the-markets-and-opportunities-144019630.html


Billionaire bond investor Jeffrey Gundlach, founder and CEO of $135 billion DoubleLine Capital, says, "the Fed has been manipulating markets for a long time," and on top of that, valuations have crept up thanks to "incredible amounts" of stimulus.

"We've had a relationship between the Fed growing its balance sheet and the value of the S&P 500 (^GSPC) that's been in place for years now ever since they started quantitative easing, and it's almost like a law of physics. It's like if you take the capitalization of the S&P 500 and you divide it by the Fed's balance sheet, it looks a lot like a constant," Gundlach said in a wide-ranging interview with Yahoo Finance from the firm's investor days.

The 61-year-old bond investor added that even though the stock market is high by historical comparisons, it looks below average in terms of its valuation versus bonds, which have a very low yield relative to inflation, Gundlach explained.

On Wednesday, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) jumped 0.8% in April compared to March, well ahead of economists' expectations. Excluding food and energy, core inflation rose 0.9% last month, the largest monthly increase since 1982. Moreover, on a year-over-year basis, headline consumer prices surged by faster-than-expected 4.2% in April, the largest gain since September 2008.

The latest CPI print was higher than DoubleLine predicted. Gundlach said DoubleLine Capital's model suggests inflation "is probably going to go higher in the next couple of months" and might peak in July.

"If we keep going higher from there, then I think people are going to be seriously worried because the concept of transitory has everything to do with what they call the base effects," Gundlach said.

Gundlach later said he believes "we're one really bad day away from going to a new high yield on the 30-year" Treasury bond, where yields have been creeping up in the face of the recovery. "I think that that's something to watch out for as a risk factor."

In terms of opportunities, Gundlach, who had been "very bullish" on commodities, said they "look overextended."

"I think we're going to be taking a pause in the short term, probably, on commodities," he said.

Gundlach thinks the U.S. dollar "might have a little bit of strength for the rest of the year."

Since January, the bond investor's recommendation he's held floating-rate corporate debt, like bank loans, like the Invesco Senior Loan (BKLN) ETTF.

BKLN was "having nothing but outflows during 2020 because people thought interest rates were going to be at zero for the rest of their lifetime, but now they're starting to factor in the idea that maybe interest rates even on the short end will ultimately go up. And the bank loans actually yield about the same as longer duration or longer maturity below other investment-grade credit. So I kind of like that."

DoubleLine also recently purchased European stocks for the first time.

"We never owned any European stocks. We hated them. We didn't like their negative interest rates. We thought they're all kinds of structural problems in the eurozone."

DoubleLine's longer-term view is for the dollar to move lower, which will bode well for European equities.

"They've performed this year exactly the same or slightly better than U.S. stocks. That's another one of these trends that seems to be changing. Just like the Nasdaq (^IXIC) is no longer outperforming the S&P 500, suddenly, non-U.S. stocks are not lagging anymore. They are in Japan and in China, but not in Europe. Europe is actually slightly outperforming. That's another sigh.

While it's still too early, Gundlach likes emerging market equities in the longer term.

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>>> Could the Fed Actually Be Right?


BY JAMES RICKARDS

MAY 17, 2021


https://dailyreckoning.com/could-the-fed-actually-be-right/


Could the Fed Actually Be Right?

You can’t have it both ways, but that doesn’t mean you can’t try. That’s what Joe Biden is doing right now.

On the one hand, Biden policies are, at least, partly responsible for the recent rise in unemployment and might be largely responsible.

They’re also responsible for the inability of employers to hire employees so they can reopen their businesses and return to full capacity. If that sounds like a contradiction, it’s not.

The unemployment rate is rising, and job losses are still high. In addition to those actually counted as unemployed, there’s a huge group of Americans, perhaps ten million or more individuals, who don’t have jobs but are not technically counted as unemployed because they’re not looking for jobs.

There are always some people in this category who may be retired, homemakers, students or have other duties that keep them out of the workforce. But that does not account for the steep decline in labor force participation in recent years.

So, if unemployment is high and labor force participation is low, why are employers having difficulties finding employees?

Why Work When You Can Make More Sitting at Home?

There are literally millions of able-bodied Americans between the ages of 25-59 who are sitting around without jobs. Why won’t they take the jobs being offered?

The reason is that millions of Americans make more money on unemployment and other benefits than they could make working. Unemployment benefits have been increased and extended with a $300 per week supplement on top of regular benefits.

Other benefit programs come into play, including childcare tax credits, low-income tax credits, Obamacare credits, etc. It’s not difficult to make up to $40,000 per year with such benefit programs (and with very low tax liabilities).

Why work for McDonald’s or Walmart for $31,200 per year (that’s a full-time job at $15.00 per hour with benefits and training) when you can get $40,000 per year to stay home?

People can do the math, and they choose to stay home. And by the way, you can expect to pay more for a McDonald’s hamburger if they’re going to pay entry-level workers $15 per hour. They’ll try to pass along their increased labor costs to customers, as businesses generally do.

One way to solve this problem is to cut the benefits and programs. Then people would take up the job openings available, and the country would move closer to self-sustaining growth.

Instead, Biden is proposing more “rescue” benefits, continued high unemployment payouts and other goodies that gave rise to the labor shortage in the first place.

Biden’s plan will be a headwind to growth in the year ahead. But it’s music to the ears of the progressives, who are actually in charge behind the scenes, calling the shots.

Inflation: The Biggest Financial Story Today

Economists had expected over one million jobs to be created in April. The actual number was 266,000, and March’s numbers were revised lower.

Do last month’s woeful unemployment numbers undercut the mainstream theory that falling unemployment will lead to inflation?

The biggest financial story today is fear of inflation. Inflation has spooked the bond market and raised expectations that the Fed will soon have to raise interest rates to fight inflation.

Any increase in rates will also hurt stocks because stocks and bonds compete for investor dollars. If yields on bonds go up, prices on stocks will go down.

Growth stocks, like many leading tech stocks, are especially vulnerable to inflation because much of their valuation comes from future earnings. As inflation rises, the present value of their futures earnings can fall dramatically.

There’s no doubt that inflation expectations have been rising. This is especially true after a spike in the reported CPI core and non-core data on May 12. This inflation spike roiled the bond markets.

From the low yield of 0.508% on August 4, 2020, the 10-year note yield peaked at 1.745% on March 31, 2021, and hit a recent peak of 1.704% on May 13 (intraday) on the CPI news before backing down a bit to the current level (1.640%).

The dollar price of gold moved down in lockstep as the yield on the 10-year note rose. Still, there’s less than meets the eye in the recent increase in rates.

“Transitory”

As recently as November 4, 2018, the yield on the 10-year note was 3.238%. On November 4, 2019, the yield was 1.942%. The fact is today’s “high yields” are actually quite low and are much lower than the two interim peaks of the past three years.

In fact, real inflation is as elusive as it’s been for over a decade.

The surge in CPI reported on May 12 was driven predominately by base effects and energy prices. The Fed isn’t right often, but in this case, I believe they got it right. Year-over-year price gains off the low 2020 base are to be expected.

April 2020 marked one of the steepest output declines in U.S. history. Consumer prices plunged. In April 2021, many of those prices recovered, especially in travel, airfares, hotels, restaurants and other services that were almost completely shut down in 2020.

They are also transitory because the 2020 output collapse was transitory. As we move into the third quarter of 2021, the new base will reflect the strong growth in Q3 2020. That’s a much steeper hill to climb for inflation metrics.

Inflation will come down sharply, and the ten-year note yield will come down with it. Gold will rally, and stocks will breathe a sigh of relief.

This does not mean all is well in the stock market. Bubble dynamics persist, although it’s impossible to know exactly when a bubble will burst.

But, at least in the short run, inflation fears are a false alarm. Inflation will arrive eventually, maybe in 2022 or later, but for now, the disinflationary dynamic is fully intact.

Don’t believe the hype.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Billionaires Are Selling Mega-Sized Stock Blocks After Surge


Bloomberg

By Devon Pendleton and Benjamin Stupples

May 14, 2021


https://www.bloomberg.com/news/articles/2021-05-14/wealthy-insiders-reap-24-billion-by-cashing-in-their-stock?srnd=premium


Corporate insiders sold $24.4 billion of shares this year

Brin’s Alphabet sales were his first disposal in four years


Corporate insiders including Amazon.com’s Jeff Bezos and Google co-founder Sergey Brin have ramped up stock sales recently, cashing in on a 14-month long bull market that’s helped boost fortunes to the tune of trillions.

U.S. public company insiders offloaded shares worth $24.4 billion this year through the first week of May, with about half sold through trading plans, according to data compiled by Bloomberg. That’s almost as much as the $30 billion total they disposed of in the second half of 2020.

Large shareholders frequently sell stock in planned intervals, often through pre-arranged trading programs. Yet the prolonged rally in equities markets has made the value of these disposals, whether planned or opportunistic, strikingly high.

There are multiple reasons an investor of any size might be motivated to sell. After the pandemic-defying rally, valuations are increasingly under pressure from rising inflation. Investors are wary the post-Covid recovery could prompt tightening measures from the Federal Reserve. And President Joe Biden’s proposed tax hikes -- including a near doubling of the capital gains rate -- have created uncertainty.

Bezos, Ellison

Whatever the reason, the sales are flooding the market with yet more liquidity, the consequences of which will ripple through philanthropy, the art market, real estate and other niches.

Bezos has sold $6.7 billion worth of Amazon shares this year. While a relative pittance for the world’s richest person, it’s more than two-thirds the value of shares he sold in 2020. Larry Ellison unloaded 7 million Oracle shares in the past week for total proceeds of $552.3 million. Charles Schwab has sold $192 million worth of shares of his eponymous brokerage this year.

Brin, who has signaled that he intends to sell as many as 250,000 Alphabet Inc. shares, has disposed of $163 million worth of stock in recent days, his first sales in more than four years, filings show.

Mark Zuckerberg and his charitable foundation, the Chan Zuckerberg Initiative, meanwhile, accelerated their sales of Facebook stock in the fall. Zuckerberg or his charity has divested shares at a near-daily clip since November, for a cumulative total exceeding $1.87 billion.

The surging markets have exacerbated the concentration risk of the single-stock-dominated fortunes typical of many tech billionaires, said Thorne Perkin, president of Papamarkou Wellner Asset Management.

“From a portfolio-management perspective, it makes sense to spread it around,” he said.

Also among the biggest sellers are some noteworthy beneficiaries of the Covid economy. Zoom Video Communications founder Eric Yuan and used-car retailer Carvana Co.’s Ernest Garcia II have together received more than $1.75 billion from stock sales since March 2020, according to the Bloomberg Billionaires Index. George Kurtz, chief executive officer of cybersecurity firm CrowdStrike, has sold shares worth at least $250 million over that period.

Eric Yuan

Zoom founder Yuan -- the poster child, in many ways, for the coronavirus economy -- has stepped up his sales this year as the firm’s share price slumped. In 2020, he typically offloaded about 140,000 shares a month through a trading plan, which generated more than $350 million over the course of the year.

Since March, he’s sold almost 200,000 shares a month on average, yielding him about $185 million. He also donated more than a third of his stake in the San Jose-based company as part of “typical estate planning practices,” according to a spokesman. Some of the cash from his share sales fund donations to unspecified “humanitarian causes.”

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>>> I Put Half Of My Net Worth Into These Hard Asset Investments


Seeking Alpha

Nov. 14, 2020

by Jussi Askola


https://seekingalpha.com/article/4388468-i-put-half-of-net-worth-hard-asset-investments


Summary

Most investors put their net worth in financial assets like stocks, bonds and cash.

I prefer to invest mine in hard assets.

You can get exposure to hard assets through publicly-traded vehicles.
Below I explain why I have 60% of my net worth in hard assets, and why you should do the same.

Most investors have the vast majority of their net worth in financial assets. Typically stocks, bonds and cash. These assets are extremely easy to invest in, which explains their popularity. But they come with a lot of downside too. From volatility to returns that barely beat inflation, they come with various disadvantages, depending on which asset class you’re talking about.

Let’s take each of the three most popular financial assets one by one.


Cash. This is like throwing money down the drain. The average savings account has only a 0.06% interest rate according to the FDIC. With inflation running at 2%, you’re losing purchasing power at that rate.

Bonds. They pay nothing or next to nothing after inflation and taxes. They’re better than cash, don’t get me wrong. But all you’re doing with bonds is maintaining your net worth, you’re not growing it. Long-term corporate bond ETFs (VCLT - BLV) yield just around 3%.

Stocks. Stocks tend to outperform cash and bonds over time. But they’re extraordinarily complex. To truly understand a stock, you need to understand all the moving pieces of a business that may have dozens of subsidiaries, subsidiaries with subsidiaries of their own, foreign operations, and more. And the risk is significant. Putting a large chunk of your net worth in the next Enron is a sure way to evaporate your savings. Finally, today's valuations are astronomically high with the S&P 500 (SPY) trading at 36x earnings, which is over 2x its historical average. Put differently, stocks are now priced at a 2.7% earnings yield even as we go trough a major crisis:





So, if all of the above assets have major problems with them, where do you put your net worth?

Hard Assets.

“Hard assets” is a term for tangible assets that have physical substance. Hard assets physically exist in the world and typically have some practical real-world use. The total list of hard assets would be far too long to reproduce here. But some good examples include:


Real estate.

Pipelines.

Farmland.

Timberland.

Airports.

Toll roads.

Other miscellaneous types of infrastructure.


All of these assets fulfill a real-world need and therefore often have stable, dependable cash flows. Not all hard assets are equal in terms of their income potential. Some are more dependable than others. But as a class, they offer high yield with relatively lower risk.

You might say: “sure, hard assets are good, but I can’t afford a second mortgage… so how do I get my exposure?”

The answer is simple: Through publicly-traded vehicles like REITs. REITs trade on exchanges like stocks but are built on portfolios of hard assets. They typically have mandates specifying that they pass a certain amount of their net income on to investors in the form of dividends. And they’re run by management teams, so you don’t need to worry about physically managing the properties yourself. By buying REITs and other REIT-like entities, you can get quick exposure to a diversified portfolio of hard assets. This is where I have over half of my net worth today, and I don’t plan on changing that any time soon.

Why Favor Hard Assets Over Stocks, Bonds, and Cash?

Reason #1: Yield

The cold hard truth is that there’s just not a lot of yield out there these days. The 10-year Treasury yields a minuscule 0.83%, while the SPDR S&P 500 ETF (SPY) yields 1.6%. The Nasdaq, meanwhile, is lagging both: The Invesco QQQ Trust ETF (QQQ) yields just 0.51%. In this market, the yield is hard to come by.

Unless that is, you look into REITs. REITs as measured by the Vanguard Real Estate ETF (VNQ) yield around 4%. That’s the market as a whole. Individual REITs can yield anywhere from 6% to 8%. If you’re really adventurous, you can find REITs yielding as much as 10%.

Our Core Portfolio is heavily invested in REITs and other hard assets. We target an ~8% yield a ~75% payout ratio. Generally, our actual portfolio yield and payout ratio are close to these targets.

Reason #2: Higher Total Returns

It’s possible to generate very high total returns with hard assets. If you buy real estate with a 6%-7% cap rate and finance half at 3%-4%, you get a 10% yield. That’s a strong return even with no price appreciation in the equation. Throw in a modest 2%-3% annual gain in there, and you’ve got a 15% a year investment.

You can do the same by buying hard assets through REITs and other publicly traded hard asset companies. Case in point: Brookfield Asset Management (BAM). Over the past 30 years, it has earned a 16% annualized return, compared to just 7% for the S&P 500.





Another example: Realty Income (O) has nearly quadrupled the returns of the S&P500 since its IPO in 1994:





On average, REITs have outperformed nearly every other asset class over the past 20 years leading up the COVID-19 crisis. When you earn high dividends, not much growth is needed to earn double-digit total returns:





Reason #3: Valuation

Finally, we get to valuation. The sad truth about the markets these days is that steep valuations are starting to become the norm. The vast majority of tech stocks trade at more than 10 times book value. Big players like Netflix (NFLX) and Amazon (AMZN) trade at anywhere from 70 to 120 times earnings. These kinds of valuations can’t persist forever. Even with strong earnings growth, it’s hard to justify a 120X multiple. And with tech making up an ever-larger percentage of the S&P 500’s market cap, we’re really talking about “stocks” as a whole here.

