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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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>>> 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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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.
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%
_________________________________
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.
>>> 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.”
<<<
>>> 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.
<<<
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)
>>> 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.
<<<
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)
>>> 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.
<<<
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).
>>> 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
<<<
>>> 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
<<<
>>> 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%
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%
>>> 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.”
<<<
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.
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'.
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) -
>>> 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
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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>>>2 Investments To 'Load Up' Before The Recession
Nov. 28, 2019
Jussi Askola
REITs, real estate, research analyst
https://seekingalpha.com/article/4308392-2-investments-load-up-recession
Summary
The investment world is faced with an unprecedented challenge: both stocks and bonds have simultaneously become overvalued and risky.
Investors are quickly seeking refuge in real assets such as commercial properties, pipelines, farmland, airports, timberland, and other.
While investing in real assets may have been reserved to high net worth individuals in the past, today there exists a lot of publicly-traded alternatives.
Below we present 2 of our favorite real assets and explain why their cash flows are resilient to recessions.
Looking for a portfolio of ideas like this one? Members of High Yield Landlord get exclusive access to our model portfolio. Get started today »
Investors are today faced with a big challenge:
"There is nothing interesting to buy."
On one hand, stocks are trading at a 30% premium to historical averages – despite slowing growth in a late cycle economy:
And on the other hand, bonds pay historically low interest rates that may not even cover inflation in the long run.
This creates two major problems to investors:
Stocks: With high valuations in a late cycle, risks are very high and investors could suffer significant capital losses from a return to historic valuation multiples.
Bonds: Not enough income is earned to meet investor's immediate needs. This is particularly dangerous to large institutions and retirees.
What is then the solution to deal with these challenges?
Our preferred strategy is to invest in Real Assets. Commercial properties, farmland, timberland, energy pipelines and other similar real assets are the only remaining investments that can still provide high income and inflation protection – without taking an enormous amount of risk.
These are not just the empty words of a Seeking Alpha author. Over the past 10 years, institutional capital in the real asset space has grown by $30 trillion. Yes that’s trillion with a “t”. Over the coming 10 years, another $50 trillion is expected to shift to real asset investments.
real asset allocations on the rise
Stocks and bonds are not providing the needed returns and professional investors are quickly changing portfolio allocations. By 2030, the allocations to real assets are expected to reach up to 40% of intuitions portfolios:
So far, individual investors have been slow to react. With poorer access to research and no expertise in real asset investing, individual investors continue to overexpose themselves to the risks of owning traditional stocks and bonds.
Fortunately, you do not need to be a multi-billion-dollar institution to invest in real assets. At High Yield Landlord, we specialize in liquid alternatives to gain exposure to high yielding real assets. This includes REITs, MLPs, Utilities, and other listed infrastructure companies.
If you've read until here, we want to share with you two of our "Top Picks" among high-yielding REIT opportunities. These two REITs are particularly well-positioned in today’s late cycle economy because of their more defensive nature, steady cash flow growth, and high level of dividend security.
INVESTMENT #1 – Medical Properties Trust (MPW)
MPW is our one and only Healthcare REIT investment at the moment.
The Buy Thesis in 3 Bullet Points:
Superior Cap Rates: Most REITs compete for properties in the 5-7% cap rate range. MPW is able to target greater cap rates at closer to 8% by specializing in hospitals - a property type that is mostly ignored by the investment community.
Resilience in Late Cycle: People need hospitals - regardless of economic conditions. MPW's tenants are healthy and enjoy strong rent coverage ratios. If we were to go into a recession tomorrow, we would expect the cash flow to remain stable - allowing it to pay a sustainable 5.3% dividend yield.
Strong Acquisition Pipeline: As the only "pure-play" Hospital REIT, MPW enjoys valuable relationships with operators to conduct sale and leaseback transactions. With a strong acquisition pipeline and the capital to fund it, we expect 5-8% annual growth in the coming years.
You can read our full investment thesis here:
Investing In Hospitals: Recession Resilience, High Growth, And 5.6% Yield
Recap of 3rd Quarter Results:
This company is doing absolutely amazing:
It beat on FFO and revenue expectations. It also reaffirmed its full year guidance – which it already boosted during the last quarter.
The CEO talks about a “record-breaking year” with “monumental results”. This is because year-to-date, the company has grown its assets by 40%!
Its new acquisitions are done at ~8% cap rates – which results in immediately accretive growth.
They note that they have a pipeline of up to $5 billion for transactions in the coming quarters. The company is not slowing down.
The investment story was already strong in MPW, but with these new acquisitions, the story is only getting better. We also love the recent expansion to more global markets including the UK and Switzerland which have very favorable demographics for hospitals. With such healthy spreads, and defensive properties, we believe that MPW is a near certain future outperformer. If the share price remains around $20 per share, we will buy more shares in the near term.
INVESTMENT #2 – EPR Properties (EPR)
EPR Properties (EPR) is one of our oldest investments. We invested heavily when it traded at mid-$50 and have a large capital gain at $77 today. To this day, it remains our Favorite net lease REIT investment idea.
The Buy Thesis in 3 Bullet Points:
Alpha-Rich Strategy: EPR targets specialty net lease assets that are ignored by most other investors. These include movie theaters, golf complexes, ski resorts, and other entertainment assets. They come with greater cap rates, longer leases, and higher rent increases.
History of Successful Execution: EPR has historically been a massive outperformer and everything points out to further outperformance in the long run.
Simple Story: The company beats its peers on all fronts. It pays a higher yield (6%), it grows faster (5-8%), and it has more upside potential due to its discounted multiple (14x FFO).
You can read our full investment thesis here:
A New Opportunity Has Emerged In EPR Properties
Recap of 3rd Quarter Results:
EPR has a long history of consistently beating expectations and surprising to the upside. The last quarter was no different:
It beat FFO and revenue expectations for the quarter. It also boosted its full year guidance.
It invested $118 million in new properties over the past 3 months alone. A big portion went into golf complexes such as the one illustrated above.
EPR is currently enjoying historically high spreads on its new investments and the guidance for further acquisitions is very strong.
