In an article in the UK's The Telegraph, the author highlights a research report published by the global asset allocation team at JP Morgan that say's the bank's measure of excess global money supply has reached an all-time high. The implications, of course, is that previous periods of excess liquidity provided to global markets have all been coincident with the inflation of unstable asset bubbles.
The latest surge in liquidity has surpassed the last three episodes of excess liquidity: 1993-1995, 2001-2006, and during the emergency response to the financial crisis between October 2008 - September 2010.
The flood of excess liquidity has sparked another asset boom, while the global economy continues to sputter along. This disconnect between asset prices and fundamentals is a dangerous game of chicken being played by global central bankers, as the hangover of recent asset booms has been devastating for many investors.
With returns from safe assets near zero, investors this year have chased higher risk investments like stocks - fund flows into stock funds have been 10 times the level of inflows to bond funds.
Global stock markets are now responding daily to whispers about the Federal Reserve's intentions. When Chairman Bernanke announced in early summer that the Fed was looking to begin tapering QE as early as this fall, stocks immediately corrected 5%. This also caused a mild panic around the globe with emerging market stocks dropping 15% and gold tumbling 20% as currency volatility spiked.
Interest rates on government debt rose from 1.6% to 3.0%, causing bond prices to drop sharply. The Fed's decision to delay tapering when it was widely expected at their September meeting caused risk assets to surge.
But we now know what is likely to be the reaction to a reduction in monetary accommodation in the months to come and some "smart money" investors are beginning to position their portfolios accordingly. Blackstone, the world's largest private equity fund, said in the Spring that they are selling everything that is not bolted down. Norway's sovereign wealth fund reportedly stopped buying stocks in the third quarter and is now a net seller.
Friday, November 1, 2013
Monday, October 21, 2013
Forget Fundamentals?
The Financial Times ran an interesting article this morning titled Forget Fundamentals, Fed Liquidity is King. The article highlights many of the same issues that I've been struggling with in 2013.
As an unapologetic fundamental analyst, it has been difficult to watch markets continually shrug off poor or weak data, both from the broad economy as well as individual companies to trade dramatically higher on any hint that the Federal Reserve will continue to flood markets with unprecedented liquidity. While it is not at all uncommon for the market to ignore short-term fundamental noise, historically, these divergences haven't lasted.
The article asks...
"Earnings per share are falling, but the stock market continues to move up due to quantitative easing. The Fed’s policies continue to have little impact on the real economy but a large impact on financial asset prices. Given the continuing gap between the economy and markets, what is the rational investor to do?
A massive downward revision to bottom-up analysts’ expectations had no market impact at all,” JPMorgan concluded. (Hedge fund manager) Mr Einhorn notes that third-quarter S&P index earnings growth is expected to be half of what was forecast in June"
The author goes on to lament that net margin debt, funds that investors borrow to buy stocks, has surged to all-time highs. Further, lower quality stocks have outperformed the overall market. Both are traditional signs of excessive speculation.
The concern of course is that the market gets so stretched in terms of valuation, that the inevitable snap-back will be more and more painful. This is why our strategy has been to slowly reduce overall exposure through the course of the year for some clients and remain on the sidelines for others. I believe it is clear that stock investors will not be happy when the Fed finally decides to begin scaling back on their grand monetary experiment.
The following chart, courtesy of Bianco Research, illustrates the declining growth rate of corporate profits for the S&P 500 over the last ten quarters.
As an unapologetic fundamental analyst, it has been difficult to watch markets continually shrug off poor or weak data, both from the broad economy as well as individual companies to trade dramatically higher on any hint that the Federal Reserve will continue to flood markets with unprecedented liquidity. While it is not at all uncommon for the market to ignore short-term fundamental noise, historically, these divergences haven't lasted.
The article asks...
"Earnings per share are falling, but the stock market continues to move up due to quantitative easing. The Fed’s policies continue to have little impact on the real economy but a large impact on financial asset prices. Given the continuing gap between the economy and markets, what is the rational investor to do?