Hard assets, by contrast, are cheap relative to cash flow at the moment, particularly if you get your exposure through REITs. In many cases, REITs are down for the year in 2020, and priced at up to 50% discounts to the underlying value of their assets. To be sure, REITs ran into some collections problems that dampened earnings early in the pandemic. But they’re beginning to turn that around even as valuations remain opportunistic.

Smart Money is Rushing into Hard Assets

If you want to know where to invest, you need to look at where institutional investors are putting their money. Institutional investors own about 80% of the public equity market, and a growing share of investments in hard assets.

That institutional investors are increasing in clout is obvious. From 2008 to 2018, institutional capital nearly tripled. It’s expected to rise to $100 trillion by 2030.

That a large share of this capital is going into hard assets also is evident. Many pension funds and other big institutions favor yield in their portfolios as income is paramount for institutions with regular cash expenses. As mentioned above, there’s barely any yield these days in stocks and Treasuries. So yield-hungry institutions will likely move into hard assets in the years ahead. That may include direct investments as well as positions in REITs.





How to Profit from Hard Assets

Once you’ve decided you want exposure to hard assets, there are several asset classes you can look into. In no particular order:

Commercial real estate. Investments in apartment communities, e-commerce warehouses, data centers, or even casinos. AvalonBay Communities (AVB) and Digital Realty (NYSE:DLR.PK) would be classic examples.

Airports. Believe it or not, there are publicly-listed airports you can buy today on equity markets. Grupo Aeroportuario del Pacifico (PAC) is an example of one.

Timberland and farmland. You can invest directly in Timberland and Farmland through LPs and REITs like Gladstone Land (LAND) and Catchmark Timber (CTT).

Energy pipelines. Companies that transport oil and gas by pipe systems. Examples include the 10%-yielding Enterprise Product Partners (EPD) and Energy Transfer (ET).

Windmills. You can invest in alternative energy projects through partnerships like Brookfield Renewable Partners (BEP).

All of the hard assets listed above have high-income potential and have delivered steady growth over time. With a diversified portfolio consisting of these types of assets, you could outperform the markets.

That’s not to say there aren’t risks with hard assets. On the contrary, there are several you need to look out for. Retail REITs are vulnerable to industry trends like e-commerce, which has wreaked havoc on lower quality mall REITs CBL (CBL) and Washington Prime Group (WPG). Pipelines are subject to regulatory scrutiny and often find their projects delayed for long periods. Airports see revenue dip during recessions. The value of windmills decreases over time.

Because of these risk factors, you need to be careful about which hard assets you invest in. It’s not a simple matter of buying any hard asset and hoping it will deliver a good return. Nor is it as simple as buying a REIT ETF (VNQ) — with VNQ, you won’t get the 6%-8% yields mentioned earlier. Instead, you need to be selective and build a reasonably diversified portfolio of hard assets with the desired characteristics.

Our Hard Asset Portfolio

Over the years, we have built a portfolio of REITs and REIT-like entities that delivers on three key metrics:

High Yield
Low Payout Ratio
Substantial Discount to NAV

With this portfolio, we generate approximately $10,000 in annual income on just $160,000. You can see how this breaks down in the table below.





These are the characteristics of our Core Portfolio in November 2020. In today’s market, this is quite achievable. However, you may struggle to build a portfolio with these characteristics if you wait too long. With ultra-low interest rates, capital will flood into hard assets. Valuations will surge and yields will compress. Put simply, the smart money is getting into hard assets today — not waiting for tomorrow.

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>>> The RPAR Risk Parity ETF Exceeds $1 Billion AUM


Yahoo Finance

January 19, 2021


https://finance.yahoo.com/news/rpar-risk-parity-etf-exceeds-155000530.html


RPAR is now one of the largest alternative ETFs in the U.S.

LOS ANGELES, CA, Jan. 19, 2021 (GLOBE NEWSWIRE) -- Wealth management and consulting firm Advanced Research Investment Solutions (ARIS) today announced that the RPAR Risk Parity ETF (NYSE: RPAR) has gathered more than $1 billion in assets in less than 13 months since its launch to become one of the largest alternative ETFs in the country1. ARIS recently merged with Evoke Advisors and the combined firm has more than $17 billion in assets under management2.

RPAR seeks equity-like returns over the long run with controlled risk. It attempts to provide investors with lower-cost and tax-efficient access to an investment strategy that has traditionally been used by sophisticated institutional investors. The fund aims to generate positive returns during periods of economic growth, preserve capital during periods of economic contraction, and preserve real rates of return during periods of heightened inflation.

“We launched RPAR because we see far too many investors making the same mistake in their portfolios: poor balance due to overexposure to equities,” said Alex Shahidi, Managing Partner and Co-Founder of ARIS Consulting. “The danger of such investment strategies became even clearer to many investors over the last year due to historic market volatility and turbulent economic and political news,” he said. “Our goal is to provide investors a way to diversify their risk exposure in a tax-efficient and low-cost way, while also capturing market upside.”

2020 presented a real-life stress test for RPAR. During the first quarter, RPAR was down only 4%. By minimizing losses during the initial COVID-19 related economic shock, RPAR demonstrated resilience during one of the steepest stock market declines in history. The fund finished the year up over 19% also showing its ability to participate in market rallies.3

The fund has a 0.53% gross expense ratio and tracks the Advanced Research Risk Parity Index by diversifying its allocations among four asset classes: equities, commodities, Treasury bonds, and Treasury inflation-protected securities (TIPS). By allocating equal risk to each of these diverse market segments and structuring each to achieve an equity-like return, the balanced mix can earn attractive returns with managed risk over time.

“Our goal is to provide investors with deeply researched and thoughtful approaches to investing,” said ARIS Managing Partner and Co-Founder Damien Bisserier. “We launched RPAR because the strategies that we believe are best suited for navigating exogenous and unexpected risks aren’t easily accessible to individual investors at a reasonable cost,” he said.

Before co-founding ARIS with Mr. Shahidi, Mr. Bisserier was a Senior Investment Associate at Bridgewater Associates, one of the world’s largest alternative asset management firms renowned for its “All Weather” risk parity strategy. Before ARIS, Mr. Shahidi managed institutional client assets at Merrill Lynch.

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>>> Best S&P 500 ETFs for Q2 2021


IVV, VOO, and SPLG are tied for the lowest fees, and SPY has the most liquidity


Investopedia

By NATHAN REIFF

Mar 18, 2021


https://www.investopedia.com/investing/top-sp-500-etfs/?utm_campaign=quote-yahoo&utm_source=yahoo&utm_medium=referral


The S&P 500 is a market-cap-weighted index of 505 large-cap U.S. stocks, representing approximately 80% of the market value of the U.S. stock market. Often synonymous with "the market" in the U.S., the S&P 500 is the closest thing to a default U.S. stock index. Its largest components by weight are mega-cap stocks such as Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), class A shares of Facebook Inc. (FB), and class A shares of Alphabet Inc. (GOOGL).1 The S&P 500 was the benchmark of the first index fund, and the first ETF. An S&P 500 ETF is an inexpensive way for investors to gain diversified exposure to the U.S. stock market, though it has been unusually volatile in the past year amid the coronavirus pandemic and massive disruptions in the global economy.


KEY TAKEAWAYS

The S&P 500 is a market-cap-weighted index of 505 large-cap U.S. stocks.

The index has a 69.0% trailing 1-year total return.

The S&P 500 ETFs with the lowest fees are SPLG, IVV, and VOO.

The highest-liquidity ETF is SPY.


There are 4 ETFs tracking the S&P 500 that trade in the U.S., excluding inverse and leveraged funds and those with under $50 million in assets under management (AUM).2 The S&P 500 has provided a total return of 69.0% over the past 12 months, as of March 16, 2021.3 Below, we look at the least expensive S&P 500 ETFs for buy-and-hold investing and the most liquid one for more active traders. There is a three-way tie between the least expensive funds, an indication of just how intense the price war is as ETF issuers compete to both retain and add investors. All numbers below are from ETFdb.com as of March 17, 2021, except where specified.


S&P 500 ETF with the Lowest Fees:

iShares Core S&P 500 ETF (IVV) (Tie)

Expense Ratio: 0.03%
Performance over 1-Year: 68.8%
Annual Dividend Yield: 1.48%
3-Month Average Daily Volume: 4,224,129
Assets Under Management: $260.6 billion
Inception Date: May 15, 2000
Issuer: iShares5


S&P 500 ETF with the Lowest Fees:

Vanguard S&P 500 ETF (VOO)(Tie)

Expense Ratio: 0.03%
Performance over 1-Year: 68.8%
Annual Dividend Yield: 1.45%
3-Month Average Daily Volume: 3,794,725
Assets Under Management: $204.0 billion
Inception Date: September 9, 2010
Issuer: Vanguard


S&P 500 ETF with the Lowest Fees:

SPDR Portfolio S&P 500 ETF (SPLG) (Tie)

Because index-tracking ETFs follow the performance of the S&P 500 index, one of the most important determinants of long-term returns is how much a fund charges in fees.

Expense Ratio: 0.03%
Performance over 1-Year: 68.7%
Annual Dividend Yield: 1.45%
3-Month Average Daily Volume: 2,759,697
Assets Under Management: $9.1 billion
Inception Date: November 15, 2005
Issuer: State Street SPDR7


Most Liquid S&P 500 ETF:

SPDR S&P 500 ETF (SPY)

Liquidity indicates how easy it will be to trade an ETF, with higher liquidity generally translating to lower trading costs. Trading costs are not a big concern with people who want to hold ETFs long term. But if you’re interested in trading ETFs frequently, then it’s important to look for high-liquidity funds to minimize trading costs.

3-Month Average Daily Volume: 76,926,968
Performance over 1-Year: 68.2%
Expense Ratio: 0.09%
Annual Dividend Yield: 1.43%
Assets Under Management: $337.2 billion
Inception Date: January 22, 1993
Issuer: State Street SPDR8

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>>> Warren Buffett: Bond investors world-wide 'face a bleak future'


Yahoo Finance

by Julia La Roche

February 27, 2021


https://finance.yahoo.com/news/warren-buffett-bond-investors-face-bleak-future-161052302.html


While Warren Buffett isn’t known to prognosticate on where interest rates are heading, he warns that fixed-income investors “face a bleak future."

“Bonds are not the place to be these days,” Buffett wrote in his annual letter to Berkshire Hathaway (BRK-A, BRK-B) shareholders.

His warning comes amid a sharp rally in long-term interest rates that saw the 10-year Treasury yield (^TNX) recently touch its highest level in a year. Though it's worth noting interest rates have been trending lower for nearly 40 years.

“Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen 94% from the 15.8% yield available in September 1981?" he wrote. "In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future."

The 10-year Treasury yield has been trending lower for four decades. (FRED)

Insurance represents the largest of Berkshire Hathaway's four "family jewel" businesses. Though unlike other insurance companies, Berkshire takes a more equity-heavy approach when investing its insurance float.

According to Buffett, Berkshire’s insurance fleet has more capital deployed than any of its competitors thanks to the financial strength of the operation and the “huge cash flow” generated by the non-insurance businesses.

This combination allows Berkshire’s insurance operation to “safely follow an equity-heavy investment strategy,” something that’s “not feasible for the overwhelming majority of insurers,” Buffett wrote. For regulatory and credit-rating reasons, a lot of insurers have to focus on bonds.

He noted that some insurers and bond investors “may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers.” In other words, they may allocate more of the portfolios to financial instruments like leveraged loans and high-yield bonds, aka junk bonds.

“Risky loans, however, are not the answer to inadequate interest rates," he added. "Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim."

According to the letter, Berkshire has $138 billion of insurance float. While noting that the funds don’t belong to Berkshire, they’re available to deploy in bonds, stocks or cash equivalents such as U.S. Treasury bills.

Always teaching others, he analogized the float to bank deposits with “cash flows in and out daily to insurers, with the total they hold changing very little.”

“The massive sum held by Berkshire is likely to remain near its present level for many years and, on a cumulative basis, has been costless to us," he wrote. "That happy result, of course, could change – but, over time, I like our odds."

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>>> It’s Time to Rethink This Tried-and-True Investment Strategy


Barron's

By Randall W. Forsyth

July 31, 2020


https://www.barrons.com/articles/its-time-to-rethink-this-tried-and-true-investment-strategy-51596212713?mod=article_inline


The classics never go out of style, it’s often said, but the days of one classic investment strategy might be waning. That is the 60/40 portfolio, consisting of those respective percentages of stocks and bonds, which could be a victim of its own success.

The idea behind it is simple: Stocks do better during good times, while bonds act as shock absorbers during bad interludes. This negative correlation—a fancy way of saying that when one zigs, the other zags—reduces risk with relatively little sacrifice in returns.

In a sense, the concept has worked too well. While stocks and bonds have been negatively correlated over short periods, over the longer span they’ve been positively correlated, with both benefiting from the steady decline in longer-term interest rates, Marko Kolanovic, J.P. Morgan’s global head of quantitative and derivatives strategy, explained in a client call this past week.

Indeed, many equities trade in tandem with bonds, he continued, including the monster megacap technology stocks that dominate the market. These have benefited from lower rates, thereby boosting the value of their long-duration, but reliable, cash flows. Actual bond proxies, such as utilities, real estate investment trusts, and consumer-staples stocks, have similarly benefited, while their low volatilities make them popular with multi-asset portfolio managers. And ESG—environmental, social, and corporate governance—stocks tend to overlap with those factors, he added, aiding them indirectly.

But with yields on bonds approaching 0%—the benchmark 10-year Treasury note fell to 0.54% Thursday—they offer little scope for income or price appreciation, Kolanovic continued. That raises the possibility that 60/40 won’t work as it has in the past and needs to be tweaked. Assuming bond yields don’t go to zero, or below as in much of Europe and Japan, there is the chance they will move higher. That, in turn, would hurt bond proxies, as well as the megacap growth stocks heavily represented in the S&P 500 and other major indexes.

The question, then, the strategist continues, is how to hedge portfolios. Buying protection, such as through put options, is relatively expensive now. (A put gives the purchaser the right to sell a security at a stated price for a period; its value increases as the underlying security’s price decreases.)

The key is to find stocks that are highly negatively correlated with most equity portfolios. And the strategist found some, including value shares, financials, industrials, small-caps, and materials stocks. These, he says, are positively correlated with the 10-year yield (which moves inversely to the bond’s price). And not coincidentally, they have been laggards in the market’s advance, which has been led by the megacaps and low-volatility bond proxies.

This situation is relatively recent, having emerged over the past five to seven years, Kolanovic observes, and possibly enhanced by the rise of passive investments, such as S&P 500 index funds, as well as by momentum-chasing and ESG.

The problem is that traditional fixed-income investments are neither fixed nor provide much income—a key observation of the J.P. Morgan strategist’s presentation. A relatively small uptick in yields would result in price declines that would more than wipe out the meager annual income offered by bonds today.

As this column contended late last year, the chance of a rise in yields make bonds a less effective hedge for equity portfolios. What couldn’t be foreseen then, with the economy cruising along at full employment, was the catastrophe wrought by the coronavirus, which has sent bond yields crashing to record lows.

The lessened effectiveness of 60/40-type portfolios can’t be offset by just adding stocks correlated with bonds, such as the megacaps, Kolanovic argues. Rotating into currently out-of-favor assets, such as value stocks, he says, would provide the sort of ballast that bonds traditionally had. This approach could attract more big multi-asset managers, such as pension funds, which could lead to a rerating of these groups, he maintains.

For the First Time Ever, Uncle Sam’s Aid to U.S. Tops Quarterly GDP

To be sure, the 10-year Treasury note’s yield could drop another 50 basis points (one-half percentage point), to near-zero. The 30-year Treasury, recently at a record-low 1.18%, could see a similar decline in yield, which would produce a double-digit total return from a price gain. Such a yield collapse would likely be associated with an economy in even more dire straits than revealed in the record 32.9% annualized plunge in second-quarter gross domestic product reported this past week.

Investors looking ahead to a recovery should consider J.P. Morgan’s advice to hedge portfolios away from the megacap tech champions and other stocks heavily correlated with bonds, to those that should benefit from a rising-rate environment, such as unloved value and financial shares.

