Why Don’t Investors Understand Emerging Markets?

Monday, June 10th, 2013

by Tassos Stassopoulos, AllianceBernstein

Big is not necessarily beautiful when it comes to forecasting emerging markets. In fact, the kind of big numbers that are often bandied around can actually make it harder for investors to understand what’s really going on. We think there is a better way.

Forecasts for consumer spending illustrate the problem. Everyone is in accord that the consumer is going to be a big growth driver in emerging markets. But nobody seems to be able to agree about the figures. According to BCG, the consultants, China and India will consume US$10 trillion of goods and services by 2020, whereas UBS puts the same value on China alone. These disparate forecasts don’t do much to help the investor identify the winners and losers.

Big Numbers Miss Key Trends

Part of the problem is the way that forecasters get to such big numbers. Often, they will take current gross domestic product, apply a notional growth rate and assume that personal consumption rises in line. Reality is, of course, never quite that neat and tidy.

In fact, the early stages of successful developing economies are typically dominated by exports. In this phase, the domestic consumer is relatively unimportant. But as the economy starts to become more sophisticated and wealth trickles down, the domestic market takes on increasing significance. Indeed, the consumers’ share typically grows faster than the economy as a whole, which is why most estimates substantially underrate the value of the consumer.

BRICs Consumer Markets Vary Wildly

There is a whole range of other oversimplification problems that affect investors. For example, there’s a mistaken tendency to assume that all countries offer similar opportunities. Take the BRIC economies (Brazil, Russia, India and China). Although the BRICs have appeared the most dynamic large emerging-market economies, their consumer markets vary wildly. At one extreme, India offers the least developed market, with a prevalence of basic products and highly inefficient supply chains. At the other end of the scale, Brazil’s market is so well developed it is increasingly taking on the characteristics of its developed counterparts, with their accompanying consumer debt problems.

Translating these trends into investment decisions is no easy task, especially since investors are often tied to an index. The problem is that traditional indices give the biggest weightings to firms that have already succeeded, not necessarily to those which are likely to do well in the future.

Largest Companies Face Structural Challenges

Another factor is “bottom-up” stock analysis. By far the easiest companies for analysts to talk to are the big established ones. Because of the fast-evolving nature of their markets, they often face significant structural challenges, but are unlikely to volunteer information about these trends.

A typical example is Hengan, China’s largest maker of nappies (diapers). The company is well researched by analysts and held in many emerging-markets portfolios. Yet our “grassroots” research revealed that it also faced a little-understood but increasingly important issue – rising competition as its customers become wealthier and more sophisticated.

In nappies—as in many other things—even quite poor people aspire to upmarket, brand-name products. As a result, Hengan’s low-end nappies are finding it increasingly hard to compete with overseas brands like MamyPoko (from Japan’s Unicharm), Pampers (Procter & Gamble) and Huggies (Kimberly-Clark), whose manufacturers are not represented in the emerging-markets indices and are therefore off the radar for many emerging-markets investors.

The simple truth is that there is often no simple truth. So investors need to do their homework—and avoid the distractions of “big is beautiful”—to survive and thrive in emerging markets.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Tassos Stassopoulos manages Global Growth/Thematic Portfolios at AllianceBernstein

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2013 Country Stock Market Returns (June 10, 2013)

Monday, June 10th, 2013

by Bespoke Investment Group

Below is a look at the year-to-date stock market performance of 77 countries around the world.  Of the 77 countries shown, the average 2013 performance is +7.11%.  Fifty-seven of the 77 countries are in the green for the year, 19 are down and one is flat.

As shown, Dubai is up the most in 2013 with a gain of 49.25%.  Nigeria ranks second with a gain of 40.91%, followed by Abu Dhabi in third at 36.81%.  While it has fallen off a cliff recently, Japan remains the best performing country of the G7 so far this year with a gain of 23.88%.  The US ranks 2nd of the G7 with a gain of 14.91%, followed by the UK (8.72%) and Germany (8.44%).  France is 5th out of 7 with a gain of 6.36%, while Italy ranks 6th at just +2.57.  Canada has been the worst performing G7 country so far this year with a decline of 0.42%.