A massive downward revision to bottom-up analysts’ expectations had no market impact at all,” JPMorgan concluded. (Hedge fund manager) Mr Einhorn notes that third-quarter S&P index earnings growth is expected to be half of what was forecast in June"
The author goes on to lament that net margin debt, funds that investors borrow to buy stocks, has surged to all-time highs. Further, lower quality stocks have outperformed the overall market. Both are traditional signs of excessive speculation.
The concern of course is that the market gets so stretched in terms of valuation, that the inevitable snap-back will be more and more painful. This is why our strategy has been to slowly reduce overall exposure through the course of the year for some clients and remain on the sidelines for others. I believe it is clear that stock investors will not be happy when the Fed finally decides to begin scaling back on their grand monetary experiment.
The following chart, courtesy of Bianco Research, illustrates the declining growth rate of corporate profits for the S&P 500 over the last ten quarters.
Tuesday, October 8, 2013
Weekly Update
Below are excerpts from Blaine Rollins' of 361 Capital Weekly Research Update...
Maybe Mark Twain said it best...
"No man's life, liberty, or property are safe while the legislature is in session."
Washington would also like to pressure the financial markets to increase the intensity on negotiations...
President Barack Obama and his top economic officials appear to be pushing for some market unrest to exert pressure on the GOP to throw in the towel. Asked in his CNBC interview Wednesday whether Wall Street is right to remain calm over the standoff, Mr. Obama replied: “No.”
“I think this time’s different,” he said. “I think they should be concerned... When you have a situation in which a faction is willing potentially to default on U.S. government obligations then we are in trouble. And if they’re willing to do it now, they’ll be willing to do it later.”
(WSJ)
Not sure who is winning the cat fight in D.C., but the raw data shows that Equity Bulls would side with Samuel Clemens...
We find a strong link between Congressional activity and stock market returns that persists even after controlling for known daily return anomalies. Stock returns are lower and volatility is higher when Congress is in session. This “Congressional Effect” can be quite large—more than 90% of the capital gains over the life of the DJIA have come on days when Congress is out of session. The Effect varies systematically with the public's opinion of Congress: returns are lower and volatility higher when a relatively unpopular Congress is active. Public opinion appears to play a fundamental role in market prices. This is consistent with a mood-based explanation that sees Congress as ‘depressing’ the average investor. Alternatively, our results can also be reconciled with rational explanations that view Congressional activity as a proxy for regulatory uncertainty or rent-seeking behavior.
(Ferguson/Witte)
Portfolio Returns When Congress is In-Session vs. Out-of-Session for the Dow Jones Industrial Average: The “Out-of-Session” strategy is the cumulative return to a strategy that invests $1 in the DJIA on days Congress is not in session and in cash (earning 1 basis point per day) when Congress is in session. Conversely, the “In-Session” strategy invests in the market index on days Congress is in session and in cash on days Congress is out of session.
Among global equities, a RISK appetite was still present with weak Europe, Brazil, Small Caps gaining while Japan, Gold & Bonds fell...
Another look at the monthly historicals as we enter the best quarter of the year to be invested in equities...
(RenMac)
Even more interesting is to note that previous global equity strength leads to even further Q4 gains...
(WayneWhaley)
The bad news is that analysts aren't expecting growth to pick up too much in the third quarter. Thomson Reuters estimates that earnings will increase just 4.9% in the third quarter, which would be the 10th consecutive quarter of sub-10% growth. "It will be difficult to generate interest from investors with growth so low," notes Pierre Lapointe, head of global strategy and research at Pavilion Global Markets. The good news is that expectations are low. Management has spent the previous three months telling analysts that their profit forecasts were too high—there have been more than three times as many companies guiding estimates lower than higher, and now the predictions are far more plausible, says Adam Parker, chief U.S. equity strategist at Morgan Stanley. In fact, an early preview from companies releasing before Tuesday has been surprisingly good. Of the 17 companies that reported through Sept. 27, six beat earnings, eight met expectations and just three missed. And earnings have topped forecasts by 3.3%, the largest for this group since the fourth quarter of 2012. "Earnings should be OK and remind people U.S. companies are in good shape," Parker says. "That should be supportive for stocks."
(Barron's)
Speaking of growth... Twitter files its IPO...