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>>> Dizzying Valuations, IPO Craze Tick Boxes on Bubble Checklist


Bloomberg

By Vildana Hajric and Elena Popina

January 2, 2021


https://www.bloomberg.com/news/articles/2021-01-02/dizzying-valuations-ipo-craze-tick-boxes-on-bubble-checklist?srnd=premium


Nasdaq 100 has doubled in two years; SPAC growth explodes

There are areas of the market ‘clearly’ in a bubble: Cecchini


The IPO market is manic. Stocks haven’t been this expensive since the dot-com era. The Nasdaq 100 has doubled in two years, leaving its valuation bloated -- all while volatility remains stubbornly high.

It’s a setup that’s left investors sitting on fat returns from 2020, a year that defied easy explanation. It’s also one that has a growing cohort of experts warning about a bubble.

Knowing when market rallies turn from logical to excessive is always tough. It was nearly impossible as 2020 ended, with interest rates pinned near zero and the federal government unleashing another $900 billion into the economy. But history offers clues, and a raft of current market conditions meet criteria that would likely be found on a bubble checklist.

Take a study by Harvard University researchers published in 2019. It noted that while not every stock surge meets with disaster, those that do share some attributes, including increased share issuance, heightened volatility, and a sector or index that doubles and is twice as high as the broader market. Check, check and almost check.

“Are there areas of the market that are in a bubble? Yeah, clearly,” Peter Cecchini, founder of AlphaOmega Advisors LLC, said on Bloomberg’s “What Goes Up” podcast, adding that “many of those are obviously speculative technology companies.”

Nasdaq 100 has doubled over the past two years

Share issuance, initial public offerings and blank-check companies have grown so popular that record after record fell in 2020. U.S. companies sold $368 billion in new stock last year, 54% more than the prior high, according to data compiled by Bloomberg.

IPOs raised $180 billion, the most ever, as companies including Snowflake Inc., Airbnb Inc., and DoorDash Inc. took advantage of the rebound in equity markets. First-day pops in share price among the newcomers were the biggest in two decades, according to Bill Smith, CEO and co-founder of Renaissance Capital LLC.

“Those are telltale signs,” said Robin Greenwood, professor at Harvard Business School and co-author of the 2019 study. “The probability of a market correction is much greater today than in the historical average.”

A subclass of IPOs took off in 2020 as well, adding to worries. Special-purpose acquisition vehicles, which use proceeds from a stock sale to acquire a private company, raised about $80 billion in 2020, more than was notched in aggregate over the previous decade. SPACs that made a purchase are up about 100% for the year, according to research from George Pearkes, global macro strategist at Bespoke Investment Group.

“That’s pretty bubbly stuff,” he wrote in a recent note, though he added that what’s “more remarkable” is that SPACs that have yet to announce deals have gained about 20%. “Obviously, this is pretty speculative behavior.”

Higher and Higher

The Nasdaq 100 Index is trading at a valuation multiple last seen in 2004

While certain assets exhibit worrying signs, the broader market may not be in for an immediate comeuppance. For one, the Federal Reserve has promised to keep interest rates pinned near zero, making stretched stock valuations look more reasonable when compared to bond yields.

And the Harvard researchers say the Nasdaq 100, while on a historic run that’s seen its price double in just two years, is still not exorbitantly elevated relative to the S&P 500 Index, compared to previous bubbles. The broader gauge has rallied 50% since 2018 and is not trailing the tech-heavy gauge by enough to meet their criteria.

Bubble talk has simmered for months, prompting plenty of warnings from the likes of Greenlight Capital’s David Einhorn to Wolfe Research strategists.

As the S&P 500 closed out 2020 with a solid but still-modest gain of 16%, spots on the market’s kookier fringes have recently seen trouble. Since peaking in December, vaccine heroes Moderna Inc. and BioNTech have both plunged 35% without any obvious catalyst for the selling. FuboTV Inc., up 596% as of Dec. 22, has lost almost half its value as share lock-ups expired. Shares of insurance company Lemonade Inc. have swung violently as similar restrictions were lifted.

“People have gotten back to a narrative-over-valuation discipline. You can slap the ‘disruptor’ name on something and have it go up 10 times for no real reason,” said Jon Burckett-St. Laurent, senior portfolio manager at Exencial Wealth Advisors. “So yeah, there are pockets of the market that don’t make a ton of sense to me.”

Bubble warnings are liable to get louder in 2021, when companies will have to deliver profits that justify valuations that by historical measures have grown stretched. The S&P 500 ended the year trading at almost 30 times profits, meaning it will start a new year higher than at any time since 2000. The Nasdaq 100 is at 40 times earnings, a level not seen in two decades.

Other price trends have raised eyebrows. Bitcoin’s record-breaking advance. Heightened trading by retail investors that’s inflated previously little-known companies. Tesla Inc.’s 750% bulge. Through it all, the Cboe Volatility Index never closed below 20 after spiking to 80 in March. At 23, it remains above its long-term average of 19.5.

“As speculative juices flow, people become more entrenched with opportunities to make a quick buck. That could be dangerous,” said Marshall Front, the chief investment officer at Front Barnett Associates. “You never know how long the party goes, but it doesn’t end well.

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>>> Why Investors Are Pulling Money From Vanguard’s Index Funds


Barron's

By Leslie P. Norton

Oct. 22, 2020


https://www.barrons.com/articles/why-investors-are-pulling-money-from-vanguards-index-funds-51603390832?siteid=yhoof2


Vanguard Group gets a lot of credit for the massive inflows into its exchange-traded funds. For good reason—for years it has been vacuuming up money, and, in some periods, has even taken in more than the rest of the ETF industry put together. But that edge may be slowing, and a closer look at the numbers reveals that its industry lead isn’t quite as exceptional as it might seem.

The news is certainly good for Vanguard. Investors added $134.3 billion to Vanguard ETFs in the first nine months of the year, according to ETFGI, up 73% from a year earlier. That’s a wide lead over rival BlackRock (ticker: BLK), which took in $106.3 billion, State Street Global Advisors, which saw inflows of $21 billion, and Invesco (IVZ), which took in $19.4 billion.

For Vanguard, the haul from the first nine months of the year is much greater than the $119.3 billion in ETF inflows it saw in 2019. Freddy Martino, a Vanguard spokesman, says that Vanguard maintains its lead in ETFs.

But a significant portion of those ETF inflows aren’t money that’s new to the firm. Vanguard has a unique structure: Its ETFs are actually a share class of its index mutual funds. Roughly 17% of Vanguard’s ETF flows so far this year, or $22.8 billion, came from people moving money out of a mutual fund and into the ETF version.

Back those flows out, and Vanguard’s ETF inflows for the nine months were $111.5 billion—still ahead of BlackRock, but less comfortably. It also suggests that inflows into Vanguard’s index funds—both mutual funds and ETFs—were sharply lower than last year. For the first nine months of this year Vanguard took in $60.3 billion, or just 47% of what it did in the same period last year.

“Vanguard has been taking money out of one pocket and putting it into another,” says Ben Johnson, director of ETF research at Morningstar. Vanguard has encouraged investors to swap out of its index mutual funds to ETFs in recent years, dropping expense ratios for the ETF versions of many core funds below those of the Admiral share class for mutual funds. (Admiral shares require a $3,000 minimum investment and feature lower expense ratios than standard Vanguard investor shares.)

For example, the Vanguard Total Stock Market Index fund’s Admiral shares (VTSAX), has an expense ratio of 0.04%. The ETF version, with a ticker symbol of VTI, has an expense ratio of 0.03%. That made the migration “inevitable,” Johnson says.

This is the first year in more than a decade in which more Vanguard index mutual funds have seen redemptions than purchases, with outflows totaling some $71 billion in the first nine months of the year, according to an analysis by Morningstar. Since $22.8 billion of that went into ETFs, $48 billion actually exited.

The trend began, like so much of what’s happened in 2020, in March. When the market cratered, investors withdrew $16.4 billion from Vanguard’s index mutual funds.

What accounts for remaining index mutual fund outflows? Johnson says it could be clients pulling out money because they’re retiring, or because they’re negatively affected by the pandemic. Perhaps some are opting for active management as the markets become more volatile. Some might have gotten so wealthy that they’re taking money out and putting it into, say, private-equity funds, which Vanguard started offering this year.

Dan Wiener, an investment manager who is also editor of the Independent Adviser for Vanguard Investors, notes that mutual funds are still more important to Vanguard than ETFs. Vanguard has $1.4 trillion in its ETFs, but it has $6.4 trillion in total assets, including $1.6 trillion in actively managed funds.

“I would not categorically say that the ETFs have been a resounding success except within the ETF market,” says Wiener. For instance, he points to the Vanguard Small-Cap ETF (VB), which has $13 billion in assets, while the four share classes of the open-end mutual fund have $61 billion. “For the typical Vanguard investor who grew up with open-ends, and even for many institutions, in a lot of cases the open-ends win.”

Still, this marks a continuing cultural change at Vanguard, whose low-cost advantage is being eroded by advances in technology, industry consolidation, and heightened competition. The firm’s clients have changed too: To compensate, it has pushed to make inroads with financial intermediaries as well as into ETFs. “Vanguard is evolving to become more marketing-oriented,” Wiener says.

Investors still need mutual funds for their 401(k) retirement plans, most of which don’t have ETFs because it’s too hard to account for investments that trade more than once a day. ETFs also don’t allow for fractional share purchases, which complicates employee purchases. That could help stem the trend.

Indeed, Vanguard’s Martino points out that the percentage of 401(k) plans offering index funds and target-date funds has increased steadily over the past decade, while the percentage of participants that use target-date funds—a key source of demand for index mutual funds—has also steadily increased.

“Ultimately, it comes down to the investment vehicle that meets investor needs in the best possible way,” he says. “It’s right in line with the Vanguard core tenets.”

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>>> The RPAR Risk Parity ETF Surpasses $500 AUM Milestone; Recognized for Growth and Innovation


Yahoo Finance

June 29, 2020


https://finance.yahoo.com/news/rpar-risk-parity-etf-surpasses-162052960.html


LOS ANGELES, June 29, 2020 (GLOBE NEWSWIRE) -- Advanced Research Investment Solutions (ARIS), the Los Angeles-based wealth management and consulting firm with $12 billion in assets under management (AUM), today announced the RPAR Risk Parity ETF (NYSE: RPAR) has surpassed $500 million in AUM, just 6 months following its launch in December 2019. The fund seeks to provide investors with low-cost and tax-efficient passive exposure to a risk parity investment strategy. According to Yahoo! Finance, RPAR is one of fastest growing ETFs of 20201 and has been nominated for Newcomer Alternative ETF of the Year by Fund Intelligence2. It was also recently named the Best New Alternatives ETF of the Year by etf.com3.

"We are so pleased that RPAR is available to investors in today’s unprecedented, uncertain times. The need for diversification and management of market volatility has become paramount in advisors’ and investors’ minds,” said Alex Shahidi, Partner and Co-Founder of ARIS Consulting. "RPAR’s approach differs from traditional portfolio allocation strategies, which tend to be overly dependent on environments that favor strong equity performance. We are excited to gain investors’ interest and recognition from etf.com and Fund Intelligence."

The RPAR Risk Parity ETF seeks to generate positive returns during periods of economic growth, preserve capital during periods of economic contraction, and preserve real rates of return during periods of heightened inflation. The fund diversifies its allocation among four asset classes – equities, commodities, Treasury bonds (Treasuries), and Treasury inflation-protected securities (TIPS) and has a 53 bps gross expense ratio (50 bps net).

ARIS is leveraging its extensive experience with risk parity investment strategies in the management of RPAR, as the firm currently utilizes this approach for many of its existing clients. Prior to starting ARIS, Co-Founder Damien Bisserier was a Senior Investment Associate at Bridgewater Associates, which is known for being one of the world's largest hedge fund managers and a pioneer in risk parity.

About ARIS Consulting

Helmed by Alex Shahidi and Damien Bisserier, Advanced Research Investment Solutions (ARIS) was built upon the foundational idea that a deep-rooted understanding of markets and economies is at the core of successful investing. Founded in 2014 in Los Angeles, California, the firm manages over $12 billion in client assets. ARIS believes that combining diverse sources of return can help clients achieve greater consistency of performance. The firm focuses on developing innovative investment solutions to enable more efficient portfolio management. Additional information may be found at arisconsulting.com.

About Tidal ETF Services

Formed by ETF industry pioneers and thought leaders, Tidal sets out to disrupt the way ETFs have historically been developed, launched, marketed and sold. With a transparent, partnership approach, Tidal offers a comprehensive suite of services, proprietary tools, and methodologies designed to bring lasting ideas to market. As advocates for ETF innovation, Tidal helps institutions and organizations launch the most interesting and viable ETFs available today. For more information, visit tidaletfservices.com.

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>>> The 60/40 Portfolio Is Muzzling Critics With Another Big Year


Bloomberg

By Gregor Stuart Hunter

November 22, 2020


https://www.bloomberg.com/news/articles/2020-11-22/the-60-40-portfolio-is-muzzling-critics-with-another-big-year?srnd=premium


Balanced portfolio of stocks, bonds performed well in 2020
Critics have long been calling for the demise of the strategy

A balanced portfolio of stocks and bonds for decades was among the few venerated precepts in investing. Yet doubts about the approach grew after the pandemic hit and turned 2020 into a year like no other.

But for all the handwringing, in reality it looks like it will be another year of solid performance for 60/40. A model portfolio composed of 60% U.S. stocks and 40% bonds has climbed 13% year-to-date, according to a Bloomberg index. That’s in line with the rally in the S&P 500 Total Return Index and bigger than the 3.5% gain in the HFRX Global Hedge Fund Index.

The strategy’s resilience is a rebuttal to the many critics who have been calling for its demise for some time. Late last year, Morgan Stanley predicted a period of anemic returns for a typical 60/40 portfolio, and this year, a debate began on potential alternatives to bonds in the strategy as yields slumped to historic lows.

“The big surprise is how well the 60/40 portfolio has done in a year like 2020 -- it has been right on the historical average,” said Vincent Deluard, global macro strategist at StoneX Group Inc. “And 2020 has been nothing like an average year.”

A 60-40 portfolio has performed almost as well as an all-stock portfolio
Adding a hefty chunk of bonds to a basket of stocks has been a staple of diversified investing for decades, with the more stable fixed-income component acting as a balance to riskier growth-sensitive equities. This year has seen periods when stocks and bonds have moved together, which critics have seized upon to disparage the strategy.

The argument went that bonds can’t be a hedge against equities if they both rise and fall together. But that’s a misunderstanding of the concept of 60/40 investing, one meant to result in a diversified portfolio for the longer-term investor, not a short-term focused absolute-return hedge fund.

Even over the short-term, a blended portfolio has proved resilient. At the height of the coronavirus fears in March, the Bloomberg 60/40 portfolio fell less than the S&P 500 Index -- a sign of the benefits of diversification in action.

Nuclear Winter

Still, caution abounds about a balanced approach. Deluard, who earlier this year warned of a “nuclear winter” for 60/40 portfolios harking back to the decade-long bust in the 1970s, said the strategy faces tougher times ahead.

Nathan Thooft, global head of asset allocation at Manulife Asset Management in Boston, noted that while the strategy is “not dead,” return expectations for a traditional balanced portfolio are “likely to fall well short of the last several decades.”

JPMorgan Asset Management recently cut its expected returns for a 60/40 portfolio to 4.2% for the coming years, though it also lowered growth forecasts for global-equity portfolios to 5.1%.

Correlation Benefit

For Societe Generale SA strategist Solomon Tadesse, the deflationary pressures unleashed by the coronavirus pandemic and the unprecedented monetary-policy response it triggered are likely to result in lower correlations between various asset classes going forward. That should benefit 60/40 investing, he said.

“The skepticism on 60/40 and more generally cross-asset performance was misguided as it did not account for the huge tailwind behind asset-return correlations,” Tadesse said. “I do expect the strong performance of the strategy to continue.”