EPR also issued $500 million in senior unsecured notes with a 10-year term at a 3.75% interest rate during the quarter. This cheap capital was used to refinance its previous notes that were yielding 5.75%.
The dividend is up by 4.2% as compared to same quarter last year.
We expect another dividend increase sometime in the coming quarters, likely in early 2020. We are very bullish and recently upgraded EPR into a Strong Buy. The discount to peers is historically high and the company is stronger than ever before. We expect ~15% upside from repricing to a higher FFO multiple and 5-8% annual FFO growth. Add to that a 6% dividend yield, and you have a recipe for consistent and predictable outperformance.
It's by targeting this type of defensive, yet undervalued REITs that we aim to outperform in today's volatile and uncertain environment.
As of today, our Core Portfolio has a 7.4% dividend yield with a conservative 68% payout ratio. Beyond the dividends, the core holdings are trading substantially below intrinsic value at just 9.2x Cash Flow - providing both margin of safety and capital appreciation potential.
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>>> 5 Ideas to Build Wealth Outside the Stock Market
Yield Street
MILIND MEHERE, FOUNDER & CEO
https://www.yieldstreet.com/five-ways-to-make-money-outside-the-stock-market?utm_source=Taboola&utm_medium=cpc&utm_campaign=NEW_WL_Desktop&utm_content=K3hh&bloomberg
Having passed the 10th anniversary of the start of the Great Recession, we are now in the longest bull run in the American economy since WW2. Historical data reveals it is only a matter of time before the market pulls back.5
With the U.S. unemployment rate at lows near 4%, the federal government has executed on a fiscal stimulus package which, according to Ben Bernanke, former Chairman of the U.S. Federal Reserve, "is going to hit the economy in a big way this year and next year, and in 2020, Wile E. Coyote is going to go off the cliff".6
Today, many investors are unaware of new alternative investment options with typically low correlation to the stock market that can be added to their portfolio to protect against the fluctuations in the broader economy.
Rather than putting all of your hard earned money in the same basket, consider these 5 strategies outside the stock market:
1. Rental properties and Vacation homes:
A drop in homeownership rates has led to a rental boom, so purchasing a second property can be a great way to boost your finances.
Rental investments can generate returns, plus any rise in equity; however, it can be difficult to be a passive landlord. If you don’t want to manage tenants and handle maintenance yourself, you’ll need to hire a trustworthy property manager.
If you want to build equity, you also must purchase property in a market that has strong interest in rentals and vacation homes. While many online portals will give you a feel for the market, you will need to build your own payback/investment model.
• Set-up: Hard
• Time commitment: High
• Money required: Medium ($20,000 to $100,000)
• How: Self-research
2. Commercial property:
The approach is similar to that of rental properties, but in this case, you’re buying into properties like a one- or two-star hotel (think Days Inn [WYN] or Holiday Inn [IHG]) or a strip mall.
The initial investment is significant, and you need to vet potential partners to ensure they’re reliable and have domain expertise.
But if you’re willing to put in the initial time and capital, you can potentially expect a 6% to 12% return, compared to around a 1% to 4% return on a single-family home.
• Set-up: Hard
• Time commitment: Medium
• Money required: High ($250,000+)
• How: Self-research
3. Franchise play:
Invest in a single franchise or a group of successful chains, such as Subway or Dunkin’ Donuts. The franchise industry is set to grow this year, and that trend could very likely hold.
A franchise investment could earn you a 10% to 15% return on your investment.
The biggest drawback is that buying just one or two will not generate enough income to make it interesting. You’ll need to purchase several for the investment to be worthwhile, which usually means a larger check size and additional time spent finding the right partner. To get started, you could attend a franchising trade show to get the lay of the land.
• Set-up: Hard
• Time commitment: Medium to high (if you run it yourself)
• Money required: High ($50,000 to $1 million)
• How: Self-research
4. Peer-to-peer lending, social lending, and crowdfunding:
These platforms enable borrowers to connect with a wide range of potential lenders (that’s you!) instead of having to rely on traditional banks for financing. The borrowers are individual consumers or small businesses, and the investments usually target an 8% to 12% return.
Even by conservative estimates, the industry is growing rapidly. Most platforms focus on consumer lending and SMB lending, and you need to be aware of credit cycles and changes in interest rates.
• Set-up: Easy
• Time commitment: Short
• Money required: Low ($5,000+)
• How: Online platform
5. Alternative lending:
Investing in specialty finance products such as real estate, commercial loans, and legal settlements can yield 8%-20% returns, and it requires less time and energy than buying and managing physical investments.
In the past, these alternative investments were generally exclusive to investors with ultra-high net worth and large investment banks.
Today, they’re increasingly available to retail investors through platforms like YieldStreet, an alternative investment marketplace that offers investment opportunities in real estate, litigation finance, and consumer lending.
• Set-up: Easy
• Time commitment: Short
• Money required: Low ($5,000+)
• How: Online platform
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In Conclusion:
Diverse, lucrative investment options exist outside of the stock market - If you‘re willing to understand and go after them.
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>>> Calls Persist for Negative U.S. Yields Even as Fed Signals Pause
Bloomberg
By Vivien Lou Chen
November 3, 2019
https://www.bloomberg.com/news/articles/2019-11-03/calls-persist-for-negative-u-s-yields-even-as-fed-signals-pause?srnd=premium
Belly of curve could go below zero by 2021: BofA’s Braizinha
Moody’s Analytics also raises prospect of sub-zero yields
The Federal Reserve may be hinting at a pause in its policy easing, but Bruno Braizinha at Bank of America Corp. sees a risk that yields on some Treasuries will go negative by 2021 as the U.S. central bank cuts rates all the way to zero.
While that may seem like a remote scenario to some, the strategist says the market can’t ignore the possibility that 5- and 7-year yields -- both presently within a few basis points of 1.60% -- could fall below zero. He says now’s the time to hedge against that prospect.
Braizinha wrote about the risk of sub-1% yields in the U.S. just ahead of August’s historic Treasuries rally, which drove 10-year yields as low as 1.43% on Sept. 3. That rate has since rebounded to around 1.71%, but his central view is that the benchmark yield will go even lower -- to around 1.25% -- in the next three months. In addition to that, he also sees the Fed being forced to return to near-zero rates amid a deterioration in the American economy and an eventual realization by investors that a U.S.-China trade deal won’t be a panacea.