If you are looking for help in valuing the company, Prof. Damodaran has built you a model framework with his thoughts...
Having learned from the Facebook fiasco, I expect the bankers and the company to make the Twitter IPO a smoother offering. That process will of course start with the road show, where they will package the company like a shiny new present, and unwrap their “offering” price. I am sure that Goldman’s bankers, working on this deal, are a capable lot and will price the stock well, with just enough bounce to make those who receive a share of the initial offering feel special. As I watch the frenzy, I have to remind myself of two realities. The first is that there will be lots of distractions (like this one) during the IPO, most designed to take my eye off the ball. The second is that the bankers have their own agenda, and I cannot make the mistake of assuming that it matches mine. Watching out for my interests, here is how I see Twitter: at a $6 billion market cap ($10/share), I think it is a very good deal, at $10 billion ($17.5/share), I am indifferent to it, and at $20 billion ($35/share), it is a moon shot. Could I be wrong? Of course, but I would rather be transparently wrong (hence the long blog post detailing every assumption that I made) than opaquely right.
(AswathDamodaran)
Speaking of non-tech growth, the 10 year rise of gambling in Macau has been incredible...
Macau has grown at light speed since the former Portuguese territory in 2002 abandoned a monopoly system that gave one concession to the tycoon Stanley Ho. Last year, gaming revenues from the six companies with casino licenses – Sheldon Adelson’s Sands China; Wynn Macau; James Packer’s Melco Crown; Mr. Ho’s SJM, Galaxy; and MGM China – reached $38bn, making Macau six times bigger than Las Vegas. CLSA expects that number to double to $77bn by 2017...
Macau’s gambling industry has been propelled by an influx of Chinese tourists. China bans gambling on the mainland, but allows its citizens to visit Macau every three months under a special visa program. Gamblers can also bypass visa restrictions by joining special tour groups. According to the Macau government, the number of mainland Chinese tourists increased 45 percent from 11.6m in 2008 to 17m last year.
(FinancialTimes)
Sports geek story of the week...
Bet me. No QB in the NFL is more accurate, goes deeper or is more effective than the Colts' Andrew Luck. And that's just his vocabulary. Wednesday, for instance, in a single half hour, he got in "vociferous" (re: loudmouth, loud-playing Seattle cornerback Richard Sherman, who brings undefeated Seattle to Indy Sunday), "cognizant" (was he aware of big moments as he's making them? no, he wasn't), and "implemented" (he was glad to see some more running plays being "implemented" into the Colts' game plan.)
A 3.48 GPA at Stanford in environmental engineering will do that to a person. "The other day he used 'paucity' on us," says his backup, Matt Hasselbeck. "And 'chutzpah.' How many people in this locker room even know what chutzpah is?" "The guy just comes at you all day long with the SAT words," punter Pat McAfee complains. "I tell him, 'You know I'm dumber than you. You don't have to rub it in all the time.'"
(ESPN)
An incredible stat to challenge your kids with this week...
@Alcoa: ~75% of aluminum ever produced since 1888 (when Alcoa invented the industry) still in use today.
In the event that you missed a past Research Briefing, here is the archive...
361 Capital Research Briefing Archive
The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, 361 Capital is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of 361 Capital.
Maybe Mark Twain said it best...
"No man's life, liberty, or property are safe while the legislature is in session."
Washington would also like to pressure the financial markets to increase the intensity on negotiations...
President Barack Obama and his top economic officials appear to be pushing for some market unrest to exert pressure on the GOP to throw in the towel. Asked in his CNBC interview Wednesday whether Wall Street is right to remain calm over the standoff, Mr. Obama replied: “No.”
“I think this time’s different,” he said. “I think they should be concerned... When you have a situation in which a faction is willing potentially to default on U.S. government obligations then we are in trouble. And if they’re willing to do it now, they’ll be willing to do it later.”
(WSJ)
Not sure who is winning the cat fight in D.C., but the raw data shows that Equity Bulls would side with Samuel Clemens...