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>>> Top Picks 2020 - Vanguard Balanced Index Admiral Shares (VBIAX)


Yahoo Finance

January 23, 2020


https://finance.yahoo.com/news/top-picks-2020-vanguard-balanced-100000192.html


Generally, balanced funds stick to a relatively fixed proportion of stocks and bonds but may also have a money fund component. Their objective is typically a mix of income and capital appreciation, explains Cynthia Andrade, contributing editor to MoneyLetter.

On the equity side, the portfolio at Vanguard Balanced Index Admiral Shares (VBIAX) mimics the CRSP U.S. Total Stock Market Index, which includes 3,600 stocks ranging from micro-caps to the largest stocks traded on the New York Stock Exchange and the NASDAQ.

The fund contains a sampling of the very smallest, but replicates the rest, holding 3,500 securities in total. Technology is the largest sector weighing at 20.4% of assets, followed by financials (19.4%).

Consumer services, industrials, and healthcare follow, all between 13%-14% of assets. This fund’s portfolio differs from many others in the asset allocation category in that it does not hold any foreign securities.

The fixed income portion of the fund tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Bond Index, which represents a wide spectrum of taxable investment-grade bonds.

It includes government, corporate, and international dollar-denominated bonds with maturities of more than one year. The fund’s bond holdings are selected through a statistical sampling process.

The fund maintains an average maturity and credit profile in line with the index. About 64% of assets are invested in US Government securities, with most of the remainder in the A/BBB range. Here, the fund differs from some peers in that it does not hold high-yield debt.

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>>> This long-forgotten ‘safe’ portfolio just had its best three months ever


MarketWatch

Aug. 3, 2020

By Brett Arends


https://www.marketwatch.com/story/this-long-forgotten-safe-portfolio-just-had-its-best-three-months-ever-2020-07-30?siteid=bigcharts&dist=bigcharts


Bulletproof investing could be back in style

When the future is so uncertain, isn’t the smart bet to be prepared for anything?

Harry Browne thought so. And his healthy skepticism for the easy nostrums of Wall Street is suddenly having its moment.

Browne was the Libertarian candidate for U.S. president in 1996 and 2000. As you may have noticed, he didn’t win. He died in 2006. But his “fail safe investing” idea lives on. And his extraordinary investment portfolio just had its best three months maybe ever.

So says Bank of America, reporting that the Browne portfolio just shot up a stunning 18% in the last 90 days, or more than twice its annual 7% average. It’s cherry-picking, data-mining or return-chasing by recommending the portfolio now. But its sudden success tells a tale.

Browne argued that when times are booming, stocks do well. In a prolonged slump, long-term Treasury bonds do well. During “stagflation,” that 1970s mixture of rising prices and low growth, gold does well. And when there’s a recession and a crisis, cash does well. (Toilet paper too, as we just learned, but that’s another story.)

As you don’t know what the future is going to hold next, he argued, throw one quarter of your money into each of these four assets and then just forget about it. You’ll underperform a bull market, of course. But you’ll almost certainly avoid disaster if things go awry.

Dylan Grice, formerly a strategist at SG Securities, back in 2012 called the same portfolio “the cockroach,” and calculated that for long-term investors it had done as well or better since the early 1970s as the traditional stock and bond mix…but, crucially, without the disasters. In other words, these investors made money during the terrible 70s, when stocks and bonds flopped.

Why “the cockroach?” Because, wrote Grice, cockroaches are one of planet Earth’s most robust species. They are amazing survivors. They’ve been around for 350 million years, or about 7,000 times as long as humans, and survived three of nature’s mass extinctions. “But what I like best about cockroaches,” wrote Grice, “isn’t just their physical hardiness, it’s the simple algorithm they use to survive. According to Richard Bookstaber, that algorithm is ‘singularly simple and seemingly suboptimal: it moves in the opposite direction of gusts of wind that might signal an approaching predator.’ And that’s it. Simple, suboptimal, but spectacularly robust.”

And, Grice added, when it comes to long-term investing, your first job is surviving. Prospering is job number two.

The idea of fail-safe or “all weather” portfolios has plenty of pedigree. (Bridgewater hedge fund tycoon Ray Dalio has been talking about the concept for years.) There’s a new version that’s recently become available in an ETF. The Advanced Research Investment Solutions Risk Parity ETF RPAR, +0.26% was launched last November and managing partner and co-chief investment officer Alex Shahidi says they’re up to $620 million in assets so far.

Returns so far this year: 12%, versus 1% for the S&P 500 SPX.

Oh, and by the depths of the crash in March it was down just 15% — half the collapse in the S&P.

The fund is 25% stocks, 15% industrial commodities, 17.5% gold GLD, -0.46%, 20% long-dated Treasury inflation-protected securities (such as you can buy on your own through the Pimco 15+ Year U.S. Tips Index ETF LTPZ, -0.46% ) and 42% long-term Treasury bonds (such as is available through the iShares 20+ Year Treasury Bond ETF TLT, -0.90% or, even more dramatic, the Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF ZROZ, -1.60%. It adds up to 120%, because the fund is 20% leveraged (and the costs of that borrowing, at current interest rates, is “near zero,” he says. Expense ratio is 0.5%.)

The stock portfolio, incidentally, is half U.S. and half overseas stocks, with the latter tilted toward high volatility emerging markets.

“You want to be diversified to (different) economic environments,” as he puts it. He doesn’t know what the future holds. (But he adds, purely as guesswork, “If I had to pick an asset class for the next 10 years, it would be gold.”)

The real message, though, isn’t about gold or inflation forecasts. It’s about the arrogance and complacency of Wall Street, a place where — as the great investment writer Fred Schwed once put it — no one is ever wrong in retrospect. Few are still around who remember it, but there have been times, long times, when stocks and bonds both produced terrible returns.

Stocks were dismal in the 2000s, while bonds were good. But both lost you money in the 1970s, and in the 1940s. Which is crazier? Going against the conventional “wisdom” and gambling some of your retirement savings on alternatives, like gold—or gambling all of them on a single asset class like U.S. stocks?

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>>> JPMorgan’s Math Shows Why U.S. Stocks Can Keep Rallying


Bloomberg

By Justina Lee

June 1, 2020


https://www.bloomberg.com/news/articles/2020-06-01/jpmorgan-s-math-shows-why-u-s-stocks-can-keep-rallying?srnd=premium


Money managers are holding plenty of cash on the sidelines

JPMorgan says equity allocations are still historically low


Think the sizzling U.S. stock rally is excessive in an economy frozen by shutdowns? From one perspective, it’s just getting started.

Giant piles of cash sloshing around the financial system means there’s substantial ammunition yet to push risk assets higher. JPMorgan Chase & Co., meanwhile, sees potential for billions to flow into equities at the expense of bonds to rebalance portfolios. Money-market funds have lured $1.2 trillion this year, while fund managers with $591 billion overall are holding cash at levels rarely seen in history, according to Bank of America Corp.

All that shows how much firepower investors have to support the market at a time when stock prices look unhinged from fundamentals like corporate profits, and trade frictions between China and the U.S. return to the forefront.

“Investors are still underweight equities and signs of overextension are confined to momentum traders,” JPMorgan strategists led by Nikolaos Panigirtzoglou wrote in a note. “There is still plenty of room for investors to raise their equity allocations.”

JPMorgan says the equity allocation of non-bank investors -- a group that includes households, pensions, endowments and sovereign wealth funds -- will probably rise to 49% in the coming years, given the backdrop of low interest rates and high liquidity. Currently, the proportion is 40%.

Just ask John Roe, the head of multi-asset funds at Legal & General Investment Management. He started buying more shares recently after finding few opportunities in credit. The investor sees a self-reinforcing rally as higher prices draw more buying and positioning, but he’s having to look past his concerns that the pandemic will causing lasting damage to the economy.

“Equities have reached a range where we worry about self-reinforcing momentum,” Roe said. “It’s very tough when we are fundamentally negative and think the scarring risks are under-appreciated.”

Another sign of cautious sentiment: investors are deeply short the market, so there’s potential for stocks to rally when they cover their positions.

Speculators have built up the largest net short position on S&P 500 futures since late 2015, according to regulatory data. Short interest in the world’s largest exchange-traded fund -- which tracks the U.S. stock benchmark -- is also still hovering close to its peak in March, according to Markit data.

S&P 500 futures see biggest net short since 2015

Among retail investors and the like, risk appetite may be returning gradually.

U.S. stocks and credit funds recorded stronger inflows in the week through Wednesday, according to EPFR Global data cited by Bank of America. At the same time, flows into money funds slowed and government bond funds saw redemptions for the first time in six weeks.

As the bank’s strategists led by Michael Hartnett put it succinctly: “Positioning still bearish, policy bullish.”

So who’s buying? Certain breeds of quants, for one. Momentum traders, like commodity trading advisers, are the only overextended part of Wall Street, according to JPMorgan.

By its estimates, the momentum signal for U.S. stocks has returned to elevated levels. The last time the overbought signal was this stretched was near the beginning of this year, just before stocks plummeted. Even so, profit-taking by momentum investors is unlikely to derail the bull market, JPMorgan strategists said, given low equity allocation by other kinds of investors.

As for other quant investors, Nomura Securities projects that U.S. volatility-control funds -- which target a particular level of price swings -- are finally piling into stocks again as the market calms. Their estimated equity exposure remains around the second percentile in data going back to 2010, meaning that it was lower just 2% of the time, strategist Charlie McElligot wrote in a note.

In sum, with the S&P 500 trading at a two-decade high versus the coming year’s earnings, stocks might look pricey. But few investors have actually poured their cash in.

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Uncorrelated asset classes -

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>>> New York Gold Traders Are Drowning in a Glut They Helped Create


Bloomberg

By Justina Vasquez

May 27, 2020


https://www.bloomberg.com/news/articles/2020-05-27/new-york-gold-traders-are-drowning-in-a-glut-they-helped-create?srnd=premium


Almost 17 million ounces of gold arrived since end-March

Supply flows in from refineries in Switzerland and Australia


The New York gold market has been flipped on its head in just a couple of months, with a scramble for the metal turning into a glut.

Earlier this year, traders who had sold contracts paid a steep premium to close positions after the coronavirus pandemic grounded flights, sparking worries about the ability to get gold to New York. That drove futures to the highest premium to the spot price in four decades, attracting a flood of metal to the U.S. from around the world. Now, contract holders are trying to avoid taking delivery from the massive inventory.

June futures sank to more than $20 an ounce below August this week, from a premium in mid-April. Notices to deliver on June contracts will begin to be filed Thursday. The June contract is also below spot prices, after fetching a $12 premium as recently as mid-May and $60 in March.

The steep discount echoes some of what oil traders saw earlier this year, when crude stockpiles surged after fuel demand plunged. In that extreme case -- which no one expects to be repeated in gold -- prices plunged below zero as traders who had bought futures but weren’t able to take delivery were forced to pay buyers to unload the contracts.

Inventory on New York exchange surges to record

“It’s a little bit of a game of chicken,” said Tai Wong, head of metals derivatives trading at BMO Capital Markets. “All of a sudden you get into a similar problem that you had in crude, but slightly different: for crude they literally didn’t have a place to put it -- whereas in this case speculative longs don’t want the logistical hassle of holding physical metal, which is why cost to roll has blown out.”

Since the end of March, 16.8 million ounces have flowed into Comex. That’s more than the total increase in ETF holdings last year, and almost equivalent to India’s annual jewelery demand. Inventories stand at a record 26 million ounces as of Tuesday, dwarfing the 9.6 million ounces worth of June contracts still open.

To be sure, the imbalance in the New York market is a localized phenomenon: gold remains in high demand around the world among investors concerned about the state of the global economy.

Bullion bulls dump soon-deliverable contract for later-dated futures
The seeds of the current glut were sown when the coronavirus shut down commercial flights earlier this year and forced some gold refineries to close. The shutdowns strangled the supply routes that allow physical bullion to move around the globe, and prompted banks to step back from arbitraging between the London and New York markets. At the same time, demand for gold as a haven grew amid fears of the pandemic’s economic toll.

The premium for New York futures over London surged as traders rushed to avoid delivering in April, instead buying back contracts they had sold short.

See also: Gold Market Snarled by Virus Lockdown as World Races for Haven

Traders trying to capture that premium were able to arrange physical delivery, swelling inventories. Key refining hub Switzerland shipped a record amount of gold to the U.S. in April, according to figures dating back to 2012. Australia’s Perth mint also ramped up production last month and shipped bars to the Comex.

“It is a seller’s market because of the premium and the buyers are stuck right now,” Peter Thomas, a senior vice president at Chicago-based broker Zaner Group, said in a telephone interview. “Do you want to deliver now, or do you want to deliver into the back, where the premium is high?”

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>>> Investors Pile Into Stocks That Win in a Full Economic Recovery


Bloomberg

By Sarah Ponczek

May 27, 2020


Bets mount that stay-at-home world won’t last much longer

Stocks that benefit from reopening surge in past two days

Stocks Higher on Economy Optimism, S&P Holds Above 3,000


https://www.bloomberg.com/news/articles/2020-05-27/recovery-obsessed-stock-zealots-put-risk-rotation-into-high-gear?srnd=premium


Signs are multiplying in the stock market that investors see the recovery from the coronavirus taking hold.

Rising optimism in the economy is popping up everywhere, with shares of banks and energy companies and small firms soaring. At the same time, previous market winners that stood to benefit from stay-at-home measures are turning into laggards. Cruise lines soared, while Peloton and Zoom Video have started lagging behind. The small-cap Russell 2000 surged 3.1% Wednesday, while tech-heavy Nasdaq indexes needed a late-session rally to close in the green.

Behind it all is a belief that as states and countries reopen and the coronavirus curve slowly flattens, investors are free to position for a monumental shift. Nowhere was that more visible than in price action of walloped industries like airlines and cruise operators. Carnival Corp. and United Airlines Inc., both up more than 12% Tuesday, again gained near 4% or more.

“If people believe the economy is starting to bottom out, they are starting to look at those more cyclical areas,” Wayne Wicker, chief investment officer of Vantagepoint Investment Advisers, said by phone. “The biggest catalyst for that is the opening of some of these economies that are giving encouragement that America is going to go back to work.”

Long/short value portfolio has best 2-day streak since at least 2002
A Dow Jones market neutral index of value stocks that goes long the cheapest stocks and shorts growth shares notched its best day in at least 18 years Tuesday, while styles including momentum stumbled. The sharp rotation was on display again Wednesday, and is raising hopes for a turn in the 10-year trouncing the buy-low philosophy has endured.

The Russell 1000 Value Index rose 2.1% Wednesday, beating its growth counterpart by 1.5 percentage points. The divergence was evident at the stock benchmark level too, the Dow Jones Industrial Average up 2.2% while the tech-heavy Nasdaq rose just 0.6%.

Pandemic sector plays now lagging more cyclical stock segments
“The sweet spot for a risk-on rotation is now, as economies reopen and more fiscal programs are implemented,” said Dennis DeBusschere, a strategist at Evercore ISI. “The quant ‘arms race’ has helped create an investment landscape where assets optimize to new regimes and narratives rapidly.”

Strategists at Wells Fargo Securities including Chris Harvey and Anna Han went “all in” on value stocks in early April, in part due to “historic price dislocations.” Now that the trade is in motion, they’re taking what they call “the next natural step” -- upgrading their call on small-cap stocks to overweight versus large-cap peers, the strategists wrote to clients Wednesday.

Goldman Sachs Group Inc. is latching on to risk, albeit a bit more apprehensively. Analysts including Alessio Rizzi note that sentiment and positioning measures remain somewhat bearish, even as the risk recovery continues. That leaves some investors worried about the potential for a massive rotation, and the possibility of being left behind if an economic recovery proceeds smoothly.

“The risk of rotation frustration increases as markets turn more bullish on growth - as a result, we only position selectively in reflationary, procyclical trade ideas,” the analysts wrote in a May 27 report. “The growth recovery might be bumpy due to risk of second COVID-19 waves and potential second-round effects from the lockdown, such as a pick-up in bankruptcies, defaults and a continued weak labor market.”

Cantor Fitzgerald’s Sachin Raghavan also noted the shifting equity market sands, pointing to outperformance of value stocks, as well as banks, transports and airlines, which stand to benefit from a normalization of economic activity. He expects the trend to continue, but with one large caveat:

“Unless there is a significant resurgence in Covid-19 cases in major cities across the country.”