Yields in belly of Treasury curve have fallen over the past year
“It’s important to acknowledge those risks and not overlook these scenarios,” he said by phone. “All the positive sentiment on trade is fading, and what’s changed now is that it’s more likely that at some point the Fed is going to have to cut again.”
A day after the Fed signaled a pause on Oct. 30, yields plummeted across the curve. In Braizinha’s view, the moves reflected a bias that permeated the bond market based on expectations for worsening economic data, lower yields and a flatter curve.
Yields regained some of that ground on Friday amid stronger-than-expected American jobs data and positive developments on the U.S.-China trade relationship, although a poor reading on the Institute for Supply Management’s factory gauge created a slightly more mixed view.
To get to negative yields in the belly of the curve, Braizinha says the Fed would need to push its target to around zero -- from 1.50% to 1.75% currently -- like it did a decade ago in the midst of the global financial crisis. Rates on Treasuries out to around three years would then be “anchored around 10 basis points to 15 basis points” in his view, while demand for dollar duration would send 5- and 7-year yields negative.
The Bank of America analyst, who recommends betting on 30-year Treasuries in anticipation that yields will go much lower, is not alone in contemplating negative Treasury yields.
Ryan Sweet, head of monetary policy research at Moody’s Analytics, said he also sees a risk that Treasury yields could go below zero if the U.S. falls into recession. And, according to him, this could happen even if the Fed doesn’t cut its target below zero.
In the options market, meanwhile, some traders have been hedging in the past month against the possibility of U.S. policy rates heading to zero or even negative levels.
Bank of America currently expects one additional Fed rate cut in the first quarter and “there are still many hurdles to get to negative interest rate policy in the U.S.,” according to Braizinha. One of these is that “it is not clear that it worked as it was intended” in other economies.
“What I find more likely is that we reach a policy exhaustion point where the Fed cuts down to near zero, which requires only six 25-basis-point moves, and the curve continues to be pressured by lower long-term inflation expectations and global duration demand,” he said.
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>>> Thank These Five Stocks as S&P 500 Reaches New Record
Apple, Microsoft, Visa, MasterCard and Oracle are buttressing a market with little breadth.
Bloomberg
By Robert Burgess
October 28, 2019
https://www.bloomberg.com/opinion/articles/2019-10-28/s-p-500-propelled-by-apple-microsoft-visa-mastercard-oracle?srnd=premium
If someone woke from a coma and saw that the S&P 500 Index was up 21% for the year and reaching a new record high on Monday, the immediate reaction would most likely be that everything is great. But that’s far from true.
The list of reasons stocks should be down is much longer than the one for why they should be up. The economy has slowed, and a majority of chief financial officers anticipate a recession within a year. Earnings have stopped growing, and estimates are being cut. Stock valuations are high. The U.S.-China trade war has not been resolved. Congress has started an impeachment inquiry against President Donald Trump. On the other hand, the Federal Reserve is easing monetary policy, but that’s only because the outlook has deteriorated.
So why are equities roaring ahead? The answer comes down to a handful of stocks: Apple Inc., Microsoft Corp., Visa Inc., MasterCard Inc. and Oracle Corp. Those five companies account for half of the S&P 500 tech sector, which has surged 30.2% for the year. Exclude that sector and the S&P 500 would be up only about 14%, according to DataTrek Research. That’s still good but nothing special when compared with the returns in the rest of the world, with the MSCI All-Country World Index excluding the U.S. having gained 12%.
Therein lies the hidden risk embedded in the market, which is that any missteps by any of these highfliers could spell doom for equities more broadly. It also underscores just how lacking in breadth this latest leg up has been. For one, the percentage of stocks on the New York Stock Exchange closing above their 200-day moving averages has dropped to 53% from 59% in mid-September.
This Is Animal Spirits?
Fewer equities are breaching important technical levels that would confirm broad strength
Not only that, but the spread between the share of S&P 500 members closing at 52-week highs and the share at 52-week lows has been in a general downtrend since June.
Downward Trend
Stocks reaching annual highs are barely exceeding those falling to lows
To be sure, it’s not unusual that a handful of stocks have led the broader market higher. Before this year, it was the FAANG group of stocks: Facebook Inc., Apple, Amazon.com Inc., Netflix Inc., Google parent Alphabet Inc. and a few others. A few years ago, AQR Capital Management’s co-founder and chief investment officer, Clifford Asness, published a paper examining the impact of individual stocks on the S&P 500 from 1994 to 2014. What he found was that while the S&P 500 rose 9.3% a year, the top 10 stocks accounted for 4.1 percentage points of that gain on average.
Then there’s the awkward fact that smaller stocks that make up the vast majority of the market are down about 11% from their records reached in August 2018 based on the S&P Small Cap 600 and Russell 2000 indexes.
Missing Out
Most stocks remain well below their previous records set in 2018
This stock market has delivered plenty of surprises, and betting against it has been a losing proposition. In January, when the S&P 500 was trading at about 2,600, the median estimate of about 25 Wall Street strategist surveyed by Bloomberg was for it to end the year at 2,913. It surpassed that level in April and ended Friday at 3,203. But those same strategists are more cautious, predicting the benchmark to drop to 3,000 by the end of the year.
Of course, they could raise their forecasts, but that would be awkward given the trend in profits and the slowing economy. Third-quarter earnings are tracking at a 3% decline from a year earlier, and forecasts for the fourth quarter have been cut to a gain of 1.2% from the 5.4% increase that was forecast at the end of July, according to Cantor Fitzgerald. The S&P 500’s price-to-earnings ratio, at just shy of 20 times, is the highest since last October, just as the benchmark was beginning a tumble that led to a 14% drop in the final three months of the year.
All that suggests investors need to look beyond the headlines about yet another record.
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>>> Q4 market update: Late cycle and lower rates
Can interest rate cuts by central banks restart global growth despite trade tensions?