We find a strong link between Congressional activity and stock market returns that persists even after controlling for known daily return anomalies. Stock returns are lower and volatility is higher when Congress is in session. This “Congressional Effect” can be quite large—more than 90% of the capital gains over the life of the DJIA have come on days when Congress is out of session. The Effect varies systematically with the public's opinion of Congress: returns are lower and volatility higher when a relatively unpopular Congress is active. Public opinion appears to play a fundamental role in market prices. This is consistent with a mood-based explanation that sees Congress as ‘depressing’ the average investor. Alternatively, our results can also be reconciled with rational explanations that view Congressional activity as a proxy for regulatory uncertainty or rent-seeking behavior.
(Ferguson/Witte)
Portfolio Returns When Congress is In-Session vs. Out-of-Session for the Dow Jones Industrial Average: The “Out-of-Session” strategy is the cumulative return to a strategy that invests $1 in the DJIA on days Congress is not in session and in cash (earning 1 basis point per day) when Congress is in session. Conversely, the “In-Session” strategy invests in the market index on days Congress is in session and in cash on days Congress is out of session.
Among global equities, a RISK appetite was still present with weak Europe, Brazil, Small Caps gaining while Japan, Gold & Bonds fell...
Another look at the monthly historicals as we enter the best quarter of the year to be invested in equities...
(RenMac)
Even more interesting is to note that previous global equity strength leads to even further Q4 gains...
(WayneWhaley)
The bad news is that analysts aren't expecting growth to pick up too much in the third quarter. Thomson Reuters estimates that earnings will increase just 4.9% in the third quarter, which would be the 10th consecutive quarter of sub-10% growth. "It will be difficult to generate interest from investors with growth so low," notes Pierre Lapointe, head of global strategy and research at Pavilion Global Markets. The good news is that expectations are low. Management has spent the previous three months telling analysts that their profit forecasts were too high—there have been more than three times as many companies guiding estimates lower than higher, and now the predictions are far more plausible, says Adam Parker, chief U.S. equity strategist at Morgan Stanley. In fact, an early preview from companies releasing before Tuesday has been surprisingly good. Of the 17 companies that reported through Sept. 27, six beat earnings, eight met expectations and just three missed. And earnings have topped forecasts by 3.3%, the largest for this group since the fourth quarter of 2012. "Earnings should be OK and remind people U.S. companies are in good shape," Parker says. "That should be supportive for stocks."
(Barron's)
Speaking of growth... Twitter files its IPO...
If you are looking for help in valuing the company, Prof. Damodaran has built you a model framework with his thoughts...
Having learned from the Facebook fiasco, I expect the bankers and the company to make the Twitter IPO a smoother offering. That process will of course start with the road show, where they will package the company like a shiny new present, and unwrap their “offering” price. I am sure that Goldman’s bankers, working on this deal, are a capable lot and will price the stock well, with just enough bounce to make those who receive a share of the initial offering feel special. As I watch the frenzy, I have to remind myself of two realities. The first is that there will be lots of distractions (like this one) during the IPO, most designed to take my eye off the ball. The second is that the bankers have their own agenda, and I cannot make the mistake of assuming that it matches mine. Watching out for my interests, here is how I see Twitter: at a $6 billion market cap ($10/share), I think it is a very good deal, at $10 billion ($17.5/share), I am indifferent to it, and at $20 billion ($35/share), it is a moon shot. Could I be wrong? Of course, but I would rather be transparently wrong (hence the long blog post detailing every assumption that I made) than opaquely right.
(AswathDamodaran)
Speaking of non-tech growth, the 10 year rise of gambling in Macau has been incredible...
Macau has grown at light speed since the former Portuguese territory in 2002 abandoned a monopoly system that gave one concession to the tycoon Stanley Ho. Last year, gaming revenues from the six companies with casino licenses – Sheldon Adelson’s Sands China; Wynn Macau; James Packer’s Melco Crown; Mr. Ho’s SJM, Galaxy; and MGM China – reached $38bn, making Macau six times bigger than Las Vegas. CLSA expects that number to double to $77bn by 2017...
Macau’s gambling industry has been propelled by an influx of Chinese tourists. China bans gambling on the mainland, but allows its citizens to visit Macau every three months under a special visa program. Gamblers can also bypass visa restrictions by joining special tour groups. According to the Macau government, the number of mainland Chinese tourists increased 45 percent from 11.6m in 2008 to 17m last year.