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>>> 6 ETF Areas Beating S&P 500 in 2020


by Sanghamitra Saha

Zacks

May 8, 2020


https://finance.yahoo.com/news/6-etf-areas-beating-p-163004389.html


The first quarter of 2020 was the worst one for Wall Street since the fourth quarter of 2008, for European stocks since 2002 and for emerging markets since 2008 due to the coronavirus outbreak. The S&P 500 saw its worst first quarter ever (down 20%) (read: Top ETF Stories of First Quarter).

Wall Street fell into bear market in mid-March only to spring higher from late March and score the 82-year best April. Gigantic Fed and government stimulus facilitated this rally. The winning momentum is being carried into May thanks to the reopening of economies.

Moreover, China – which enacted lockdown pretty earlier than the rest of world – reported a 3.5% year-over-year rise in exports in April, crushing analysts’ expectations of a decline in 15.7%. This flared optimism on the same level of global recovery in the coming days.

Overall, the S&P 500 is down 10.8% this year, after a massive recovery in April. Against this backdrop, we highlight a few ETF areas that have beaten the S&P 500 this year.


Biotech

Healthcare and biotech stocks and ETFs soared higher amid the ongoing medical emergency. Biotech stocks, in fact, had their best monthly gain in two decades in April. Large pharma and biotech companies are working on medicines, vaccines and testing kits. Most recently, Gilead GILD indicated that the trial for coronavirus treatment Remdesivir has met its initial goal. And Remdesivir received the FDA nod for emergency use for coronavirus as an experimental drug. Moderna Inc. MRNA, which is developing experimental vaccines, said it has entered into an agreement to manufacture a billion doses a year. This optimism should keep Wall Street charged up.

VanEck Vectors Biotech ETF BBH — Up 6.1%

iShares Nasdaq Biotechnology ETF IBB — Up 3.4%


Technology

Tech stocks have been investors’ darlings this year despite the coronavirus outbreak. In fact, social distancing norms enacted globally to mitigate the spread of the virus compelled people to stay at home, binge online and work as well as learn from home. This new lifestyle has boosted various corners of the technology sector, ranging from enterprise cloud computing, cyber security, remote communications, video gaming and e-commerce to online payments.

First Trust Dow Jones Internet ETF FDN — Up 4.5%

iShares Expanded TechSoftware Sector ETF IGV — Up 2.6%

SPDR NYSE Technology ETF XNTK — Up 1.8%


Large-Cap Growth

April’s torrid stock market rally was mainly spurred by large-cap growth stocks. Amid pandemic, small-cap stocks were initially beaten-down as these lack financial stability lesser than their larger peers.

iShares Morningstar LargeCap Growth ETF JKE — Up 0.3%

Vanguard Mega Cap Growth ETF MGK — Down 1.2%


China

Despite being the perpetrator of the pandemic, China stocks beat Wall Street surprisingly in Q1, having lost only 11% in dollar terms. Note that the epidemic began in China in January leading to lockdowns in cities. Still, several China stocks and ETFs lost very little in the quarter. Compelling valuations, the signing of the phase-one trade deal and policy easing probably helped China ETFs hold up well this year. Latest recovery is another positive (read: These China ETFs Hardly Felt Any Coronavirus Pain in Q1).

VanEck Vectors ChinaAMC SMEChiNext ETF CNXT — Down 0.13%

KraneShares CSI China Internet ETF KWEB — Down 5.42%


Xtrackers MSCI China A Inclusion Equity ETF ASHX — Down 5.43%


Retail

Retail — predominantly dependent on consumer discretionary activity — had a painful stretch in the peak of the pandemic due to store closures. However, before the virus outbreak, the sector was steady.

VanEck Vectors Retail ETF RTH — Down 0.13%


Clean Energy

Upbeat earnings and Tesla’s TSLA optimistic solar plan boosted solar ETF investing in early 2020. Investors should note that the United States is putting focus on clean electricity generation. China is a major player building a green environment. The European Union’s (EU) 28 member states’ efforts on this ground is also commendable. All these explain the rally in clean energy ETFs before the virus outbreak (read: Bet on "American Magic" With 4 Solid Small-Cap Sector ETFs).

Invesco Solar ETF TAN — Down 5.0%

First Trust NASDAQ Clean Edge Green Energy ETF QCLN — Down 5.1%

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[bar1080]

I've spent time thinking about how IHUBers allocate their investments. Some members have little money to invest so I understand why they might go with a single stock or two. Over the years I've encountered IHUBbers who had no more than $50 in the market! (one guy referred to it as his "beer money" and he lost it all quickly!).

But some here, especially older investors *seem* to have ample funds to intelligently diversify over a number of stocks and a number of sectors. And yet they *marry* one or two stocks which is idiotic since very, very few investments outperform over long periods. Studies have shown that the vast majority of stocks -- even quality issues -- fail to beat money in the bank or T-bills over long periods.

Why don't they diversify? Almost certainly it's because they're seeking, usually unconsciously, lottery-like payoffs. 10-baggers. 100-baggers. They're craving thrills, not investment success. Diversification is the arch-enemy of the lottery-like return.

I've said all this before, but in these times diversification works its magic. My bonds are off maybe 1%. My bank CDs are more valuable than ever. And I'm damn glad I have a home.

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Bar, >> red hot play, plunge in 100% <<


Yes, that basically sums up most of I-Hub (99%).

With my own strategy, I decided to take Buffett's advice and rely even more on the broad index ETFs (S+P 500), rather than trying to pick sector ETFs. So not only won't there be individual stock picking, but no (or few) sector ETFs. This will make for an extremely boring portfolio, but over time it should perform better and with fewer headaches.

For now I still have some tech related ETFs (cloud computing, cybersecurity), since they are doing so well, but eventually will replace those with the S+P 500 ETF (VOO). The S+P has 22% in technology, which should be plenty -


S+P 500 -
***************

Technology ---------------- 22%
Healthcare ----------------- 16%
Financial Services ------- 14%
Communication Svcs --- 11%
Consumer Cyclical ------ 10%
Industrials ------------------ 8%
Consumer Defensive ---- 8%
Utilities ---------------------- 3%
Energy ----------------------- 3%
Real Estate ----------------- 3%
Basic Materials ------------ 2%

________________________________


Here's my current allocation -


Stocks ------------ 35%

Bonds ------------- 36%
(Corporates - 21%)
(Municipals - 15%)

CDs ----------------- 7%

Gold --------------- 11%

Cash --------------- 11%

_________________________________

[bar1080]

You're kicking a dead horse. For local slobbering "players" the only allocation strategy is to find a red hot play, marry it, plunge in 100%, and pump it to fellow members of the unwashed masses. If if drops, average down. And down.

That way the lottery-like effect remains undiluted by sensible diversification.

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>>> Buffett: 'I would disagree quite violently' with notion that passive investing is dead


By Dhara SinghReporter

Yahoo Money

May 5, 2020


https://finance.yahoo.com/news/buffett-i-would-disagree-quite-violently-with-notion-that-passive-investing-is-dead-202620430.html


Despite the stock market volatility in recent months set off by the coronavirus pandemic, the Oracle of Omaha declared passive investing isn’t dead.

Warren Buffett stood by his defense of index funds, which are mutual funds that track market indices, such as the Standard & Poor’s 500 index. These investments aren’t actively traded by a wealth manager.

“If you say the day of investing in America is over, I would disagree quite violently,” Buffett said during the 2020 Berkshire Hathaway Annual Shareholders meeting. “There’s something special about index funds.”

He remains so passionate about index funds that it’s a key component of his estate planning.

“Well I can tell you I haven’t changed my will and it directs that my widow would have 90% of the funds in index funds,” Buffett said. “I think it’s better advice than people are generally getting from people that are paid a lot to give advice.”

‘I know which side is going to win over time’

Buffett extolled the low fees offered by index funds along with their profitable performance. He also alluded to some financial advisors who focus more on selling investments than seeing them grow.

“One side has high fees and they think they can pick out stocks and the other side has low fees,” Buffett said. “I know which side is going to win over time.”

A recent study by Index Fund Advisors, an investment firm that showed that just two of Vanguard's actively managed funds could outperform the market.

While he said not all advisors don’t know what they’re doing, he cautioned investors to understand that many are sales-driven.

“You’re dealing with an industry where it pays to be a great salesperson,” Buffett said. “There’s a lot more money in selling than in actually managing, if you look into the essence of investment management.”

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>>> The Retirement ‘Bucket Strategy’ Didn’t Leak During the Worst of the Crash, Because It’s Heavy on Cash


Barron's

By Gail MarksJarvis

April 19, 2020


https://www.barrons.com/articles/the-retirement-bucket-strategy-didnt-leak-during-the-worst-of-the-crash-because-its-heavy-on-cash-51587297601


Reta Lancaster worries a lot that she or her husband, Richard, will be stricken by the new coronavirus. But the retired Indianapolis couple haven’t had a moment’s worry about paying their bills.

The couple, who spent careers in teaching and nonprofits, proved to themselves during two bear markets since 2000 that a large cash stash and what’s known as a “bucket strategy” would get them through the cruelest of markets. And it seems to be working again during the market’s abrupt turn from near record highs to a nearly 35% drop at one point in recent weeks.

“We really are feeling fortunate,” said the 88-year-old Reta, contrasting her peace of mind with retirees whose savings have been savaged during the coronavirus crisis.

A typical iteration of the Lancasters’ strategy includes three buckets designed to give retirees long-term growth potential as well as a stash of cash and liquid investments that can be drawn upon for living expenses and as a bulwark from having to sell stocks in a market downturn.

In the first bucket, a retiree typically has at least two years of cash for any expenses no matter what the stock market does.

A second bucket, containing primarily bonds, provides another safeguard—a stash to get through a stock-market beating as Treasuries typically act as a haven when equities are tumbling. As time goes on, bond income via interest or through maturity replenishes cash that’s been spent from the first bucket.

The third bucket is key: This is where stocks go to provide more long-term growth than bonds or cash, while also potentially yielding cash dividends for use in the first bucket. When a market downturn comes, however, this bucket can be left untouched until stocks rebound.

Christine Benz, director of personal finance for Morningstar, examined the impact of the market tumult on a prototypical bucket strategy in late March. Her conclusion: The third bucket made up of stocks was awful, but that was to be expected. The second bucket of bonds, which are supposed to be relatively safe, had been hit with some “worrisome” losses.

But investors were pacified by their cash, Benz said. “Now is the bucket portfolio’s time to shine. It’s giving people comfort,” she said, and keeping people from bailing out of deep losses on the riskier stock investments they will need over time.

Benz contrasts this volatile period with times when stocks are steadily climbing. During long rising markets, Benz said, investors look at stock gains and question why they should keep two years of cash out of stocks and bonds. Some studies have questioned the strategy, too, because sizable cash stashes can deprive retirees of the growth they need to make portfolios last for 20 or 30 years.

What’s more, bonds have provided meager income in recent years and haven’t always performed as expected during recent downturns. In 2018, bonds were a disappointment and in March, safe Treasuries fell along with stocks at a certain point although they have been cushioning stock losses recently.

“The long-held belief that bonds give you a hedge against a fall in stocks is not always true,” said Patrick Leary, head of trading for InCapital.

While the bucket approach is used by many financial planners, the design of the buckets varies. Some financial planners in the first bucket want cash to last three years in case a long bear market occurs. Others are satisfied with one year. Advisors differ on investment choices, too: Some stick to federally insured savings accounts and certificates of deposit for cash, while some take on a little more risk with money-market funds and short-term bond funds.

“We really are feeling fortunate. ”

— Reta Lancaster, 88, on how the “bucket strategy” has given her and her husband peace of mind during the market crash
In the second bucket, bonds and bond funds are key because they replenish cash as retirees spend the money they originally had stashed away in bucket one. But there is no universal prescription. Advisors usually pick a mixture of bond types, but some lean toward safe U.S. Treasury bonds and top-quality corporates, while others try to boost income with larger exposures to riskier corporate bonds and small allocations of dividend-paying stocks.

This second bucket has been a particular thorn in recent years for many financial planners, who say they have been struggling to hold relatively safe bonds that will provide enough income to replenish the cash retirees need. Ten-year Treasuries, for instance, were recently yielding around 0.70%, compared with 1.6% early this year.

Yet higher-yielding bonds—everything from corporate bonds, to floating rate bank loans, mortgages and municipal bonds—have been dicey as the coronavirus crisis has pummeled the economy. For example, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), lost 21% between March 6 and March 19.

Meanwhile, financial planners say they are sticking with well-diversified portfolios and the security their clients have from large amounts of cash to ride out the coronavirus lockdown.

“Most people have 10 or more years to ride out the storm, and during that time money comes to them virtually every month,” said Marc Hadley, the Lancasters’ financial planner.

If this crisis goes on long enough, though, Long Island financial planner Larry Heller said he might need to suggest some clients reduce their spending. That happened in the financial crisis as the market fell 57% and people panicked and demanded an escape from stocks.

Yet retirees appear positioned well and no one has asked him to sell stocks, Heller says. “They get a check every month so they don’t worry,” he said. “They can sleep.”

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>>> BlackRock Becomes Key Player in Crisis Response for Trump and the Fed


Bloomberg

By Annie Massa

April 17, 2020


President sought advice from Larry Fink in coronavirus fallout

World’s largest asset manager also helped in ‘08 crisis


https://www.bloomberg.com/news/articles/2020-04-17/blackrock-takes-center-stage-with-trump-seeking-to-calm-markets?srnd=premium


As President Donald Trump grappled with the coronavirus outbreak last month, he boasted at a press conference of tapping a secret weapon for advice: Larry Fink.

The chief executive of BlackRock Inc. provided insight to Trump on coping with the fallout from the pandemic -- and once again put his firm at center of a white-hot economic emergency.

BlackRock is no stranger to stepping in during a financial crisis cleanup. It played a similar role in 2008. But back then, it was a smaller firm with a focus on fixed income, closer to Pacific Investment Management Co., which had renowned money managers Mohamed El-Erian and Bill Gross at the helm.

More than a decade later, the investing landscape has shifted. BlackRock has a premiere role in helping the Federal Reserve stabilize markets. The central bank has hired the firm to help manage its economic relief efforts. Beyond U.S. borders, the Bank of Canada has called on the asset manager as it shapes its response to the meltdown.

BlackRock’s government connections reflect the dominance it has achieved in the asset management arena since the last financial crisis. It became the world’s largest asset manager with $6.5 trillion in assets -- a size and breadth that make the firm an essential player on Wall Street, in Washington, and beyond.

That may be an advantage amid the current tumult. “The companies that are going to come out in better shape are going to be the big businesses,” said Greggory Warren, an analyst at Morningstar Inc.

Financial crises can mark inflection points in investor preferences. After 2008, inexpensive index-based investing took off, buoying BlackRock, which holds about two-thirds of its assets in passive funds. Scale allows a massive firm like BlackRock or competitor Vanguard Group Inc. to offer prices that were once unheard of in the industry. Think U.S. stock-tracking funds that cost a few cents for every $100 invested.

“The one thing that rules in this world is cheap,” said Eric Balchunas, an analyst at Bloomberg Intelligence.

The economic recession following the 2008 crash helped set that tone. In the trenches of that contraction, investors became more comfortable using exchange-traded funds, which are tethered to indexes and can be bought or sold at any time in the trading day. Those funds hold about $4 trillion in the U.S., compared to about $531 billion in 2008, according to data compiled by Bloomberg.

BlackRock owes much of its dominance to a well-timed bet on those products. The firm got its start as a bond-focused shop, and had about $1.3 trillion in assets at the end of 2008. Today it is a formidable giant, overseeing about five times that sum. BlackRock first moved into ETFs with its purchase of Barclays Global Investors in 2009, a defining moment in the company’s history. The British bank sold the prized unit after rejecting U.K. government bailout money.

Moving into passive investing put BlackRock’s growth “on steroids,” Warren said. It is the world’s largest global issuer of ETFs today.

BlackRock’s government advisory business also cemented some crucial relationships in the fallout from 2008. BlackRock scored mandates to manage portfolios of toxic assets from Bear Stearns Cos. and American International Group Inc., playing to Fink’s roots in structuring mortgage-backed securities.