The BRICs have been extremely weak so far this year.  India is doing the best of the bunch with a gain of 0.01%, while Brazil and Russia are the second and third worst performing countries on the entire list.  Only Peru has been worse this year with a decline of 22.63%.

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The “Tuesday Rally” and Recency Bias …

Thursday, June 6th, 2013

by Cullen Roche, Pragmatic Capitalism

If there’s one cognitive bias you have to be particularly aware of in the markets, it’s recency bias.  Recency bias is the tendency to believe that what has just recently occurred is likely to form part of a larger future trend.   It’s dangerous, you should become extremely familiar with it, learn from it and ensure that you don’t fall for it.

If you’ve been paying attention to the market rally over the last 6 months you’ve certainly heard of the Tuesday winning streak that just came to an end.  Yes, the S&P 500 rallied in 20 consecutive Tuesdays.  Pretty amazing, right?  No, it’s meaningless.  This is a classic case of recency bias or the gambler’s fallacy.  In the gambler’s fallacy one looks at a series of recent events and concludes that this makes a future event more likely to occur.  It’s like flipping a coin that lands on heads 10 times in a row and then concluding that that either makes the next flip more or less likely to be a heads.  Of course, each flip is its own independent action and has no influence on the next flips, but that doesn’t stop people from falling for this myth.

The stock market is a little different in that the actions of past buyers/sellers has an impact on future buyers/sellers, but you have to be very careful when deciphering the connection here.  The silly “Tuesday winning streak” idea implies that 1 day per week in a sample of 5 days is somehow connected to the same day in the past/future.  As if this Tuesday’s market is necessarily connected to next Tuesday’s performance.  But that ignores a huge sample of data inbetween and drawn out over the course of the period that is being analyzed.  In this case, by looking at a random sample of 100 trading days the media has managed to take a particular day ending in Y and attach some special attribute to it as though there’s something unique or special about that particular day.  In essence, we’ve flipped heads a bunch of times in a row and now we seem mesmerized or fooled by what looks like a VERY BRIEF pattern in a sample of thousands of Tuesdays.   It ignores the fact that the market is a massive sample that is in the process of currently playing out over millions of different trading events.  The fact that brief patterns occur within this larger dataset does not somehow alter the long-term randomness of the specific events any more so than 10 consecutive coin flips alters the odds of the next 1,000,000 flips.

In case common sense doesn’t protect you from this misunderstanding, CXO provides some more in-depth data on the idea that certain days of the week are better than others.  But the important message is just to ignore this kind of noise.

***

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. For more info about Orcam Investment Research see here.

Copyright © Pragmatic Capitalism, Orcam Financial Group, LLC

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Technical Talk: Bull Market Momentum Turning Over?

Wednesday, June 5th, 2013

by Don Vialoux, TechTalk

Upcoming US Events for Today:

1. ADP Employment Report for May will be released at 8:15am. The market expects 171,000 versus 119,000 previous.
2. Productivity for the First Quarter will be released at 8:30am. The market expects a quarter-over-quarter increase of 0.7%, consistent with the previous report. Unit Labor Costs are expected to increase by 0.5%.
3. Factory Orders for April will be released at 10:00am. The market expects a month-over-month increase of 1.4% versus a decline of 4.0% previous.
4. ISM Services for May will be released at 10:00am. The market expects 53.8 versus 53.1 previous.
5. Weekly Crude Inventories will be released at 10:30am.
6. The Fed’s Beige Book for June will be released at 2:00pm.