BY DIRK HOFSCHIRE, CFA, SVP; LISA EMSBO-MATTINGLY, DIRECTOR; JAKE WEINSTEIN, CFA | SENIOR ANALYST; AND RYAN CARRIGAN, CFA L ANALYST, ASSET ALLOCATION RESEARCH
FIDELITY VIEWPOINTS
10/11/2019
Key takeaways
The US is firmly in the late phase of the business cycle which is a time when stock market volatility typically increases.
Interest rate cuts by the Federal Reserve and other central banks have yet to reaccelerate slowing global economic growth.
Trade tensions between the US and China are continuing to create uncertainty which is slowing business investment.
Government bond yields are dropping and stocks are turning more volatile, so it’s important to have a diverse mix of investments.
During Q3, the Federal Reserve and other central banks eased monetary policy in an effort to counter flagging global-growth momentum. However, further escalation of the US-China trade conflict continued to weigh on confidence, and it remains unclear whether monetary easing alone is sufficient to catalyze economic acceleration. The mature global business cycle continues to warrant smaller cyclical allocation tilts.
See our interactive presentation for in-depth analysis.
With lackluster global growth and increased policy uncertainty, the continued drop in government bond yields during Q3 spurred gains across less risky bond categories, gold, and interest rate-sensitive equity sectors such as real estate investment trusts (REITs). Year-to-date returns for all major asset categories remained in positive territory, with US stock and bond markets registering strong gains.
Economy/macro backdrop: Mature US and global business cycles
The global business cycle continues to mature, with the US and most major economies in the late-cycle phase. Sagging trade and industrial activity continued to weigh on global growth, with the share of major countries with expanding manufacturing sectors dropping to its lowest level since 2012. This weakness occurred despite an upturn in our diffusion index of China's industrial production. For the first time in the past decade, China's stimulus measures and manufacturing upswing have failed to lift global trade and industrial activity. While China's monetary and fiscal policy easing has helped stabilize industrial activity, we believe high debt levels and US-China trade uncertainty supports our stance that material economic reacceleration remains unlikely.
The US is firmly in the late-cycle phase, but the economy remains supported by consumption, which represents around 70% of GDP. Historically, consumer spending and employment growth stay positive during the late cycle, typically not falling until the onset of recession. Several leading indicators suggest the labor market is nearing peak levels, including consumers’ extremely favorable assessment of the job market, which tends to be most elevated just prior to recession.
Ten-year US Treasury yields dropped due to a decline in both inflation expectations and real interest rates, with both measures decreasing to near multi-year lows. Yields on 10-year Treasurys remained below 3-month Treasurys, keeping the yield curve inverted. Curve inversions have preceded the past 7 recessions and may be interpreted as the market signaling weaker expectations relative to current conditions. The time between inversion and recession has varied considerably, however, and the curve also has flashed 2 "head fakes" in which expansion lasted for at least 2 more years.
Core inflation has been generally stable at about 2% in recent years, but tariff hikes have lately pushed goods prices upward, helping boost core CPI to a multi-year high. Tariffs also have negatively impacted demand—for example, last year's tariffs on washing machines both boosted prices and lowered consumption. The near-term inflation outlook remains balanced amid uncertain trade policy and downside economic risk.
We think global economic momentum has peaked and that trade-policy friction is negatively influencing capital expenditures. Global central banks lowered interest rates during Q3, and the Fed ended its balance-sheet drawdown while the European Central Bank (ECB) reinitiated quantitative easing. However, the global liquidity backdrop is much less favorable than it was in 2016–2017, with US Treasury increases of cash held at the Fed offsetting recent central-bank accommodation. Monetary policy may be showing its limitations, with a number of challenges blunting the effects of easing.
Asset markets: US assets led widespread rally
In Q3, equity sectors and factor segments that typically are less cyclical and may benefit from lower interest rates led the equity markets: Utilities, real estate, consumer staples, and minimum-volatility stocks fared best. Treasury bonds and other less risky debt types were the top performers among fixed income sectors. Gold was the best-performing commodity segment. Emerging-market equities struggled.
Returns for categories of assets -
Q3 (%) YTD (%)
Real estate stocks - 7.5, 27
Long government and credit bonds - 6.6, 20.9
US corporate bonds - 3, 12.6
Investment grade bonds - 2.3, 8.5
High yield bonds - 1.2, 11.5
US mid cap stocks - 0.5, 21.9
Gold - 4.5, 14.8
Commodities - (1.8), 3.1
US large cap stocks - 1.7, 20.6
US small cap stocks - (2.4), 14.2
Non-US small cap stocks - (0.4), 12.1
Non-US developed country stocks - (1.1), 12.8
Emerging market bonds - 1.3, 12.1
Emerging market stocks - (4.1), 5.9
US earnings growth continued to decelerate during Q3, after receiving a boost from corporate tax cuts in 2018. Meanwhile, non-US developed-market (DM) and emerging-market (EM) profit growth stayed in negative territory. Forward estimates point to market expectations of a convergence of global profit growth in the mid-single-digit range over the next 12 months.
Continued rising US stock prices pushed equity valuations further above the long-term US historical average this quarter, while trailing price-earnings (P/E) ratios for non-US developed and emerging markets remained below their respective long-term averages. Further, using 5-year peak inflation-adjusted earnings, DM and EM equity P/E ratios remained lower than those for the US, providing a relatively favorable long-term valuation backdrop for non-US stocks. After moving sideways during the first half of 2019, the US dollar appreciated during Q3, resulting in generally expensive valuations versus many of the world's major currencies.
In fixed income, modest inflation, flagging growth expectations, and the Fed's dovish shift pushed bond yields lower for the third quarter in a row. Credit spreads experienced some volatility but ended the quarter roughly unchanged. Many bond categories have dropped to the bottom-yield deciles relative to their own long-term histories. Credit spreads also are generally below their long-term averages.
Historically, the mid-cycle phase has tended to favor riskier asset classes and produce broad-based gains across most asset categories. Meanwhile, late cycle has produced the most mixed performance results of any business cycle phase. Another frequent feature of late cycle has been an overall more limited upside for a diversified portfolio, although returns for most asset categories have, on average, been positive.