Today, BlackRock’s role is even more expansive. The Fed enlisted the New York-based firm to shepherd three debt buying programs. Canada’s central bank is bringing in BlackRock as an adviser in purchases of commercial paper, a form of short-term debt companies use to fund day-to-day expenses like payroll.

Beyond Covid-19-related mandates, the firm also won a contract to help incorporate sustainability into the European Union banking system.

“I do believe it’s going to continue to bring opportunities for us,” Fink said on an earnings call on Thursday, referring to BlackRock’s government assignments. He added he’s “very proud of” such work.

Another giant located across the country, Pimco, is reprising a role it played in the 2008 financial crisis too. The Fed once again called on Pimco as the investment manager for its purchases of commercial paper.

The Newport Beach, California-based firm oversaw $1.8 trillion at the end of the first quarter. In the intervening years since the last financial collapse, it has stuck to its original ethos as an active fixed income investment company.

Along with the rest of the active fund management industry, Pimco faced some challenges in an era when belief in star fund managers began to fade. One of the most dramatic examples of that arc was investing legend Bill Gross.

Gross, Pimco’s former chief investment officer, founded the Pimco Total Return Fund in 1987 and turned it into a behemoth. The fund had almost $300 billion in assets at its peak in 2013, and generated annualized returns of 7.8% from inception through his last day.

But when Gross left for Janus Henderson Group Plc in September 2014, an investor exodus followed. The fund suffered total redemptions of more than $100 billion in the 12 months after he departed.

Pimco spokesman Michael Reid responded to a request for comment on Gross by pointing to remarks from Morningstar analyst Eric Jacobson. “The firm didn’t flinch,” Jacobson said. “Pimco managed to keep performance competitive or better in most cases despite the outflows.”

“As an active manager, Pimco’s defensive positioning and liquidity management enabled us to navigate unprecedented market volatility,” Reid said in a statement. “We now see some extremely attractive long-term value in higher-quality segments of the investment-grade credit and mortgage markets as well as in more resilient areas of emerging markets.”

Gross was also known for his discursive investor letters that touched on topics like his dead cat and the eroticism of sneezing. In recent years, Fink’s annual missives have attracted similarly broad industry attention, albeit with a more staid style.

Proponents of active management argue that the industry gains additional edge in times of volatility. Though cheap index funds are easy to love when markets rise, active managers say they’re better suited to pick through the rubble after a downturn. (BlackRock has significant resources in active funds of its own, with $1.8 trillion in such strategies.)

Size and ties to governments put firms like BlackRock and Pimco, which is owned by German insurance giant Allianz SE, on stronger footing as the world navigates the unprecedented changes brought by the pandemic, said John Morley, a Yale University Law School professor who studies the regulation and structure of investment funds.

“The small asset managers may not have the resources to weather the storm,” he said.

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Here is where the 're-entry' funds will be invested if anyone is interested -

Broad Market ETF (double weight this)

High Dividend ETF

Utilities ETF

Consumer Staples ETF

REIT ETF

Info Tech ETF

Energy ETF (not to keep forever)

Gold ETF (to supplement the 10% already in bullion)

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>>> A $33 Billion ETF Sees Most Cash in 18 Years on Fed-Fueled Rally


Bloomberg

By Katherine Greifeld

March 25, 2020


https://www.bloomberg.com/news/articles/2020-03-25/a-33-billion-etf-sees-most-cash-in-18-years-on-fed-fueled-rally?srnd=premium


LQD on track for best week ever after $1.5 billion inflows

Fed signaled ‘unlimited firepower’ for bond markets: Tannuzzo


The Federal Reserve’s planned foray into the corporate-bond market has exchange-traded fund investors rushing in at a breakneck pace.

Investors poured a record $1.5 billion into the iShares iBoxx $ Investment Grade Corporate Bond ETF on Tuesday, following a $1 billion influx on Monday, according to data compiled by Bloomberg. The back-to-back inflows have put the $33 billion LQD on track for its best week on record after the U.S. central bank said it would begin buying corporate bonds and certain credit ETFs.

The Fed’s pledge of support and a $2 trillion stimulus deal have eased corporate default fears after the coronavirus outbreak reignited solvency concerns. Now, investors are racing to get ahead of the central bank’s purchases. LQD has rallied for four consecutive sessions and posted its biggest gain since 2008 on Monday after the Fed announced its plans.

“Signaling that they have unlimited firepower is huge for the market,” said Gene Tannuzzo, a Columbia Threadneedle portfolio manager. “The investment-grade market offers the best risk-adjusted return right now.”

LQD sees biggest inflow ever as high-grade bonds rally
The U.S. central bank said Monday that it would create a Secondary Market Corporate Credit Facility, one of several new measures aimed at cushioning the economic blow from the coronavirus. The terms of the facility allow for the purchase of up to 10% of an issuer’s outstanding bonds and up to 20% of the assets of any ETF “whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds,” a primer accompanying the Fed action said.

The Fed’s involvement is also helping to restore order to credit ETFs, Tannuzzo said. LQD’s share priced has climbed nearly 3% higher than the value of its underlying assets -- the fund’s biggest premium since 2009. Last week, it slumped to a discount of 5% relative to the presumptive value of its bond holdings.

While policy makers have committed to being the “broker of last resort” for U.S. corporations, uncertainty over the virus’ economic fallout will limit the rally in high-grade bonds, according to Janney Montgomery Scott LLC’s Guy LeBas.

“Now that the liquidity floor is in place, that should support valuations to a point, but I doubt spreads return to pre-February levels for some time,” said LeBas, chief fixed income strategist. “Pricing credit is a very imprecise exercise right now given the unprecedented nature of the economic downturn.”

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>>> Utilities Plunge: Making Sense Of The Sector's Big Decline


Seeking Alpha

Mar. 23, 2020

by Ian Bezek


https://seekingalpha.com/article/4333697-utilities-plunge-making-sense-of-sectors-big-decline


Summary

Utility stocks dropped nearly 20% between last Tuesday and last Friday.

This has to be concerning to investors that bought these stocks as strong defensive plays.

There are two factors that could hurt utility profitability going forward.

The sector offers fine yields, but isn't compelling yet aside from the income.

This idea was discussed in more depth with members of my private investing community, Ian's Insider Corner. Get started today »

This article was highlighted for PRO subscribers, Seeking Alpha's service for professional investors. Find out how you can get the best content on Seeking Alpha here.

Last week, the Utility Select Sector SPDR (XLU) sector got utterly smashed. From Tuesday's high onward, the XLU ETF lost 18% of its value. I don't recall these names ever getting hit this badly, even in 2008. It's simply been an incredible drop, with the sector giving back 5 years of gains in a little over a month:

Even more incredibly, if you go way back, XLU was trading for $43 prior to the financial crisis. Thus it's only gone up 10% over the past 13 years, with all other returns coming from dividends. Even farther back, XLU traded for as much as $34 in the year 2000, meaning that the ETF is up only 40% over the past 20 years. Of course, with dividends, things look a lot better. Still, it's a stunning turn of events for a sector that had looked unstoppable over the past two years. On a longer-term chart, you can see that XLU is rapidly threatening to breach price levels from more than a decade ago:

What can we take away from this? For one, utilities have reverted to form - they're simply not a great (nor particularly bad) industry historically. Over the past 82 years (data through 2015) utilities were the median sector, coming in 15th out of 30 in the market, producing essentially market-matching returns:

That table comes from this article, where I discussed this data in much more detail. The fundamental return is calculated based on the real annual growth of dividends over the past eight decades.

As for the question of utilities being defensive, though their stock prices suddenly gave way last week, the companies are still favorable ones to hold in an economic downturn. But investors were using them to play offense throughout 2019, hoping that falling interest rates would lead to sustained higher valuation ratios for the sector. In theory, that's probably still a reasonable hypothesis; reliable dividend streams are worth a lot more in a zero interest rate world.

In the short-run, however, above average valuation ratios become their own risk factor. When people are getting margin calls, or simply wanting to shift funds into more beaten-up names, they're going to sell the stuff where they are still showing a profit. Defensive assets can turn into a source of funds during a panic; even gold (GLD) started selling off at the height of the market panic. Simply put, people will get funds in the short-term wherever they can find them.

Over the long-haul, however, utilities should remain a defensive sector. Thus, is now the time to be buying as prices have come in dramatically? In some cases, yes. A lot of individual utility stocks have come down a great deal in March. That said, before you get too aggressive with your purchases, here are a couple of things to keep in mind.

Potential Issues: Declining Demand, Declining Returns On Equity
Interestingly, there's been (at least that I've seen) little discussion of the economic impact of the current situation on utility companies. Sure, some folks are considering the possibility of the government stopping utilities from collecting on past due clients for the duration of the crisis. That could hurt a bit on a marginal basis.

But zoom out. If the economy grinds to a halt for a few months, what happens to electricity usage? Over in the oil market, traders have quickly reacted to the slowdown by absolutely slamming the price of crude, and its refined products such as gasoline. Oil is more sensitive to the economy than electricity, as oil is the dominate transportation fuel. Most electricity uses, by contrast, aren't greatly impacted by a near-term economic slowdown.

Still, it probably isn't reasonable to think that electricity demand will remain steady. What do we have for data? I haven't seen much yet, but I did run across this interesting data point on New York City electricity usage. There's a ton of caveats here, as it's just one city, the weather could be a factor, and so on. But there appears to be a sharp rollover that started in the week of March 16th:

Historically, we can also look back to 2000 and 2009. Interestingly, due to rises in efficiency, electricity usage per person has pretty much stopped going up in the U.S. - it peaked in 2000 and has gone no higher:

Looking at the data, we can see there was a noticeable decline between 2000 and 2001, in some part likely due to the overall economic slowdown and then also specifically the sizable drop-off in economic activity immediately following the 9/11 attacks.

Moving forward, from 2008 to 2009, electricity consumption per capita dropped from 13,663kWh to 12,914. The effect was particularly harsh in the first quarter of 2009, when the economy and stock market were still heading downward. For that quarter, Power Magazine reported that residential electricity consumption was down 2.5%, commercial consumption was down 4.7%, and industrial consumption was down by fully 13.8%.

We should expect as much of a decline, and probably significantly more in the near-term, in 2020. Residential usage may actually go up a touch, as people spend far more time at home. That said, the marginal electricity use from staying at home probably isn't that high, many high-impact uses such as heating and appliances aren't going to change too much.

Meanwhile, commercial use is going to get pummeled. In 2009, stores had less activity, but there wasn't a mass government-ordered shutdown. You had malls with few shoppers, but not malls that were locked up with everything turned off inside as we have now. Similarly, industrial use will plummet for the length of the shutdown, as non-essential factories simply won't operate.

Longer-term, there's also the question of authorized returns on equity "ROE". Utilities tend to bargain with states and localities to earn a set rate on their capital investments. These ROE targets are a balance that should give utilities sufficient incentive to invest in needed services and provide safe and reliable operations for consumers. On the other hand, the locality has an obvious incentive to keep the utility from price gouging. These ROE targets are a well-known feature of the industry - here's a table by S&P from 2017, for example, showing this process in action:

There are now two factors working against utilities going forward. For one, with the economy hurting, look for states to be tougher at the negotiating table. When times are tough, there's less slack to be had overall. Second, the lower interest rates for longer environment is going to drag down the overall "fair" ROE target as time goes on. In a world where a utility's capital costs, say, 5%, a 10% ROE might make sense. But if the utility can now get capital at half that, the state or locality is likely to want a chunk of that savings as well. At the end of the day, utilities are regulated businesses, and as such, they aren't going to get the full benefits of favorable market-pricing developments.

As I showed above, historically utilities have been an average industry, doing no better or worse than the market as a whole. And after their recent sell-off, many individual utility stocks are back to more normal valuations, though they're by no means "cheap" yet.

Should you buy some? They're still one of the safest income sources around, no doubt, and the current yields have moved up nicely. For longer-term investors, however, you can surely find more attractive stocks that are much more deeply-discounted at the moment.

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Fwiw, started nibbling today, and will be using a re-balancing plan to get the stock allocation back up to 25%, and eventually up to 30% or 33% over the next 10 weeks. The basic idea is to add equal amounts daily to these 4 categories until the allocation goal is reached. I figure a systematic approach reduces the timing risk, and reduces the emotional aspects. Plus, if you are buying every day, you don't mind when the prices drop -


A) Broad Market (VOO, IVV, ITOT, VTI)

B) High Dividend (VYM, SCHD, HDV)

C) Utility (XLU, VPU, FUTY)

D) Consumer Staples (VDC, XLP, FSTA)


For my own account I'll probably add in a few additional categories -


E) Cloud Computing (SKYY, CLOU, WCLD)

F) Energy (XLE, VDE)

G) Alternate Energy (PZD)

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>>> High-Grade Bond-Fund Outflows Hit $35.6 Billion, Smashing Record


Bloomberg

By Claire Boston, Olivia Raimonde, and Alex Harris

March 19, 2020


https://www.bloomberg.com/news/articles/2020-03-19/investors-pull-record-35-6-billion-from-investment-grade-debt?srnd=premium


Withdrawal dwarfs second-largest outflow of $7.3 billion

Record $249 billion added to government money-market funds


Investors withdrew an unprecedented $35.6 billion from U.S. funds that buy up investment-grade debt this week as the global market rout from the spreading coronavirus intensified. At the same time, a record $249 billion poured into U.S. government money-market funds.

The withdrawals from corporate high-grade debt blow through the previous record $7.3 billion outflow from last week, according to Refinitiv Lipper. Funds that buy junk bonds lost $2.9 billion in the five business days ended March 18, while leveraged loan investors withdrew about $3.5 billion.

Credit markets had another volatile week amid a worldwide meltdown in risk assets. Risk premiums on investment-grade bonds reached levels not seen since the financial crisis, while junk bond yields breached 10% for the first time in more than eight years.

”The number is off the charts, but so is the magnitude of this market correction,” Dorian Garay, a portfolio manager at NN Investment Partners, said in reference to the investment-grade bond outflows.

Despite the turmoil, investment-grade companies including Walt Disney Co. and PepsiCo Inc. seized moments of relative calm to issue new debt. Many firms selling bonds this week were doing so to reduce their reliance on the commercial paper market, where prices have risen rapidly amid a broad market seize-up. Lipper fund flow data covers investment-grade funds that manage about $1.3 trillion in assets.

“The flows into IG have been so steady over the past eight years, that it was like the farmer coming with a daily handful of grain to feed the turkey in the back yard,” said Gregory Staples, head of fixed income at DWS Investment Management. “Today what the farmer had in his hand was an axe.”

Investment-grade bonds are poised for another one of the largest weekly losses on record as spreads widen to crisis levels. The three most recent daily outflows from high-grade funds and exchange-traded funds are the largest on record, Bank of America Corp. strategists led by Hans Mikkelsen said in a report Wednesday.

Money-Market Funds

The Federal Reserve stepped in on Tuesday, announcing that it would reintroduce the Commercial Paper Funding Facility, a measure it used during the financial crisis to shore up short-term funding markets.

Total assets in government money-market funds rose to an all-time high of $3.09 trillion in the week ended March 18, according to Investment Company Institute data that stretches back to 2007.

The prior weekly inflows record of $176 billion was set in September 2008 during the financial crisis caused by the collapse of Lehman Brothers.

Prime money-market funds, which tend to invest in higher-risk assets such as commercial paper, saw outflows of $85.4 billion, the largest move since October 2016, according to ICI. Total assets fell to $713 billion.

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Some vehicles (ETFs) to re-enter the stock market in the weeks/months ahead -


A) Broad Market (VOO, IVV, ITOT, VTI)

B) High Dividend (VYM, SCHD, HDV)

C) Utility (XLU, VPU, FUTY)

D) Consumer Staples (VDC, XLP, FSTA)


These conservative sectors may lag somewhat as the overall market recovers (vrs say tech stocks), but they should drop less if the market continues to fall more than expected (beyond the 40% drop to the S+P support area at 2000-2100).

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>>> Best & Worst ETFs During Market Chaos


ETF.com

March 05, 2020

by Sumit Roy


https://www.etf.com/sections/features-and-news/best-worst-etfs-during-market-chaos?nopaging=1


Not many areas of the market have been immune to the enormous gyrations the financial markets have seen lately. In the two weeks since the S&P 500 peaked, most exchange-traded funds have fallen. Likewise, most ETFs rose when the market had two extraordinary rallies of more than 4% on Monday and Wednesday.