Upcoming International Events for Today:

1. India PMI Services will be released at 1:00am EST.
2. German PMI Services for May will be released at 3:55am EST. The market expects 49.8 versus 49.6 previous.
3. Euro-Zone PMI Services for May will be released at 4:00am EST. The market expects 47.5 versus 47.0 previous.
4. Great Britain PMI Services for May will be released at 4:30am EST. The market expects 53.0 versus 52.9 previous.
5. Euro-Zone GDP for the First Quarter will be released at 5:00am EST. The market expects a year-over-year decline of 1.0% versus a decline of 0.6% previous.
6. Euro-Zone Retail Sales for April will be released at 5:00am EST. The market expects a year-over-year decline of 0.6% versus a decline of 2.4% previous.
7. Canada Building Permits for April will be released at 8:30am EST. The market expects a month-over-month decline of 2.3% versus an increase of 8.6% previous.
8. Australia Trade Balance for April will be released at 9:30am EST. The market expects 180M versus 307M previous.

Recap of Yesterday’s Economic Events:

The Markets

Equities traded lower on Tuesday, bringing an end to 20 consecutive Tuesday’s of positive results for the Dow Jones Industrial Average. Concerns pertaining to the Fed tapering its bond buying program led the stock market selloff, pushing the Dow almost 1% lower by midday. The remainder of the week will only fuel further speculation as to what the Fed might do as employment reports for the month of May are released; ADP will release their report this morning at 8:15 followed by the BLS report on Friday. Disappointing results may actually garner a positive reaction as the perception would become that the present easy monetary policy will remain intact. Vice versa if the results are strong. Talk of tapering has had a significant effect on yields over the past month. The 10-year note has jumped from around 1.6% to as high as 2.2%, testing the upper limit of a rising trendline that stretches back to last summer. The 200-day moving average of the yield has now curled higher for the first time since early 2011, implying positive momentum over a long-term scale. This trend is contradictory to seasonal averages. Typically yields trend lower throughout the summer months as equity market volatility forces investors into safe-haven assets. Bonds and interest sensitive plays that typically flourish in the summer may experience some volatility themselves.

The recent weakness in the S&P 500 has triggered momentum “Sell” signals with respect to RSI, MACD, and Stochastics. The percent of stocks within the large-cap index trading above 200-day moving averages is also offering a signal that suggests caution is warranted. The percent recently topped 90 (94 to be exact), a level in which significant market peaks have been known to form. The percent is now attempting to push below its 50-day moving average line, a level that has typically provided reliable sell signals for equity market positions. The break below the 50-day moving average line is so far just marginal and more evidence is required to confirm the signal, but downside risks are escalating.

Seasonal charts of companies reporting earnings today:

Sentiment on Tuesday, as gauged by the put-call ratio, ended bearish at 1.16.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $13.33 (up 0.08%)
• Closing NAV/Unit: $13.29 (down 0.09%)

Performance*

* performance calculated on Closing NAV/Unit as provided by custodian

Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.

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Looking South of the Border

Wednesday, June 5th, 2013

Looking South of the Border

Seeking U.S. Equity Exposure through ETFs

Alfred Lee, CFA, CMT, DMS
Vice President, BMO ETFs
Portfolio Manager & Investment Strategist
BMO Asset Management Inc.
www.bmo.com/etfs

June 4, 2013
Recent Developments:

• Since the beginning of 2011, when we made the recommendation to overweight U.S. equities, the 44.0% total return of the S&P 500^® Composite Index (SPX) (in Canadian dollars) has easily outperformed the 1.4% total return of the S&P/TSX Composite Index (S&P/TSX) – (Chart A). From a fundamental perspective, we continue to favour U.S. equities given that the 16.1x current price-to-earnings (P/E) ratio of the SPX is still at a 34.2% discount to its 2009 high. In comparison, the 16.3x forward P/E ratio of the S&P/TSX is at a 23.4% discount to its 2009 high.
• As investors are aware, the S&P/TSX is heavily concentrated in sectors that are highly sensitive to global economic growth. For instance, the energy and material sectors together currently make up close to 40% of the S&P/TSX. With many emerging markets focusing on internalizing their economic growth, and relying less on infrastructure related projects to stimulate their economies, commodity related areas will likely continue to face headwinds. The material sector has had a total return of -23.9% year-to-date, by far the worst performing sector of the S&P/TSX. While the 6.0% total return of the energy sector is more than the 3.7% total return of the S&P/TSX year-to-date, it is the third worst performing sector of the S&P/TSX over the period.
• For Canadian equity exposure, we continue to recommend low volatility ETFs such as the BMO Low Volatility Canadian ETF (ZLB) and/or dividend related ETFs such as the BMO Canadian Dividend ETF (ZDV), given their lower weights to cyclical oriented areas – (Chart B). Over the long-term, we remain favourable on U.S. equities, but indicators such as the Relative Strength Indicator (RSI), a technical measure we use for shorter-term price momentum, suggest U.S. equities to be short-term overbought. Given we remain favourable on U.S. equities over the long-term, should the market experience a short-term pull-back, exchange traded funds (ETFs) can be used to efficiently gain exposure to U.S. equities. For alternatives in which BMO ETFs investors can use to get U.S. equity exposure, please see below.

Investment Idea:

• Investors can easily access U.S. equities through traditional indices such as the S&P 500 Composite Index (SPX), the Dow Jones Industrial Average (Dow) and the NASDAQ-100 Index (NDX) which a number of BMO ETFs track. For the broad based SPX, investors have several alternatives including the S&P 500 Index ETF (ZSP), which is also available in U.S. dollar units (ZSP.u) and in a currency hedged format through the BMO S&P 500 Hedged to CAD Index ETF (ZUE). Investors looking for U.S. blue chip companies can utilize the BMO Dow Jones Industrial Average Hedged to CAD Index ETF (ZDJ), which tracks the multinational oriented Dow. Those investors preferring a heavier exposure to technology may prefer the BMO NASDAQ 100 Equity Hedged to CAD Index ETF (ZQQ), which tracks the NDX.
• Investors that seek a dividend oriented approach to U.S. equity investing, may want to consider the BMO U.S. Dividend ETF (ZDY), which is also available in U.S. dollar units (ZDY.u) and a currency hedged version through the BMO U.S. Dividend Hedged to CAD ETF (ZUD). This ETF screens for stocks that have a flat or growing dividend payout over the last three years and also companies that have a sustainable payout ratio.
• Investors that prefer a more defensive approach to U.S. equity investing may consider the BMO Low Volatility U.S. Equity ETF (ZLU), which is also available in U.S. dollar units (ZLU.u). This unique ETF screens for U.S. stocks that have a low beta. Beta measures a security’s sensitivity to market movements, the lower the beta, the less sensitive a security to equity market movements. The portfolio contains 100 low beta stocks, with those stocks that are less sensitive or with the lowest beta having a higher weighting in the ETF.
• For a complete look at our current portfolio positioning ideas using ETFs, please see our second quarter BMO ETF Portfolio Strategy Report.

Chart A: U.S. Equities Have Rallied While Canadian Equities Have Stalled

Chart B: Low Beta and Dividend ETFs Have Outperformed the S&P/TSX Composite

For additional information, please visit our website at www.bmo.com/etfs

For questions, please contact:

Investor Contact:
Client Services: 1-800-361-1392

Advisor Contacts:

Kevin Prins
Vice President, Ontario
kevin.prins@bmo.com

Daniel Stanley
Vice President, Ontario
daniel.stanley@bmo.com

Alain Desbiens
Vice President, Quebec & Atlantic
alain.desbiens@bmo.com

Mark Webster
Vice President, Western Canada
mark.webster@bmo.com

*All prices and yield figures as of market close May 29, 2013 unless otherwise indicated.

Information, opinions and statistical data contained in this report were obtained or derived from sources deemed to be reliable, but BMO Asset Management Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment.

BMO ETFs are managed and administered by BMO Asset Management Inc, an investment fund and portfolio manager and separate legal entity from the Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in funds. Please read the prospectus before investing. The indicated rates of return are the historical annual compound total returns including changes in prices and reinvestment of all distributions and do not take into account commission charges or income taxes payable by any unit holder that would have reduced returns. Exchange traded funds are not guaranteed, their value changes frequently and past performance may not be repeated.