(FinancialTimes)
Sports geek story of the week...
Bet me. No QB in the NFL is more accurate, goes deeper or is more effective than the Colts' Andrew Luck. And that's just his vocabulary. Wednesday, for instance, in a single half hour, he got in "vociferous" (re: loudmouth, loud-playing Seattle cornerback Richard Sherman, who brings undefeated Seattle to Indy Sunday), "cognizant" (was he aware of big moments as he's making them? no, he wasn't), and "implemented" (he was glad to see some more running plays being "implemented" into the Colts' game plan.)
A 3.48 GPA at Stanford in environmental engineering will do that to a person. "The other day he used 'paucity' on us," says his backup, Matt Hasselbeck. "And 'chutzpah.' How many people in this locker room even know what chutzpah is?" "The guy just comes at you all day long with the SAT words," punter Pat McAfee complains. "I tell him, 'You know I'm dumber than you. You don't have to rub it in all the time.'"
(ESPN)
An incredible stat to challenge your kids with this week...
@Alcoa: ~75% of aluminum ever produced since 1888 (when Alcoa invented the industry) still in use today.
In the event that you missed a past Research Briefing, here is the archive...
361 Capital Research Briefing Archive
The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, 361 Capital is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of 361 Capital.
Monday, September 23, 2013
Economic Template by Ray Dalio
The following 30-minute video is probably the best "easy-to-understand" template for how the economy works that I have come across. Ray Dalio is the founder and head of Bridgewater Associates, the world's largest hedge fund with $122 billion in assets under management.
Wednesday, September 4, 2013
Broad Asset Performance
There has been a wide diversion in many asset classes thus far in 2013. US and Japanese stocks have led while US Treasury Bonds, Emerging Markets, and Commodities have suffered from rising interest rates and volatility in currency markets.
Depending on allocation, a basic diversified portfolio is likely flat for the year despite double digit gains in US stocks. Many investors have been told that bonds offer a safe, steady income stream - and they have increased their bond allocations accordingly in recent years.
| Broad Indexes | Ticker | YTD |
| Global Stocks | ACWI | 8.07% |
| Core Total US Bond Market | AGG | -4.78% |
| Commodities | DBC | -4.43% |
| US Related | ||
| Large Cap | IWB | 15.79% |
| Small Cap | IWM | 19.86% |
| SPDR S&P 500 | SPY | 15.43% |
| Dow Jones Industrial Average | DIA | 13.42% |
| Bonds | ||
| Treasury Bonds - 7-10 yrs | IEF | -7.26% |
| Treasury Bonds - 20yr + | TLT | -13.70% |
| Inflation Protected Treasury Bonds | TIP | -9.46% |
| Corporate Bonds | LQD | -7.17% |
| High Yield Bonds | HYG | -2.95% |
| International | ||
| EAFE | EFA | 6.79% |
| Emerging Markets | EEM | -12.55% |
| Frontier Markets | FRN | -20.80% |
| Alternatives & Commodities | ||
| US Real Estate | IYR | -3.96% |
| Gold | GLD | -17.02% |
| Silver | SLV | -22.68% |
Tuesday, July 16, 2013
2nd Quarter Performance for Major Asset Classes
The 2nd quarter of 2013 saw most major asset classes decline, led by weakness in bonds, commodities and emerging market stocks. Here is a breakdown of how several categories fared in the quarter.
| Stocks | Bonds | Alternatives | |||||
| MSCI All World Index | -0.4% | US Treasury | -7.8% | Commodities | -9.5% | ||
| US Stocks | 2.7% | Corporate | -3.4% | Real Estate | -3.9% | ||
| World Developed ex-US | -1.5% | High Yield | -3.7% | Gold | -24.2% | ||
| Emerging Markets | -7.4% |
Our benchmark 50/50 stock-bond portfolio lost approximately 2.5% in the second quarter. Our higher than normal allocation to cash instead of bonds helped avoid most of the losses in the bond market, however, our small 3% allocation to gold miner stocks acted as a drag on performance in the quarter. Still, almost all of our managed accounts outperformed our benchmark after fees.