But while most ETFs have been moving in tandem, the gains and losses haven’t been equal. Since its Feb. 19 top, the SPDR S&P 500 ETF Trust (SPY) is down 10.6% through March 4 (it was down as much as 12.4% on a closing basis, and 15.8% on an intraday basis at its trough on Feb. 28). On a year-to-date basis, SPY is down about 6%.

SPY’s performance in the past two weeks sits at about the middle of the pack; some ETFs have done better, while others have done worse.

Safe Havens

Inverse ETFs aside, it’s been extremely difficult to generate gains in the market since the Feb. 19 peak. It comes as no surprise that one of the few segments to perform well in that time frame is the bond market. Treasuries and other investment-grade bond ETFs have simply been on fire.

The iShares 20+ Year Treasury Bond ETF (TLT) and the iShares 7-10 Year Treasury Bond ETF (IEF) gained 9.1% and 5.2%, respectively, since Feb. 19. On a year-to-date basis through March 4, the two funds are up 17.4% and 8.4%.

Those are fantastic returns, and come as interest rates hover at record lows (bond yields and prices move inversely).

Another safe-haven winner during the past two weeks is gold. The yellow metal leapt to seven-year highs of $1,689/oz on Feb. 24. Since then, prices cooled down a little bit to around $1,670, but the SPDR Gold Trust (GLD) is still up 3.8% since Feb. 19 and 10.2% on a year-to-date basis—not as good as long-duration Treasuries, but better than IEF, the 7-10 year Treasury fund.

Gold Near A 7-Year High



China ETFs

Who could have imagined that stocks trading in China, the epicenter of the coronavirus, would end up being among the best performers of the past two weeks? But that’s precisely what’s happened.

The Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) is up 4.3% in the period and 1.7% year-to-date. Two explanations for this puzzling performance come to mind. One, China got hit by the virus first, the government took drastic action to combat it, and there are signs the epidemic may be peaking in the country. The market may be anticipating that China will be the first country to recover from the crisis thanks to decisive action from the authoritarian government.

Another explanation is that the Chinese government may be propping up the financial markets. It wouldn’t be the first time that China lent support to its equity markets to prevent panic and provide confidence to its financial system.

Surprising Strength In ASHR



Sector Outperformers

Within the U.S. equity market, sector performance has deviated significantly. The S&P 500 may be down 10.6% over the past couple of weeks, but relatively safe consumer staples stocks are down only 3.8%, as measured by the Consumer Staples Select Sector SPDR Fund (XLP).

The Utilities Select Sector SPDR Fund (XLU) and the Real Estate Select Sector SPDR Fund (XLRE) are also outperforming, with losses of 3.6% and 5%, respectively, in the same period. The two sectors have been aided by plunging interest rates.

Then there is the Health Care Select Sector SPDR Fund (XLV), which has fallen 6.1% since the correction began. XLV made up a lot of ground on Wednesday, when it surged 5.7%, its biggest single-session gain since 2008. Surprise victories by Joe Biden in the Super Tuesday democratic primaries reduced concerns about Medicare-for-all and other health care measures that could negatively impact the sector’s profits.

On a year-to-date basis, XLP is down 1.5%; XLU is up 4.7%; XLRE is up 1.3%; and XLV is down 4.1%.

XLU Is Up Year-To-Date



Sector Laggards

On the flip side of the sector ledger are laggards like the Energy Select Sector SPDR Fund (XLE) and the Financial Select Sector SPDR Fund (XLF). The two worst-performing sectors, energy and financials, were down 17.9% and 15%, respectively, in the two weeks since Feb. 19.

In a way, financials are the flip side of real estate. The latter gets a boost from lower rates, while the former is hurt by them. Investors in financials certainly don’t want to see a situation like that in Europe, where negative interest rates have decimated the profitability of the region’s banking sector.

Additionally, the energy sector, already a pariah among investors, was hit yet again by the coronavirus-induced sell-off in oil prices. Crude was last trading below $46/barrel as traders anticipate the biggest slowdown in oil demand since the financial crisis.

The only saving grace for energy investors are the sky-high dividend yields the sector provides. XLE was last yielding nearly 5%.

XLE At An 11-Year Low



Other Laggards

XLE isn’t the only energy ETF to be walloped in the past two weeks. Two popular ETFs with exposure to smaller companies in the space, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the VanEck Vectors Oil Services ETF (OIH) each tumbled more than 25% in just the past two weeks alone and are down by more than 37% on a year-to-date basis.

Meanwhile, cheaper fuel prices haven’t been enough to offset the plunging demand for travel that airlines are facing. The US Global Jets ETF (JETS) sank nearly 30% since the market top and by a similar amount for the year as a whole.

On Wednesday, United Airlines announced that it is cutting its international flights by 20% and its domestic flights by 10% next month.

JETS Losing Altitude



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>>> Heading Into Negative (Real) Interest Rates


BY JAMES RICKARDS

MARCH 5, 2020


https://dailyreckoning.com/heading-into-negative-real-interest-rates/


Heading Into Negative (Real) Interest Rates

Last July I was in Bretton Woods, New Hampshire, along with a host of monetary elites, to commemorate the 75th anniversary of the Bretton Woods conference that established the post-WWII international monetary system. But I wasn’t just there to commemorate the past —I was there to seek insight into the future of the monetary system.

One day I was part of a select group in a closed-door “off the record” meeting with top Federal Reserve and European Central Bank (ECB) officials who announced exactly what you can expect with interest rates going forward — and why.

They included a senior official from a regional Federal Reserve bank, a senior official from the Fed’s Board of Governors and a member of the ECB’s Board of Governors.

Chatham House rules apply, so I still can’t reveal the names of anyone present at this particular meeting or quote them directly.

But I can discuss the main points. They essentially came out and announced that rates are heading lower, and not by just 25 or 50 basis points. Rates were 2.25% at the time. They said they have to cut interest rates by a lot going forward.

Well, that’s already happened. The Fed cut rates last September and October (each 25 basis points), bringing rates down to 1.75%. And now, after Tuesday’s emergency 50-basis point rate cut, rates are down to 1.25%.

That’s a drop of one full percentage point. If the Fed keeps cutting (which is likely), it’ll soon be flirting with the zero bound. And if the economic effects of the coronavirus don’t dissipate (very possible), the Fed could easily hit zero.

But then what?

These officials didn’t officially announce that interest rates will go negative. But they said that when rates are back to zero, they’ll have to take a hard look at negative rates.

Reading between the lines, they will likely resort to negative rates when the time comes.

Normally forecasting interest rate policy can be tricky, and I use a number of sophisticated models to try to determine where it’s heading. But these guys made my job incredibly easy. It’s almost like cheating!

The most interesting part of the meeting was the reason they gave for the coming rate cuts. They were very relaxed about it, almost as if it was too obvious to even point out.

The reason has to do with real interest rates.

The real interest rate is the nominal interest rate minus the inflation rate. You might look at today’s interest rates and think they’re already extremely low. And in nominal terms they certainly are. But when you consider real interest rates, you’ll see that they can be substantially higher than the nominal rate.

That’s why the real rate is so important. If you’re an economist or analyst trying to forecast markets based on the impact of rates on the economy, then you need to focus on real rates.

Assume the nominal rate on a bond is 4%; what you see is what you get. But the real rate is the nominal rate minus inflation. If the nominal rate is 4% and inflation is 2%, then the real rate is 2% (4 – 2 = 2).

That difference between nominal and real rates seems simple until you get into a strange situation where inflation is higher than the nominal rate. Then the real rate is negative.

For example, if the nominal rate is 4% and inflation is 5%, then the real rate of interest is negative 1% (4 – 5 = -1).

The U.S. has never had negative nominal rates (Japan, the eurozone and Switzerland have), but it has had negative real rates.

By the early 1980s, nominal interest rates on long-term Treasury securities hit 13%. But inflation at the time was 15%, so the real rate was negative 2%. The real cost of money was cheap even as nominal rates hit all-time highs.

Nominal rates of 13% when inflation is 15% are actually stimulative. Rates of 3% when inflation is 1% aren’t. In these examples, nominal 2% is a “high” rate and 13% is a “low” rate once inflation is factored in.

What is the real rate today?

The yield to maturity on 10-year Treasury notes is currently at a record low of under 1% (it actually fell to 0.899% today before edging slightly higher). That’s never happened before in history, which is an indication of how unusual these times are.

Meanwhile, inflation as measured by the PCE core deflator (the Fed’s preferred measure) is currently about 1.6% year over year, below the Fed’s 2% target.

Using those metrics, real interest rates are in the neighborhood of -.5%. But believe it or not, that’s actually higher than the early ’80s when nominal rates were 13%, but real rates were -2%.

That’s why it’s critical to understand the significance of real interest rates.

And real rates are important because the central banks want to drive real rates meaningfully negative. That’s why they have to lower the nominal rate substantially, which is what these central bank officials said at Bretton Woods.

So you can expect rates to go to zero, probably sooner or later. Then, nominal negative rates are probably close behind.

The Fed is very concerned about recession, for which it’s presently unprepared. And with the coronavirus, now even more so. It usually takes five percentage points of rate cuts to pull the U.S. out of a recession. During its hiking cycle that ended in December 2018, the Fed was trying to get rates closer to 5% so they could cut them as much as needed in a new recession. But, they failed.

Interest rates only topped out at 2.5%, only halfway to the target. The market reaction and a slowing economy caused the Fed to reverse course and engage in easing. That was good for markets, but terrible in terms of getting ready for the next recession.

The Fed also reduced its balance sheet from $4.5 trillion to $3.8 trillion, but that was still well above the $800 billion level that existed before QE1 (“QE-lite” has since taken the balance sheet up above $4 trillion, and it’s probably going higher since new cracks are forming in the repo market).

In short, the Fed (and other central banks) only partly normalized and are far from being able to cure a new recession or panic if one were to arise tomorrow.

The Fed is therefore trapped in a conundrum that it can’t escape. It needs to rate hikes to prepare for recession, but lower rates to avoid recession. It’s obviously chosen the latter option.

If a recession hit now, the Fed would cut rates by another 1.25% in stages, but then they would be at the zero bound and out of bullets.

Beyond that, the Fed’s only tools are negative rates, more QE, a higher inflation target, or forward guidance guaranteeing no rate hikes without further notice.

Of course, negative nominal interest rates have never worked where they’ve been tried. They only fuel asset bubbles, not economic growth. There’s no reason to believe they’ll work next time.

But the central banks really have no other tools to choose from. When your only tool is a hammer, every problem looks like a nail.

Now’s the time to stock up on gold and other hard assets to protect your wealth.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Hottest Bond Market in History Is Starting to Make Some Nervous


Bloomberg

By Cecile Gutscher and Anchalee Worrachate

March 3, 2020


https://www.bloomberg.com/news/articles/2020-03-03/hottest-bond-market-in-history-is-starting-to-make-some-nervous?srnd=premium


Duration bets at a record as coronavirus spurs caution

Haven play may turn dangerous if doomsday doesn’t come


Surging rate-cut expectations and a desperate lunge for safe assets amid the coronavirus outbreak have earned the bond market a lot of fans in recent weeks. The resulting rally is creating a few detractors, too.

A growing chorus of strategists and money managers is voicing concern as investors charge into government debt at seemingly any price.

The fear is they’re exposing themselves to interest rate risk like never before, risking a precipitous slump on even a modest bump in yields. One breakthrough in the fight against the illness, or a sign the global economy is recovering faster-than-expected, might be all it takes.

The yield on 10-year Treasuries touched an all-time low on Monday but traders didn’t have to look far for clues of just how fast the narrative can change. The S&P 500 Index surged 4.6% on bets central banks would coordinate to limit the economic impact of the virus. The moves highlight belief in some corners that policy action will stoke growth, creating upward pressure for stocks and bond yields.

“If things go a little better -- if there is a cure in the next two, three months or if with warmer weather the virus fades -- then long-end rates will sell off,” said Alberto Gallo at Algebris Investments. “Duration is expensive to protect the portfolio.”

The London-based money manager said he’s using short positions in credit to hedge the risk of a deeper sell-off.

Bond duration risk rises to record

Amid a rally so ferocious that it has stirred speculation some Treasury yields could even be headed below zero, the danger of rising bond yields still seems remote. Even those flagging it as a concern aren’t ready to unwind their bets on longer bonds -- for now.

The Federal Reserve’s announcement Friday that it was ready to act if needed took 10- and 30-year Treasury yields to new lows, with futures markets now pricing in more than 100 basis points of Fed cuts this year. The announcement by the Fed, a rare departure from typical central bank protocol, ushered in similar assurances from the Bank of Japan and the Bank of England.

The yield on the Bloomberg Barclays Global Aggregate Bond Index, which includes developed and emerging-market debt from governments and corporations, tumbled to 1.05% Monday, its lowest ever.

Global bond yields hit record low as investors seek virus havens
Still, the risks of taking one-way bets on bonds at such elevated valuations loom large. Sensitivity to changes in rates measured by duration is running at a record 8.6 years in the Bloomberg Barclays Global Aggregate Treasuries Index. That means every percentage point increase in average yields would spark a price decline of about 8.6%.

Bond traders throwing their faith behind policy makers should also be thinking about how steps to shore up confidence will affect those bets, according to Jim McCormick, the London-based global head of desk strategy at NatWest Markets. A boost to economic growth would ultimately mean higher long-dated yields.

“Central banks will likely cut and unlikely unwind them when things settle, but a recovery plus more fiscal policy should pressure the back end of the curve,” he said. “The curve steepens if the combination of policy response works.”

A sobering assessment by the OECD Monday did little to assuage market panic. The Paris-based group warned of possible global contraction this quarter and cut its full-year growth to just 2.4% from 2.9%, which would be the weakest since 2009.

As the number of new virus cases in China declines, those elsewhere are climbing, with countries like Brazil and Pakistan reporting instances of the illness for the first time.

But if measures to contain and stamp out the illness take hold, China returns to work and records an upswing in growth in the second quarter, bets on expensive government bonds may start to look dangerous.

Bond momentum signals tracked by a type of systematic investors known as trend followers have turned so extreme their bullish bets are now vulnerable to profit-taking, according to JPMorgan Chase & Co.

TLT posts its largest weekly outflow in more than a month
Wariness is reflected in passive flows in the world’s most heavily traded government debt product, the iShares 20+ Year Treasury Bond fund, which shows investors’ love affair with duration may be cooling somewhat. The ETF just posted its largest weekly outflow in more than a month.

“Chasing bonds when yields are at an all-time low seems very risky,” said Mark Dowding, a money manager at BlueBay Asset Management, who has a neutral stance on duration. “At the same time it seems that news flow on the virus will get worse before it gets better.”

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Here's how the various sectors have performed since the S+P peaked on Feb 19 (approx figures) -


S+P 500 ------------ down 13%

1x Inverse S+P 500 ETF -- up 14%
HDGE -------------------- up 11%
Long Term Treasuries ---- up 7%
Intermediate Treasuries - up 2%
Total Bond Market ------- up 2%
Cash -------------------- no change

Gold bullion -------------- down 2%
Gold Miners (GDX) ------- down 12%
Gold Miners (GDXJ) ------ down 14%

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Looking at how the various 'hedges' did today in comparison to the S+P 500 -


STOCKS -
**************
SPY - down 3.3%
SH --- up 3.5%


CASH -
***********
no change


BONDS -
***********
VGLT --- up 1.5% (Long term Treasuries)
VGIT --- up 0.5% (Int term Treasuries)
BND ---- up 0.31% (Total bond market)


GOLD BULLION -
***********************
GLD ---- up 0.90%


GOLD MINER ETFs -
**************************
GDX ---- up 1.3%
GDXJ -- down 0.13%


GOLD MINING STOCKS -
*******************************
AUY --- down 0.64%
LMCNF - down 1.5%
HL ---- down 5.5%
CDE --- down 7.2%
MUX --- down 7.7%

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>>> There’s a Wall of Cash Eager to Buy Treasuries on Any Price Dip


Bloomberg

By Liz McCormick and Ruth Carson

February 16, 2020


https://www.bloomberg.com/news/articles/2020-02-16/there-s-a-wall-of-cash-eager-to-buy-treasuries-on-any-price-dip?srnd=premium


It’s ‘a resilience play that makes sense’: BlackRock’s Thiel

Pensions, mutual funds and hedge funds have all piled in


Investors overseeing trillions of dollars are plowing money into U.S. government debt like never before, in a wave that’s only gaining strength as the spreading coronavirus casts doubt on the global growth outlook.