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>>> Markets: Late cycle and more volatile
Stick close to your long-term target asset mix and stay diversified.
Fidelity Investments
BY DIRK HOFSCHIRE, CFA, SVP; LISA EMSBO-MATTINGLY, DIRECTOR; JACOB WEINSTEIN, CFA, RESEARCH ANALYST, ASSET ALLOCATION RESEARCH AND CAIT DOURNEY, ANALYST
09/24/2019
Key takeaways
Around the world, most big economies are in the late phase of the business cycle.
We expect financial markets to become more volatile than they have been in recent years.
Central bank monetary policy may boost asset prices without necessarily stimulating global economic growth.
In this environment, prioritize portfolio diversification.
United States
The US is firmly in the late-cycle phase as evidenced by tight labor markets, challenged corporate profit margins, and a flat/inverted yield curve.
The US consumer remains solid amid low unemployment—a typical pattern during late cycle.
Corporate earnings growth has decelerated due largely to higher wages and a weak global backdrop.
The Federal Reserve (Fed) has started to ease monetary policy, although historically rate cuts have been less effective late in the economic cycle.
Global
The global business cycle continues to mature, with most major economies in the late-cycle phase and several appearing to be in an industrial production recession.
China's economy has stabilized as a result of the past year’s stimulus measures, but growth remains subdued and a reacceleration from its growth recession has remained elusive.
Rising trade tensions and higher tariffs, particularly between the US and China, have damaged corporate confidence and added to global-growth headwinds.
Overall, weaker global manufacturing and trade activity have shown few signs of abating, and it remains to be seen whether policy easing measures will prove sufficient to incite a sustained global reacceleration.
Asset allocation outlook
Consistent with a maturing business cycle, asset-class patterns may become less reliable, warranting smaller cyclical tilts and prioritization of portfolio diversification.
The move to a global monetary easing cycle may boost asset valuations and provide support for financial conditions in the near term, but heightened trade policy risks and a multitude of economic headwinds may blunt the ability of monetary easing to stimulate global growth.
Overall, we expect the late-cycle environment to provide more volatility and a less favorable risk-return profile for asset markets than during recent years.
Business cycle framework
The business cycle, which is the pattern of cyclical fluctuations in an economy over a few years, can influence asset returns over an intermediate-term horizon. Cyclical allocation tilts are only one investment tool, and any adjustments should be considered within the context of long-term portfolio construction principles and strategic asset allocation positioning.
The diagram above is a hypothetical illustration of the business cycle. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one. *A growth recession is a significant decline in activity relative to a country's long-term economic potential. We use the "growth cycle" definition for most developing economies, such as China, because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity, and the deviation from the trend tends to matter most for asset returns. We use the classic definition of recession, involving an outright contraction in economic activity, for developed economies.
Source: Fidelity Investments (AART), as of August 31, 2019.
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Wow, silver resumes its climb, up almost 5% today. Gold and bonds also moving back up.
From a TA perspective, it looks like silver will soon be challenging its 2016 highs (20-21 area), and once those are taken out the new uptrend for silver will be confirmed.
The uptrend for gold was confirmed in June when it broke through its 2016,17,18 highs (~1370 area).
Considering the longer term predicament the Fed and economy is in (see last post), the tailwind for the metals should continue, and pullbacks can be considered buying opportunities (imo). Some headwinds for the metals (and bonds) could come from -
1) Trade war with China resolved
2) War with Iran receeds
3) US economy picks up
I would be buying any dips with the idea of holding gold/silver long term. The debt situation is past the point of no return, and the noose will gradually tighten on the dollar, with the Fed's policy options dwindling and eventually running out.
Not thrilled with these conclusions, but you have to be a realist. The question now is what allocation to give to gold - 10%, 20%, etc. I'll probably follow Rickards' basic recommendations.
Recent interview with Jim Rickards -
Since the Fed has failed in its attempt to normalize, it's time to start considering some endgame scenarios. The Fed still has some 'ammo', although limited -
Interest rates - the interest rate 'ammo' available to the Fed (approx 2%) will be used up quickly during the next recession. Historically a 3-4% drop in interest rates is required to get out of a recession, and we only have 2% available.
Fed's balance sheet - Looking at the Fed's balance sheet available for more QE, the big question is what will be the upper limit (6, 8, 10 trillion) before confidence is lost in the dollar? Currently the balance sits at approx $4 tril.
Even a mild recession will put us at ZIRP or even NIRP, and on the Fed's balance sheet side, they can probably expand from $4 tril to $6 tril without a run on the dollar. But how much higher than that before you reach the confidence limit for the dollar?
Bottom line, we can see where this is heading (SDR bailout), and the only real question is how long? The key factors will be -
1) The severity of the next recession
2) Whether there is an associated financial crisis
With all the Derivatives out there, some type of financial crisis wouldn't be surprising once stresses start to build. Just look at the past week, where the Fed was forced to pump $275 bil into the repo market over four days.
To delay the process, all sources of instability should be minimized. So resolve the China trade war, avoid war with Iran, etc.
Meanwhile for us investors -- gold (10%), cash (30%), hard assets, Treasury notes, and for stocks mainly focus on the resource sectors (gold mining, oil, water, land, etc).
Allocation strategy for 2020 -
It's pretty clear now that the 'sanity will prevail' idea can be permanently shelved when it comes to Trump. Even the idea that Trump will act in his own self interest (reelection) is in serious doubt.
Below are the reasons why Trump's kamikaze course will not abate until the 2020 election at the earliest (and why all we can do as investors is go to cash, bonds, gold, etc) -
Looking at the entities that could restrain/remove Trump -
1) Republican Party - they won't because they want to stay in power and believe Trump is their only chance. So they'll ride this horse for better or worse.
2) Democrat Party - like the Reps, all the Dems care about is regaining power. Since Trump is self destructing so spectacularly on his own, they can sit back and watch as he drives the US into recession. However, with such a lame lineup of candidates for 2020, the Dems have to worry that they'll still lose the election even if there's a recession.
3) Neocons - I think Trump has promised them action on Iran after the election, so the Neocon faction will just sit pat until then.