“S & P^®“, “S & P 500^®” and “S & P/TSX Capped Composite™” are trade-marks of S & P Opco, LLC and “TSX” is a trade-mark of TSX Inc. These and other associated trade-marks and/or service marks have been licensed for use by BMO Asset Management Inc. None of the BMO ETFS are sponsored, endorsed, sold or promoted by any of its aforementioned trade-mark owners and the related index providers or their respective affiliates or their third party licensors and these entities make no representation, warranty or condition regarding the advisability of buying, selling or holding units in the BMO ETFs.

The Dow Jones Industrial AverageSM is a product of Dow Jones Opco, LLC, (“Dow Jones Opco”), a subsidiary of S&P Dow Jones Indices LLC and has been licensed for use. “Dow Jones®” and “Dow Jones Industrial AverageSM” are service marks of Dow Jones Trademark Holdings, LLC (“Dow Jones”) and have been licensed to Dow Jones Opco for use for certain purposes. BMO ETFs based on Dow Jones indexes are not sponsored, endorsed, sold or promoted by Dow Jones Opco, Dow Jones or their respective affiliates, and Dow Jones Opco, Dow Jones and their respective affiliates make no representation regarding the advisability of trading in such product(s).

Nasdaq®, OMX®, NASDAQ OMX®, Nasdaq-100®, and Nasdaq-100 Index®, are registered trademarks of The NASDAQ OMX Group, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by BMO Asset Management Inc. The BMO Nasdaq 100 Equity Hedged to CAD Index ETF has not been passed on by the Corporations as to its legality or suitability and is not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO The BMO Nasdaq 100 Equity Hedged to CAD Index ETF.

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Scott Minerd: “The Canary in the Coalmine”

Wednesday, June 5th, 2013

The Canary in the Coalmine

by Scott Minerd, CIO, Guggenheim Partners LLC

Early coal mines lacked ventilation systems, so miners brought caged canaries into new seams to detect the presence of methane and carbon monoxide. If a canary stopped singing – or worse, died – the mine would be evacuated until the dangerous gas buildup could be cleared. Other animals were tried for this purpose, but canaries have become recognized for their natural ability to detect small but potentially lethal concentrations of toxicity.

The recent string of surprise downside moves in markets may be the canary in the coal mine for global investors. Ongoing monetary stimulus is leading to heightened volatility, and the bull market which has been in place since 2009 is becoming overextended. To recount some of the recent disturbing developments, Japanese equities, which have nearly doubled since November 2012, fell almost 10% in three days in late May, and have continued to fall in June. This price move of approximately five standard deviations was eerily similar to the collapse in gold that occurred in April of this year.

The 12% crash in the Dow Jones Utilities’ Average, which occurred within an hour of market open on May 23, 2013, was largely overlooked. Several technical explanations for the crash were put forth, and the index nearly recovered by the end of the day. Oddly, a parallel series of events played out in the Flash Crash on May 6, 2010. Fat fingers were blamed for the outsized sell orders that swamped the market in that technical downturn. Equities, though, subsequently sold off to the lows of that day and eventually moved lower, despite the technical explanation.

Crashes that occur in bull markets, irrespective of their causes, do not bode well for short-run performance. The damage from April’s gold crash could take months or years to consolidate and repair. Investors should be prepared for this type of price action in other markets, including high yield bonds and U.S. equities.

Even U.S. Treasuries may not be immune from a sudden contraction. Between January 1, 2013 and June 3, 2013, yields on the 10-year Treasury note have risen from 1.76% to 2.12%. Yields on Japanese government bonds have almost tripled in recent months, indicating they are susceptible to further downside as well.