Monday, June 24, 2013
RISK HAPPENS FAST
It's often been said that markets take the stairs higher and the elevator lower.
It appears that comments from the Federal Reserve last week caused investors to rethink their positions in credit and equity markets. I have a variant view on what has transpired. I believe the Fed saw a ghost in the form of a stock market that went straight up for six months, ostensibly on the back of easy money policy and opened-ended quantitative easing (QE).
The Fed began hinting in their February and March meeting minutes that they were concerned with the potential risks of too much QE - i.e. the creation of imbalances and excesses that plagued monetary policy for much of the last twenty years.
Enter talk of tapering. Fed chair Ben Bernanke said last week that they could begin tapering the latest round of bond purchases as soon as this fall, but that the decision would be data-dependent. What is curious is he/they chose to begin the "tapering talk" at the same time that inflation is weakening (the Fed's preferred measure of inflation - the PCE deflator is at a record low) and unemployment remains above their stated rate of 6.5%.
I believe their primary purpose is to reign in some speculative fervor that is manifesting itself in various markets. Stocks rose uninterrupted for six months, margin debt has again reached all-time record highs, junk bond yields reached record lows.
But this a dangerous game to play with levered market participants. Currency disruptions in Asia, combined with the risk of convexity blowouts in mortgage backed securities could lead to a reflexive bout of volatility across various markets. While I don't believe the Fed intended a sharp spike in interest rates, the impact of a 1% rise in the benchmark 10-year Treasury yield 1.6% to 2.6% over a span of several weeks puts investors on their heels. While housing has bounced strongly off its lows, the shift higher in mortgage rates (back above 4% for 30-year borrowers) risks derailing the strongest part of the economy.
We have been extra cautious in positioning our bond allocations with yields on the deck, and that has been the right decisions thus far. We have also been cautious adding stock positions as domestic stocks have rallied in a parabolic manner for the majority of 2012. We have reduced incremental exposure to the higher risk small cap and emerging market sectors, and focused on yield-producing parts of the market.
We expect the shift in Fed dialogue, along with volatility in interest rates and currencies will likely usher in a period of choppy trading for the remainder of the summer.
We will continue to look to find assets that offer a compelling risk/reward trade-off but will be patient in deploying capital - Risk happens fast!.
SRP
It appears that comments from the Federal Reserve last week caused investors to rethink their positions in credit and equity markets. I have a variant view on what has transpired. I believe the Fed saw a ghost in the form of a stock market that went straight up for six months, ostensibly on the back of easy money policy and opened-ended quantitative easing (QE).
The Fed began hinting in their February and March meeting minutes that they were concerned with the potential risks of too much QE - i.e. the creation of imbalances and excesses that plagued monetary policy for much of the last twenty years.
Enter talk of tapering. Fed chair Ben Bernanke said last week that they could begin tapering the latest round of bond purchases as soon as this fall, but that the decision would be data-dependent. What is curious is he/they chose to begin the "tapering talk" at the same time that inflation is weakening (the Fed's preferred measure of inflation - the PCE deflator is at a record low) and unemployment remains above their stated rate of 6.5%.
I believe their primary purpose is to reign in some speculative fervor that is manifesting itself in various markets. Stocks rose uninterrupted for six months, margin debt has again reached all-time record highs, junk bond yields reached record lows.
But this a dangerous game to play with levered market participants. Currency disruptions in Asia, combined with the risk of convexity blowouts in mortgage backed securities could lead to a reflexive bout of volatility across various markets. While I don't believe the Fed intended a sharp spike in interest rates, the impact of a 1% rise in the benchmark 10-year Treasury yield 1.6% to 2.6% over a span of several weeks puts investors on their heels. While housing has bounced strongly off its lows, the shift higher in mortgage rates (back above 4% for 30-year borrowers) risks derailing the strongest part of the economy.
We have been extra cautious in positioning our bond allocations with yields on the deck, and that has been the right decisions thus far. We have also been cautious adding stock positions as domestic stocks have rallied in a parabolic manner for the majority of 2012. We have reduced incremental exposure to the higher risk small cap and emerging market sectors, and focused on yield-producing parts of the market.