4) Deep State / Finance Oligarchy - this is the big question. If they are ready for the SDR transition, Trump can be used as the fall guy to induce the required crisis. Under Trump, the crisis will likely start in China, which may be the ideal scenario - to have China weakened heading into the SDR financial 'reset'.
If the Finance Oligarchy isn't ready for the SDR crisis, why aren't they doing more to reign in Trump's kamikaze tariff insanity? It could be that the deranged Trump has become uncontrollable by normal means, in which case extraordinary means would become necessary (?) Possible, but if the powers that be really wanted Trump to cease/desist on China, ultimately they could do it.
My conclusion - all us small fry investors can really do is to batten down the hatches and get into cash, bonds, and gold. For bonds, mainly Treasuries and high quality corporates (avoid junk bonds, leveraged loans). Stock exposure should be reduced toward the minimum allowed in one's asset allocation model.
This chart says it all -
And what it says is batten down the hatches for a recession. Unfortunately the Fed is no shape to deal with a recession, and the world's other central banks are in even worse shape - already near ZIRP or even in NIRP. The Fed balance is still bloated up near $4 tril, and the US is already running trillion plus budget deficits.
So..
What tools are available to deal with a big global recession? And what if the downturn morphs into a financial crisis? You're looking at an IMF bailout of the world with their SDRs. As Rickards says, the IMF has the only clean balance sheet left in the world.
The SDR system is what the global financial elites have been building to replace the current dollar reserve system. Whether they want the change to come now or later I'm not sure, but they don't want to get the blame for the crisis required to bring in the SDRs, and in Trump they have a convenient scapegoat. Dumbass Don walked right into it, both guns blazing.
>>> Swagger Seeping Out of Stocks as Bond Market Signals Get Louder
By Elena Popina and Sarah Ponczek
August 16, 2019
https://www.bloomberg.com/news/articles/2019-08-16/swagger-seeping-out-of-stocks-as-bond-market-signals-get-louder?srnd=premium
Equities have dropped and Treasuries gained for three weeks
Concern grows that companies will lose taste for investment
All year, whenever you felt like panicking over the bond market’s dismal message, you could find comfort in stocks, where optimism about the economy drove the biggest first-half gain since 1987.
That kind of solace is getting harder to find.
While a rousing rally took some of the sting out on Friday, it wasn’t enough to rescue the week for equities -- the third straight in which they’ve dropped while Treasuries soared. The stock index has lost 4.5% from its July 26 record and recently posted its two worst days of 2019. Bonds, meanwhile, saw their two best days, as buyers sought shelter from gathering clouds.
In short, if your biggest concern in 2019 was that signals sent by dueling rallies in stocks and bonds were in disagreement, you can stop worrying about that. And start worrying about what it means now that they agree.
“Concern about a recession is going up,” Michael O’Rourke, JonesTrading’s chief market strategist, said by phone. “Stocks are still up double-digits for the year, and we have the potential to decline further.”
Alignment in the markets’ messages has been building for a while. Using the biggest exchange-traded funds as proxies, equities and fixed income have now moved in the opposite direction for 16 straight weeks, the longest streak since 2012.
SPY and TLT have moved in different directions for 16 consecutive weeks
While a few down weeks have barely dented their year-to-date performance, U.S. equities face a lengthening list of problems. Beyond anxiety over plunging yields and the sight of central banks rushing to add stimulus, there’s still a trade war raging and the prospect that earnings growth will grind to zero in 2019. Leading the concerns this week was the yield curve inverting, when rates on longer-dated Treasuries slip below nearer ones. It’s a phenomenon with a nearly unblemished record of portending recessions.
“An inverted curve can signal concern over future growth, which could impact investment decisions and confidence,” said Chris Hyzy, chief investment officer at Bank of America Global Wealth & Investment Management. “The uncertainty over trade appears to be impacting some decisions in addition to concerns over slower growth and the inverted yield curve.”
The 2s10s yield curve inverted for the first time since 2007
In particular, with the bond market looming as a giant argument against taking on long-term risk, anxiety is starting to coalesce around anything that might imply weaker growth in the future. One of those is corporate investment, viewed as economic lifeblood without which a recession becomes harder to stop. Non-residential capital spending dropped 0.6% in the second quarter for the first time since 2015, data released last month showed. Spending on structures fell by the most since 2016 and outlays for intellectual property slowed by half.
Flattening return expectations could signal a world where executives become hesitant to borrow for new projects, concerned that by the time factories are built, growth will have slowed to a point that doesn’t justify the investment. Couple that with a trade war with China with the potential to snarl supply chains, and the reason for the anxiety becomes clear.
“Confidence is what really matters, and confidence has been hit with a trade war and growth uncertainty,” Sanford Bernstein’s Philipp Carlsson-Szlezak said. “As long as hiring continues and jobs are safe, they’ll keep spending and that’s what will help the economy, and the stock market, to tick along. At this point, you didn’t have a pick-up in capex that the cycle could rely on.”
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GLDM - >>> Pinch Pennies With a New Gold ETF
Investopedia
BY TODD SHRIBER
Jun 25, 2019
https://www.investopedia.com/news/pinch-pennies-new-gold-etf/
Investors looking for a more cost-effective avenue for investing in gold have a new exchange-traded fund (ETF) to consider following Tuesday's debut of the SPDR Gold MiniShares Trust (GLDM). The SPDR Gold MiniShares Trust is the latest product in the long-running partnership between State Street Global Advisors (SSgA) and the World Gold Council (WGC), the groups behind the SPDR Gold Shares (GLD). GLD is the largest gold ETF in the world by assets and the largest commodities ETF trading in the U.S.
"GLDM will be initially listed at a per-share trading price of 1/100th of an ounce of gold, as represented by the LBMA Gold Price PM," according to a statement issued by SSgA and the WGC. By comparison, ownership of one GLD share represents one-tenth of an ounce of gold. The differences do not end there. GLDM's annual expense ratio is just 0.18%, or $18 on a $10,000 position. That is less than half the 0.40% annual fee found on GLD. That makes GLDM the least expensive gold ETF currently trading in the U.S.