These dramatic swings are likely a consequence of the rapid expansion of central bank balance sheets and the uncertainty over the pace and size of future monetary accommodation. With new liquidity flooding the system, causing asset prices to rise, many investors believe they are “missing out.” This is especially true for investors who have been underinvested in risk assets such as equities and below investment grade debt, causing them to trail their benchmarks.

Increasingly extended prices and nervous buyers and sellers have damaged the market’s psychology. Many investors now face a dilemma of whether to jump into the market after the robust rally since November 2012, or wait for a correction. Meanwhile, those holding long positions are becoming more concerned with the prospect that a minor adjustment to quantitative easing could result in a loss of profits accumulated during the past months.

The United States and Japan have improving economic fundamentals, but market participants know that continued monetary expansion is required to drive further positive performance. If the Federal Reserve allows interest rates to rise too much, it risks knocking the legs out from under the housing market, which is the main pillar of the current economic expansion. Investors in Japan are similarly aware that ongoing policy accommodation is necessary to maintain buoyancy in that market.

These waves of monetary liquidity are like the tides of the ocean. It is practically impossible to gauge the direction of the tide while standing on the beach, and certain waves may roll in more or less forcefully regardless of the direction of the tide. The Fed and the Bank of Japan have indicated that they will keep the printing presses rolling, so investors realize that no matter what happens in the immediate-term, the water level will climb over time.

This is where we are today. The tide is rising for U.S. and Japanese markets and asset prices will ultimately move higher. The size and violence of each wave that advances or recedes will continue to increase due to the surge of liquidity from central banks. These tides of liquidity are strong, as are the currents underneath. We must guard ourselves from the risk of being pulled under.

How do we do this? Reducing spread duration and increasing asset quality are two ways. Placement on the yield curve and relative value selection are also important contributors to performance in times like these. We must continue to have discipline as investors. Selling on strength as spreads tighten, and using backups to add to positions are tactics which are likely to serve us well. I do not anticipate that the next few months will be an easy ride, and it appears as though the canary in the coal mine has died. Those who remain in the mine without an evacuation plan are likely to die next.

***

This article is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product or as an offer of solicitation with respect to the purchase or sale of any investment. This article should not be considered research nor is the article intended to provide a sufficient basis on which to make an investment decision. The article contains opinions of the author but not necessarily those of Guggenheim Partners, LLC its subsidiaries or its affiliates. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and nonproprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed as to accuracy. This article may be provided to certain investors by FINRA licensed broker-dealers affiliated with Guggenheim Partners. Such broker-dealers may have positions in financial instruments mentioned in the article, may have acquired such positions at prices no longer available, and may make recommendations different from or adverse to the interests of the recipient. The value of any financial instruments or markets mentioned in the article can fall as well as rise. Securities mentioned are for illustrative purposes only and are neither a recommendation nor an endorsement. Individuals and institutions outside of the United States are subject to securities and tax regulations within their applicable jurisdictions and should consult with their advisors as appropriate. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.

©2013 Guggenheim Partners, LLC

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Morning in a New Europe

Friday, May 31st, 2013

by Scott Minerd, CIO, Guggenheim Partners

Europe has had one of the nastiest winters on record, but hopes are high for a better summer. This is analogous to the economic outlook for the region. Brussels has announced a six billion euro program to reduce unemployment called a “New Deal” for Europe, echoing the language used by Roosevelt in the U.S. in the 1930s. This comes with a formal relaxation of the European Union’s (EU) austerity targets in exchange for labor reforms across the continent.

The focus of most of the policy reforms is on the periphery, but France aims to create half a million new jobs over the next three years, and Germany is preparing to relax immigration and provide training to reduce the labor shortage in high tech engineering jobs. The EU is also seeking to improve infrastructure with a program that emulates Build America Bonds called “Project Bonds.” There is likely to be an announcement of a program in which the European Central Bank will securitize assets away from banks’ balance sheets by the end of the summer. Adding all of this up, it appears to be “Morning in a New Europe,” bringing about a number of attractive investment opportunities.