We expect the shift in Fed dialogue, along with volatility in interest rates and currencies will likely usher in a period of choppy trading for the remainder of the summer.
We will continue to look to find assets that offer a compelling risk/reward trade-off but will be patient in deploying capital - Risk happens fast!.
SRP
Wednesday, June 12, 2013
BOND INVESTORS FEEL PAIN FROM RISING RATES
We've been extremely cautious deploying capital toward bonds/fixed income in an environment where interest rates scrape the bottom of the floor. The New York Times comments on the pain investors are feeling with rates on the rise...
"As if it wasn’t bad enough for the millions of Americans scraping by on paltry interest payments, now they face another threat: the loss of principal on their bonds and other fixed-income assets. The month of May, and this first week of June, was terrible for many fixed-income investors who have spent the last few years reaching for higher yields. If there was an index for fixed income with the status of the Dow Jones Industrial Average or Standard & Poor’s 500 Index for stocks, the carnage in fixed-income markets would have been a big story and we’d all be talking about a bear market in bonds.
Consider the damage: mutual funds that invest in long-term United States Treasury bonds lost an average 6.8 percent in May, according to Morningstar, with the loss in principal wiping out years of interest payments. But that’s not the worst-hit sector. Higher-yielding bonds and fixed-income securities, to which investors have turned in droves in recent years, have suffered even more, especially mortgage-backed securities and emerging market debt, as well as just about anything that uses borrowing to increase returns. Many individual securities and funds were hit much harder than the averages. Vanguard’s Extended Duration Treasury Index fund was down more than 6 percent in the last month. In the mortgage area, Annaly Capital Management, a popular real estate investment trust that invests in mortgages, fell 8.7 percent, and an iShares mortgage exchange-traded fund lost 10.4 percent. Pimco’s Corporate Opportunity Fund, which is managed by the star analyst Bill Gross and which invests in a mix of corporate bonds and mortgage-backed securities and uses some borrowing, lost nearly 13.4 percent. Annualized, such declines are off the charts."
"As if it wasn’t bad enough for the millions of Americans scraping by on paltry interest payments, now they face another threat: the loss of principal on their bonds and other fixed-income assets. The month of May, and this first week of June, was terrible for many fixed-income investors who have spent the last few years reaching for higher yields. If there was an index for fixed income with the status of the Dow Jones Industrial Average or Standard & Poor’s 500 Index for stocks, the carnage in fixed-income markets would have been a big story and we’d all be talking about a bear market in bonds.
Consider the damage: mutual funds that invest in long-term United States Treasury bonds lost an average 6.8 percent in May, according to Morningstar, with the loss in principal wiping out years of interest payments. But that’s not the worst-hit sector. Higher-yielding bonds and fixed-income securities, to which investors have turned in droves in recent years, have suffered even more, especially mortgage-backed securities and emerging market debt, as well as just about anything that uses borrowing to increase returns. Many individual securities and funds were hit much harder than the averages. Vanguard’s Extended Duration Treasury Index fund was down more than 6 percent in the last month. In the mortgage area, Annaly Capital Management, a popular real estate investment trust that invests in mortgages, fell 8.7 percent, and an iShares mortgage exchange-traded fund lost 10.4 percent. Pimco’s Corporate Opportunity Fund, which is managed by the star analyst Bill Gross and which invests in a mix of corporate bonds and mortgage-backed securities and uses some borrowing, lost nearly 13.4 percent. Annualized, such declines are off the charts."
Welcome!
Welcome to the online blog for Cypress Wealth Advisors. Our team will use this medium to share content related to all aspects of wealth management, including investments, financial planning, tax issues, estate planning. Much of what we will share will be macro-economic related data points that we follow to craft our investment thesis.
We hope this a useful outlet to connect with clients, friends and folks to share our thought process as we navigate an increasingly confusing financial landscape.
SRP
We hope this a useful outlet to connect with clients, friends and folks to share our thought process as we navigate an increasingly confusing financial landscape.
SRP
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