Evidence of the insatiable demand can be found across the fixed-income universe. Pensions, which have been ramping up bond allocations for more than a decade after a change in regulations, now hold a record amount of longer-dated Treasuries. Bond mutual funds saw a historic inflow of money last year, with no sign of a slowdown. Even hedge funds have piled in.

The wall of cash is a boon to American taxpayers as the federal deficit swells. It’s keeping Treasury yields, a benchmark for global borrowing, near all-time lows. With buyers ready to pounce, even surging stocks, record auction sizes and the tightest labor market since the 1960s can barely make a dent in bond prices.

“Treasuries are a resilience play that makes sense,” said Scott Thiel, chief fixed-income strategist at BlackRock Inc. “And so far, people have been rewarded for coming in and buying when yields get to the high end of the range.”

Investors have been buying on dips in Treasury prices
Just weeks ago, global economic reflation and the seeming inevitability of higher yields were the buzz among strategists and investors. The virus’s onslaught is unraveling that narrative, which already faced skepticism from those who argue that persistently low inflation and shifting demographics will pull yields lower.

“I expect the Treasury 10-year yield to fall to zero, perhaps within two years,” said Akira Takei, a global fixed-income fund manager at Asset Management One Co., which oversees more than $450 billion. “I’ve been overweight U.S. Treasuries. That’s based on my view that developed economies are facing a combination of aging demographics and falling birth rates, slow growth and low inflation.”

Investors snapping up Treasuries as an insurance policy have turned the U.S. yield curve on its head. With inflation still subdued and concern mounting that the spreading illness will damage an already fragile global economy, traders have boosted bets on Federal Reserve rate cuts in 2020. That prospect is in turn supporting equities.

The appetite for debt has extended to sovereign obligations of all flavors. One example: Greek 10-year rates once near 45% slid below 1% this month. The country’s junk rating is proving little deterrent with the world’s pile of negative-yield debt climbing above $13 trillion amid the latest global bond rally.

Benchmark 10-year U.S. yields have dropped to around 1.6%, from a 2020 peak of 1.94% in the first week of the year. The world’s biggest bond market has earned about 2.2% this year, after a 6.9% return in 2019 -- the best performance since 2011.

READ MORE

Bond Market Braces for Fresh Trillion-Dollar Fund Flow Wave

Bond Funds See Record Inflows After Virus Spurs Bets on Stimulus

Inverting Treasury Curve Shows Global Fear More Than U.S. Slump


“You still need a duration ballast and shock absorber,” said Con Michalakis, chief investment officer of retirement fund Statewide Superannuation Pty., which manages about $7 billion in Adelaide, Australia. “And I don’t see yields moving materially higher from here.”

The likely economic hit from the virus reinforces that view. Fed Chairman Jerome Powell last week cited the outbreak as a risk. Goldman Sachs Group Inc. predicts it will subtract two percentage points from annualized global growth this quarter.

“If the Fed is staying super-accommodative -- basically in reflation mode -- then you want to buy equities, credit and, strangely, you also want to buy Treasuries,” said Ralph Axel, an analyst at Bank of America Corp.

The demand for Treasuries in some corners has been building for years. U.S. corporate pensions, for example, have been big buyers since the federal Pension Protection Act, passed in 2006.

For the top 100 funds, with combined assets of more than $1.4 trillion, the fixed-income allocation surged to about 49% at the end of 2018 from 29% in 2005, as equities’ share fell by half to 31%, according to Milliman Inc., a pension and risk advisory firm. JPMorgan Chase & Co. strategists estimate the debt portion topped 50% as of December.

An up-to-date read on retirement funds’ demand can be seen in the record surge in Strips, which are created when Treasuries are split into principal- and interest-only securities. Pensions tend to favor these assets, which have longer duration, or sensitivity to interest-rate changes, to match the length of their liabilities.

Pension funds' Treasury demand seen in Strips rise

Soaring stocks are also spurring buying of bonds on price declines.

U.S. public pensions, with total assets of over $4 trillion, have kept holdings steady over the past five years, at about 25% in fixed income, 50% in public equities and the rest in alternative investments, according to data from the Pew Charitable Trusts.

As equities have climbed, the funds have needed to buy more debt to keep the breakdown stable, said Greg Mennis, director of public sector retirement systems at Pew.

Veteran bond manager Dan Fuss says he’s been been buying Treasuries as a safety play. He points to last week’s 10-year auction as a sign that yields won’t bust higher anytime soon. A measure of demand for the $27 billion sale was the highest since March.

“When you look at the bids for the 10-year notes, you’d have thought, ‘Wow, the government was giving out free ice cream’,” said Fuss, vice chairman of Loomis Sayles & Co. “There’s just more money available to invest than there’s marketable investment opportunities, and no risk of inflation at this time.”

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Ray Dalio and Jim Rickards each have a big chunk in Treasuries, 55% and 40% respectively, to go along with their 7.5% and 10% in physical gold.

Rickards recommends Treasury notes (which mature in 2-10 years), while Dalio uses longer maturity Treasuries (40% long term, 15% intermediate term). Rickards also said he has 30% in cash.

Beyond gold, both recommend owning real assets. Dalio has 7.5% in commodities, and Rickards likes fine art and natural resource plays like oil, water, and land.

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More on Ray Dalio's 'All Weather Fund' allocation -


Apparently it took Dalio 10 years to perfect his 'All Weather Fund' approach, and he has his entire family fortune (approx $18 bil) invested using this asset allocation.

According to Robbins, Dalio back tested this allocation going back 75 years, and it performed phenomenally well, even during the 1970s stagflation and the 2008 crisis. He said the worst year was a loss of under 4%. Apparently Dalio also uses a certain amount of leverage on the bond side in order to make the entire portfolio risk neutral.

Of course we've had a 4 decade bull market in bonds since they peaked in 1982. So that won't be repeated, but Dalio back tested to 1945 and his allocation worked well even when interest rates were rising. The key to his allocation is getting the entire package 'risk neutral', by which I think he means having the asset classes as uncorrelated as possible. In another video Dalio explains how his hedge fund Bridgewater is constructed the same way, with each bet as uncorrelated to the others as possible.

One thing I've noticed about these famous investors is their obsession with controlling risk. They may look like wild gunslingers, but what they do is more like arbitrage, where bets may individually be high but are counterbalanced off each other to achieve a low risk in the overall package.

Dalio said a great advantage to this approach is on the emotional side, since with the risks being balanced, the overall volatility is muted and thus it's much easier to 'stay the course'.

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Ray Dalio's recommended 'All Weather Fund' portfolio, which has been back-tested for 75 years, as explained by Tony Robbins -


(from 8:15 to 14:45) -

Here's the allocation -


Stocks - 30%

Bonds - 55% (40% in long term treasuries, 15% intermed term)

Gold - 7.5%

Commodities - 7.5%


The idea is to fully balance the risk, and the bond % has to be so high because stocks are 3 times riskier than bonds.

Something very close to this 'All Weather Fund' is how billionaire Dalio apparently has his entire family fortune invested, at the above percentages.

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>>> 6 biggest pitfalls for investors


Avoid these common emotional biases to help improve your financial life.


FIDELITY VIEWPOINTS

Fidelity Investments

01/22/2020


Key takeaways

Natural human instincts often undermine our success as investors.
Common pitfalls include aversion to loss and ambiguity, following the crowd, and focusing on information that's recent or confirms what we already believe.

Antidotes include seeking out alternative information, doing your research, and developing a long-term financial plan that you can stick with.

Our brains evolved to protect us from all kinds of primal dangers—saber-toothed tigers, earthquakes, dodgy-looking strangers from the other side of the river. Trouble is, the instincts and mental shortcuts humans developed to manage life-and-death scenarios aren't all that helpful when deciding when to sell a losing investment, or whether to buy that stock or mutual fund everyone was talking about at lunch.

In fact, these tendencies aren't just unhelpful—they can be harmful. They often prompt us to make decisions that seem rational but are self-defeating. To disrupt this cycle, it helps to know a bit about the mental shortcuts that human brains are prone to taking—and how to short-circuit them.

"It's very easy to fall back on gut decisions and intuition—it's automatic, and it feels good," says Andy Reed, PhD, Fidelity's Vice President for Behavioral Science. "It's a little harder, and takes more awareness, to reflect on our own reasoning that leads us to the decisions we make. But there's all sorts of evidence that when you broaden the scope of your thinking, you come up with better solutions to the problems you're facing."

Start broadening your own thinking by familiarizing yourself with the following mental pitfalls, and ways to avoid them.

1. Avoid losses at all costs: Loss aversion

What it is: The fear of loss is a stronger motivator than the pleasure of gain. As a result, people tend to avoid the risk of losing money, even if that means not reaching their goals.

How it plays out: Fear of loss can cause investors to invest too conservatively, and overreact during market volatility, selling low.

The problem: If you only invest in low-risk, low-return investments, your money may not grow enough to reach long-term goals like retirement. And selling out of fear during market downturns locks in losses, making it harder to catch up.

How to prevent it: Planning helps you focus on long-term goals, not short-term fears. If your goal is 20 years away, a loss over one month or year probably isn't all that important. Focus on your individual goals and time horizon. And monitor your investments and progress toward your goals on a set, not-too-frequent schedule—perhaps once or twice a year, or if your goals or situation change.

2."I am the greatest!" Confirmation bias

What it is: We tend to seek out information that confirms or supports what we already think, and reject information that doesn't. In the words of Muhammad Ali, "I don't always know what I'm talking about, but I know I'm right."

How it plays out: Say you've just invested in a company's stock. As you continue reading up on the firm, you come across 10 positive headlines and 10 negative ones—and click only on the ones that support your decision.

The problem: Limiting yourself to information that confirms what you already think can cause you to miss important warning signs.

How to prevent it: Repeatedly ask yourself: "What could I have gotten wrong?" Seek out information from a diverse range of sources. A good place to start is Fidelity's stock, bond, and fund research pages.

3. Getting stuck on the first thing you see: Anchoring bias

What it is: We tend to latch onto the information we receive first—whether it's relevant to the decision we're making or not.

How it plays out: We commonly anchor on specific numbers just because, well, we know about them. Imagine your friend is raving about a mutual fund you've never heard of that she just bought at $50. But by the time you check the quote it's already at $55. So you decide not to pursue the idea.

The problem: The anchors our brains pick often have zero bearing on the decision to be made. For example, whether it makes sense to buy a fund at a given price depends on factors such as your situation, the fund's strategy, and future prospects. The price your friend bought at is completely irrelevant.

How to prevent it: Ignore the anchor. Do your homework. For stocks and stock funds, consider investment fundamentals like earnings growth, price-earnings ratio, and free cash flow. For bonds and bond funds, research factors like the issuing company's strength and credit rating as well as interest rates. Also consider how these investments would fit into your overall financial plan. And if you can't do it yourself, get help from a professional.

4. The breaking news problem: Recency bias

What it is: We tend to over-emphasize information we just received, because it's most readily available to our brains.

How it plays out: When the market is down, we tend to feel—and sometimes act—like it's going to keep falling forever. And when the market is rising, we tend to feel and act like it will never stop.

The problem: Recency bias can lead you to invest more at market tops and sell at market bottoms—just the opposite of what successful investors do. Add to that a 24-hour news cycle that bombards us with breaking news, and there is no shortage of stimuli to point us in the wrong direction as investors.

How to prevent it: Stop constantly checking on what the market is doing. Most scary headlines have little impact on long-term market trends. Focus on your personal goals. Consider building a mix of stocks, bonds, and short-term investment to get there. If market moves shift your asset allocation—or your situation or goals change—think about how you can rebalance back to your target mix. That discipline can help you buy low, sell high, and build wealth over time.

5. There's safety in numbers ... right? Herding bias

What it is: We humans tend to follow the crowd, saving time and mental energy by doing what people around us do.

How it plays out: Multiple people in your life start talking about a particular investment. You figure if it's that popular, it must be worth buying.

The problem: The crowd is often wrong. When it is, the repercussions can be costly: Think internet stocks in 2001 and Bitcoin in 2018.

How to prevent it: Rather than following the crowd, focus on developing an investment plan that's right for you. That means a plan that takes into account your individual goals, situation, and time horizon—and one that's diversified. Diversification doesn't mean you won't ever lose money. But owning a mix of investments can help reduce the risk. That way if some investments drop, others may rise, helping you reach your goals.

6. The devil you know: Ambiguity aversion

What it is: People tend to be more comfortable with things that are predictable and shy away from uncertainty.

How it plays out: You might be tempted to load up on investments that offer predictable returns—like money market funds or bonds with a fixed rate of return, versus a growth stock with no dividend and uncertain returns.

The problem: Sometimes sticking to your comfort zone is risky. For example, if your goal is to grow your money over a long time period, investments with predictable returns might not give you the best chance to achieve your goals.

How to prevent it: Establish a financial plan centered on your goals and situation. Build an investment mix that can include stocks, bonds, and cash to help achieve those goals in your chosen time frame. And then stick to it.

The bottom line

Understanding the mental shortcuts we're primed to take is the first step in combating their influence on our decision-making. That task is made easier by developing—and sticking to—a solid financial plan that's squarely focused on achieving your individual goals. In times of uncertainty, that plan can remind you of your priorities and help you build the resources you need to reach your goals.

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A comparison of how the various asset classes performed in 2008 during the big financial crisis -


Treasury Bonds (8 yr maturity) - up 20%

Cash - no change

Total Bond Market - down 12%, fully recovered in 3 months

Gold Bullion - down 30%, fully recovered in 4 months

Stocks - down 60%, fully recovered in 36 months

Gold Miners - down 70%, fully recovered in 12 months

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Triumph for indexing - >>> Active fund managers trail the S&P 500 for the ninth year in a row in triumph for indexing


Trader Talk

MAR 15 2019

by Bob Pisani


https://www.cnbc.com/2019/03/15/active-fund-managers-trail-the-sp-500-for-the-ninth-year-in-a-row-in-triumph-for-indexing.html


Active managers who claim that they would do better during periods of heightened volatility are going to have to find another argument. For the ninth consecutive year, the majority (64.49 percent) of large-cap funds lagged the S&P 500 last year.

After 10 years, 85 percent of large cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index.

It’s the triumph of indexing: Fund managers continue to trail their benchmarks.

This week, S&P Dow Jones Indices released its annual report on how actively managed funds performed against their benchmarks. The conclusion is that active managers continue to show dismal performance against their passive benchmarks. For the ninth consecutive year, the majority (64.49 percent) of large-cap funds lagged the S&P 500 last year.

“The figures highlight that heightened market volatility does not necessarily result in better relative performance for active investing,” the report said.

“What’s different about 2018 was the fourth quarter volatility,” Aye M. Soe, a managing director at S&P and one of the authors of the report, told CNBC. “Active managers claimed that they would outperform during volatility, and it didn’t happen.”

The study will bolster the claims of many financial advisors, who say that investing in low-cost, passive funds remains the soundest long-term investment.

This is not a one-year phenomenon. S&P has been doing this study for 16 years, and the long-term results only strengthen the claims for index investing. Indeed, while a fund manager may outperform for a year or two, the outperformance does not persist. After 10 years, 85 percent of large cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index.

Long-term, the numbers were not much better in other categories like small-cap stocks or fixed income: “Over long-term horizons, 80 percent or more of active managers across all categories underperformed their respective benchmarks,” the report concluded.

Looking at managers’ overall record last year versus the broader S&P 1500 Composite, 2018 was the fourth-worst year for stock managers since 2001.

Critically, the study adjusts for “survivorship bias.” Many funds are liquidated because of poor performance, so the survivors give the appearance the overall group is doing better than it really is.

“The disappearance of funds remains meaningful,” the report notes. Over 15 years, 57 percent of domestic equity funds and 52 percent of all fixed income funds were merged or liquidated.

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