"GLDM offers the lowest available total expense ratio among all gold exchange-traded products, with a net and gross expense ratio of 0.18 percent," according to the statement. (See also: Fee War Makes Its Way to Gold ETFs.)
While GLD is the world's largest ETF backed by physical holdings of gold, the ETF faces competition from lower-cost rivals. For example, the iShares Gold Trust (IAU) has an annual fee of just 0.25%. As has been proven time and again in the world of ETFs, fees matter. This year, investors have pulled $620.22 million from GLD, but IAU has seen $1.26 billion in inflows.
Due to its robust liquidity and tight bid/ask spreads, GLD is a favorite commodities ETF among professional traders and institutional investors, likely explaining why SSgA and the WGC opted to introduce GLDM rather than paring GLD's expense ratio.
"For many investors, costs associated with buying and selling the shares in the secondary market and the payment of GLDM's ongoing expenses will be lower than the costs associated with buying and selling gold bullion and storing and insuring gold bullion in a traditional allocated gold bullion account," according to SSgA. (For additional reading, check out: Fees Matter With Gold ETFs, Too.)
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>>> Gold ETFs Rally As Demand Jumps
ETF.com
Sumit Roy
August 5, 2019
https://finance.yahoo.com/news/gold-etfs-rally-demand-jumps-124500642.html
Treasury bonds aren’t the only safe havens rallying this year. As trade war and global growth concerns have continually flared throughout the year, another safety play is doing just as well: gold. Prices for the yellow metal currently hover near $1,450/oz, a level not seen in six years.
Investors have taken notice. The SPDR Gold Trust (GLD), the $38 billion gold ETF, is up 12.5% so far this year and has taken in $1.7 billion in fresh cash from investors. The No. 2 gold ETF on the market, the iShares Gold Trust (IAU), has taken in $1.3 billion in the same period.
At the same time, the SPDR Gold MiniShares Trust (GLDM) and the GraniteShares Gold Trust (BAR) have gathered a combined $600 million. The two ETFs offer some of the cheapest exposure to gold out there, with annual fees of 0.18% or less.
Zero Yield Looks Good
It is clear why investors have taken a liking to gold this year. Bond yields around the globe are at or near record lows, and could move even lower if central banks continue to cut interest rates. Bloomberg estimates that $14 trillion of debt in the world is yielding less than zero, or nearly 26% of the market.
It’s a bizarre situation, and makes gold look much more appealing by comparison. When investors literally have to pay to lend money, gold’s “zero yield” is downright attractive.
Indeed, that is probably why demand for gold ETFs in Europe, where government bond yields are broadly negative, has been even stronger than in the U.S, where rates are still positive. The World Gold Council estimates that inflows for European gold ETFs totaled $3.9 billion as of the end of June.
Separate data from Bloomberg shows that total holdings of gold in ETFs stood at 75.6 million troy ounces as of Aug. 1, the highest in six years, and only 8.6% below the all-time high set in 2012.
2 Pillars Driving Gold
Strong demand for gold ETFs is one pillar driving overall gold demand to its highest level in three years. It’s also helped offset tepid physical investment demand for gold bars and coins (which fell to its lowest point since 2009 during the first half of 2019), and surging gold supply (which reached the highest level since 2016, according to the World Gold Council).
The other big factor driving gold demand higher this year has been central bank buying. Gold demand from these institutions surged 57% year over year during the first half of 2019, on pace for the strongest year in decades.
The total net purchases of 374.1 metric tons by central banks equaled 17.1% of total global gold demand between January and June.
“Sluggishness, exacerbated by trade and geopolitical tensions, continued to cast a dark cloud over the global economy,” wrote the WGC. “Central banks, like other investors, sought safety in gold as they looked to protect themselves in the face of many looming risks.”
Poland, Russia, China, India and Turkey were among the biggest gold-buying central banks this year.
Outlook
Looking ahead, the gold rally will depend on the factors that have lifted it to where it is now. ETF demand may largely be driven by investors’ appetite for portfolio hedging against an economic downturn or for safe-haven alternatives to low-yielding bonds.
Meanwhile, central bank buying may be influenced by the relations between the U.S. and other countries. Tensions between the U.S. and China, the U.S. and Russia, etc., may push those countries to diversify their dollar-denominated foreign exchange reserves into gold.
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>>> A Decade of Low Interest Rates Is Changing Everything
Cheap money has transformed the world of borrowers, savers, bankers, money managers, and retirees.
Bloomberg
By Liz McCormick
July 23, 2019
https://www.bloomberg.com/news/articles/2019-07-23/a-decade-of-low-interest-rates-is-changing-everything?srnd=premium
It’s hard to wrap your head around just how low U.S. interest and bond yields are—still are—a decade after the Great Recession ended. Year after year, prognosticators said that rates were bound to go back up soon: Just be ready. That exercise has proved to be like waiting for Godot.
In 2018, Jamie Dimon, chief executive officer of JPMorgan Chase & Co., put Americans on alert to the likelihood of higher interest rates. He said the global benchmark for longer-term rates, the yield on a 10-year Treasury bond, could go above 5%. Right now it’s just a hair above 2%. Thirty-year mortgage rates are a fraction of long-run averages, and companies too are paying very little to borrow. All that cheap money has been helping the economy along. On the other side of the ledger, bank depositors are getting paid only a fraction of 1% on their savings.
The longevity of low rates has upended long-standing assumptions about money and reshaped a generation of investors, traders, savers, and policymakers. The Federal Reserve has tried to push the U.S. into a higher-rate regime, raising rates nine times since 2015, when the key short-term rate was near zero. But now the central bank appears ready to reverse course and start cutting again when it meets at the end of July. “This is the new abnormal,” says David Kelly, chief global strategist at JPMorgan Asset Management, which oversees $1.8 trillion. “Normally when you are in this phase of an expansion, you have a rising inflation problem, a Federal Reserve overtightening to slow the economy, and businesses that can’t afford to borrow. None of that is true right now.”