Economic Data Releases

Strong Consumer Confidence and Housing Data Lift U.S. Outlook

• The Conference Board’s consumer confidence index rose to 76.2 in May, the highest level since February 2008.
• The S&P/Case-Shiller 20 city home price index gained 10.9% from March 2012 to March 2013, the best yearly increase since April 2006.
• The FHFA house price index was up 1.3% in March, the largest one-month gain on record.
• Existing home sales rose 0.6% in April to an annualized rate of 4.97 million, the highest rate since November 2009.
• New home sales increased 2.3% in April to 454,000, a three-month high.
• Initial jobless claims fell to 340,000 for the week ended May 18th, after a jump to 363,000 the previous week.
• Durable goods orders rose a more-than-expected 3.3% in April, with non-defense capital goods orders (excluding aircraft) rising for a second consecutive month.

European PMIs and Confidence Improve, Disappointing Manufacturing PMI in China

• Eurozone consumer confidence rose for a sixth straight month in May to -21.9.
• The eurozone composite PMI climbed to 47.7 in May, the second consecutive month of slowing contraction.
• Germany’s first quarter GDP was unchanged in the second estimate of 0.1%. Private consumption growth of 0.8% was offset by falling investment and government spending.
• The German IFO business climate indicator reversed two months of falling confidence, rising to 105.7 in May, while GfK consumer confidence rose to its highest level since September 2007 in the June survey.
• The German CPI rose to 1.7% in May, after 1.1% inflation in April.
• German unemployment increased by 21,000 in May, the largest monthly increase in four years. The unemployment rate held at 6.9%.
• France’s May manufacturing PMI reached the highest level in over a year, but remained well into contraction at 45.5. Meanwhile, German manufacturing activity had a third straight month of contraction.
• Business confidence in France increased to a one-year high in May, while consumer confidence unexpectedly fell, reaching an all-time low of 79.
• U.K. GDP grew 0.3% in the first quarter, with consumption growth of just 0.1%.
• U.K. retail sales excluding auto fuel fell 1.4% in April, the largest drop in nearly two years.
• The HSBC flash manufacturing PMI for China dipped into contraction in May for the first time since October 2012.

Chart of the Week

A Broken Monetary Policy Transmission Mechanism

The credit environment in the eurozone’s real economy continues to deteriorate, despite a pickup in money supply growth. M3 money supply rose 2.8% year-over-year in April, while bank lending to households remained flat, and loans to the non-financial corporate sector fell 4.6% from a year ago. The divergence reflects the ongoing breakdown of the transmission mechanism for monetary policy, indicating an increasing need for European policymakers to implement more specific measures to address the credit constraints in the private sector.

Source: European Central Bank, Haver Analytics, Guggenheim Investments. Data as of 4/30/2013.

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2013, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

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Playing the Field For Yield (Tucker)

Friday, May 31st, 2013

by Matt Tucker, iShares

Lately it feels like all I talk about here on the blog is the potential for rising interest rates – when it might happen, signs that a rate rise may be imminent, how to position bond portfolios in advance.  While this is definitely a worthy subject – and one that spurs a great number of questions from our clients – I think it’s important to take a step back every so often to remember that interest rates today are still hovering at rock bottom.  Rising rates may be a future challenge that investors need to prepare for, but the fact of the matter is, low interest rates are a challenge many investors are facing today.

It was with this challenge in mind that we launched the iShares Multi-Asset Income ETF (IYLD) a little over a year ago.  IYLD is an ETF comprised of other ETFs, tracking an index that seeks to deliver high current income while seeking long-term capital appreciation.  The objective:  to deliver yield and balance risk through diversified asset allocation.  Now that IYLD has been around for a year, and recently passed the milestone of $100 million in assets under management, it’s a good time to revisit this ETF to see how it’s doing.