Investors are betting that a quarter-percentage-point rate cut is all but certain, according to prices in the futures market. Fed Chair Jerome Powell reinforced those views with remarks to Congress on July 10 and 11. He cited rising global risks, low inflation, and weakening business investment and manufacturing. Depressed U.S. rates come as other central banks, including the European Central Bank, have turned more dovish—even with their rates already set below zero.
relates to A Decade of Low Interest Rates Is Changing Everything
Fed chairman Jerome Powell.PHOTOGRAPHER: ANDREW HARRER/BLOOMBERG
Anne Walsh, chief investment officer of fixed income at Guggenheim Partners, says there’s been “a paradigm shift of epic proportion for investors.” Not only are short-term rates low, but long-dated bond rates are minuscule, too, suggesting that investors see little likelihood of rates—and the economic conditions they reflect—changing anytime soon. (Bonds’ yields fall as their prices rise.)
Borrowers of all kinds have been clear benefactors of this sea change, with many nations and companies locking in low rates for as long as a century. Belgium and Ireland have sold 100-year bonds, as did Austria this year at a yield of 1.171%. In 2015, Microsoft Corp. sold 40-year bonds and the University of California issued 100-year debt. Subdued rates have also buffered the U.S. Treasury from rising interest costs on the federal debt.
For banks, the squeeze in long-term rates isn’t ideal. That’s because they tend to fund long-term investments with short-term debt, so they prosper when long-run rates are significantly higher than short ones. In the U.S., banks have still been able to profit, with the top five firms cracking $30 billion in quarterly earnings for the first time. But some big commercial banks have warned that lower interest rates are weighing on their outlooks for revenues from lending.
Individuals have had to get used to earning paltry rates. The national average rate on savings accounts is 0.10%, little changed from four years ago and down from 0.30% in 2009, according to data from Bankrate.com. In 2000, well before the financial crisis, the rate was 1.73%. “We never got to the would-be promised land with respect to higher rates,” says Mark Hamrick, senior economic analyst at Bankrate.com. “This has been the difference for savers between having more money and not.”
The problem is the same for institutions that manage savings on behalf of others. Pension funds, overseeing trillions in retirees’ future cash, have been ratcheting down return expectations. The 30-year Treasury bond, a favored debt security, yields about 2.5%—compared with an average 6.5% since the 1970s. Even a record rise in stock prices hasn’t solved the low-return problem for pension funds, because many of them cut their allocations to equities after the financial crisis. Ben Meng, chief investment officer of the California Public Employees’ Retirement System, said in June that the expected return for his pension portfolio over the next 10 years would be 6.1%, down from a previous target of 7%.
Where low rates really bite isn’t in current returns but in the future gains investors can reasonably expect. Interest rates set a kind of baseline for the return on all assets. As they fall, bond values rise and stocks often do, too. But once rates have settled at or near rock bottom, there’s less room for that kind of price appreciation.
All this has sent investors looking under every available rock for more return—even if it means taking more risk. The fear is this could lead to the formation of bubbles and eventually destabilize the financial system. “Institutional investors are out there in the great truffle hunt for yield,” says Walsh, at Guggenheim. “This is particularly true of large institutions, like banks and insurance companies and pension funds. These firms are searching for yield and potentially taking on unintended risk because that is what they need to do.”
It’s a global phenomenon. Japan Post Bank Co., the banking unit of Japan Post Holdings Co., a publicly traded company that’s majority-owned by the government, held $577 billion in bonds outside its low-yielding home market in March. Norinchukin Bank, a cooperative that invests the deposits of millions of Japanese farmers and fishermen, has $69 billion in collateralized loan obligations—essentially, loans to companies with less-than-stellar credit—in the U.S. and Europe.
While some Fed officials wish they could get back to more-normal rates, so they have more room to ease again in the future if they need to fight a downturn or fresh financial crisis, they seem to have their hands tied. For all the problems low rates may cause, policymakers see them as a stimulant to growth. Although unemployment rates are very low, the economy took an agonizingly long time to recover from the financial crisis. And now a slowdown in global growth and headwinds from Trump’s trade war have made risks to U.S. output too strong to ignore.
This has some wondering if we’ve been thinking about the economy all wrong. “The traditionalist views on monetary policy and monetarism are really being questioned,” says Mark Haefele, chief investment officer at UBS Global Wealth Management, referring to to the notion that central banks always have the ability to juice the economy—or put the brakes on it—when needed. “That has led to a wide range of alternative theories including Modern Monetary Theory, and just how to re-stimulate growth.” According to MMT, for example, government policymakers should be willing to run bigger deficits, at least until a boom in demand causes inflation to kick in.
The surprising persistence of low rates has even quietly reordered the hierarchy on Wall Street. Hedge fund managers may still be glamorous on shows like Billions, but in real life they’ve had to fight to retain clients. Partly that’s because many hedge fund managers thrive on volatility, and in a world where the dreaded spike in interest rates has never arrived, there’s been too little of that for them. The long fall in rates has made it easier so far to earn money with simple investments such as stock and bond index funds. Meanwhile, cheap financing costs and rising asset values have been a boon for private equity firms. Investors have committed about $4 trillion to them in the last decade, according to data from research firm Preqin Ltd.
In 2009, bond powerhouse Pacific Investment Management Co. saw all this coming, when they dubbed their multiyear investment outlook “the new normal” and predicted lower long-term yields. They saw the same issues the Fed and central bankers around the world are grappling with now: slow growth, a combination of technological innovation and low-cost global labor that eases inflationary pressure, and a glut of savings as the populations of rich countries age. Looking ahead, with many of those 2009 factors remaining, “the new wrinkle is concern around global trade and countries looking more inward,” Pimco Group Chief Investment Officer Dan Ivascyn says. “Yields can absolutely go a lot lower.”
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Name | Symbol | % Assets |
---|---|---|
Apple Inc | AAPL | 3.23% |
Microsoft Corp | MSFT | 2.88% |
Amazon.com Inc | AMZN | 2.43% |
Facebook Inc A | FB | 1.14% |
Alphabet Inc Class C | GOOG | 0.78% |
Alphabet Inc A | GOOGL | 0.77% |
Johnson & Johnson | JNJ | 0.71% |
Berkshire Hathaway Inc Class B | BRK.B | 0.68% |
Procter & Gamble Co | PG | 0.62% |
Visa Inc Class A | V | 0.61% |
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