First, a quick review of how the fund works.  The asset allocation of IYLD is set at 60% fixed income, 20% equity and 20% “alternative” income sources, such as preferred stocks and REITs.  While those numbers remain static, the weights of the underlying ETFs that make up each asset class are rebalanced on a quarterly basis and are chosen based on historical correlations, returns, yields and volatilities.  Only iShares ETFs that meet size, liquidity and income objectives are considered as potential holdings.  Here’s a snapshot of the fund’s current holdings (as of 4/30/13)*:

A few discerning clients have asked us why a fund that targets “income” would have an allocation to the iShares 20+ Year Treasury Bond ETF (TLT), which is currently yielding a rather unimpressive 2.7%. The answer is that US Treasuries provide a diversifying exposure to the portfolio and, while they do add some yield, they’re actually included here primarily to reduce price risk and bring relative stability to the fund’s performance through varying market environments.

So how is IYLD doing today?  With a current SEC yield of 5.43% and a one-year total return of 13.73% through the end of April, it appears IYLD has delivered on its objectives.  As a comparison, the S&P 500 Index has returned 16.89% and the Barclays Aggregate Bond Index has returned 3.68% over the same timeframe – both with current yields around 2%.  The upshot: Investors who are struggling to find yield but also want to balance risk might find IYLD to be an intriguing solution.

As for the inevitable question about rising rates, IYLD may be an interesting solution for that environment as well.  While we would generally not expect a rising rate environment to be a tailwind for the fund (remember that it’s 60% fixed income), the benefits of diversification across asset classes could help it outperform a pure fixed income portfolio.

Source: Bloomberg, BlackRock

Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to the iShares Blog.  You can find more of his posts here.

The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling toll-free 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com.

Index returns are for illustrative purposes only and do not represent actual iShares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Asset allocation models and diversification do not promise any level of performance or guarantee against loss of principal. Investment in the Fund is subject to the risks of the underlying funds. There is no guarantee that the Fund will generate high income.

*Holdings are subject to change. Full fund names are as follows: PFF – iShares US Preferred Stock ETF; HYG – iShares High Yield Corporate Bond ETF; TLT – iShares 20+ Year Treasury Bond ETF; EMB – iShares Emerging Markets USD Bond ETF; TLH – iShares 10-20 Year Treasury Bond ETF; CLY – iShares 10+ Year Credit Bond ETF; DVY – iShares Select Dividend ETF; HDV – iShares High Dividend ETF; IGF – iShares Global Infrastructure ETF; REM – iShares Mortgage REIT Capped ETF

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Tags: ETF, ETFs, Fixed Income, yield
Posted in Bonds, ETFs, Fixed Income, ideas, Insight, Outlook, REITs, Stocks | Comments Off

Defensives Continue to Get Whacked

Thursday, May 30th, 2013

by Bespoke Investment Group

After a rough day yesterday, defensive sectors continue to get sold off this morning.  Below is a snapshot of where the ten S&P 500 sectors are currently trading within their normal trading ranges.  In the table, the black vertical line represents the sector’s 50-day moving average.  The white zone represents between one standard deviation above and below the 50-day, and moves into the red or green zone are considered overbought or oversold.  As shown, Utilities and Telecom are now well into oversold territory, while Consumer Staples is quickly approaching its 50-day moving average.  Health Care has also now moved out of overbought territory into the neutral zone.

Investors typically move into more defensive sectors if they think the market is due for a pullback.  If you have done that recently, it has done anything but pay off.

Copyright © Bespoke Investment Group

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Tags: defensives, Fixed Income, utilities
Posted in Bonds, ETFs, Fixed Income, US Stocks | Comments Off

REITs, Utilities, and Treasuries Fall Off a Cliff

Thursday, May 30th, 2013

by Stockcharts.com

The Utilities SPDR (XLU) and the 20+ Year T-Bond ETF (TLT) both peaked in early May and declined sharply the last four weeks. The Real Estate iShares (IYR) continued higher into mid May, but peaked last week and fell sharply the last four days. Interest rate sensitive issues are not having a good time right now.

Click this image for a live chart.

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Tags: ETF, ETFs, Fixed Income, yield
Posted in Bonds, ETFs, REITs | Comments Off