Erasers (Hussman)

Tuesday, August 7th, 2012

by John Hussman, Hussman Funds

August 6, 2012

I’ve never been very popular in late-stage bull markets. Defending against major losses and achieving our investment objectives over the complete bull-bear market cycle (bull-peak to bull-peak, or bear-trough to bear-trough) requires us to maintain an investment exposure that is essentially proportional to the expected return/risk ratio that is associated with each given set of market conditions. When prevailing market conditions are associated with a sharply negative expected return/risk ratio, as they are at present, and either trend-following measures are negative or several hostile indicator syndromes are in place (what we call Aunt Minnies), we will typically be fully-hedged, and will raise the strike prices of our put options toward the level of the market, in order to defend against steep market losses and indiscriminate selling. At present, we expect an average 10-year total return on the S&P 500 of about 4.7% annually in nominal terms, on the basis of rich normalized valuations. Based on a much broader ensemble of evidence, and considering horizons between 2-weeks and 18-months, we estimate the prospective return/risk ratio of the S&P 500 to be in the most negative 0.6% of all historical observations.

Moderate losses may be a necessary feature of risk-taking, but deep losses are erasers. A typical bear market erases over half of the preceding bull market advance. It is easy to forget – particularly during late-stage bull markets – how strongly this impacts full-cycle returns. The most obvious example, of course, is the 2008-2009 decline, which erased not only the entire total return of the S&P 500 since its 2002 low, but also erased the entire total return of the S&P 500 in excess of Treasury bill yields (its “excess return”) going all the way back to June 1995 – making all of the benefit from risk-taking during the late-1990’s completely for naught. Similarly, the 2000-2002 bear market wiped out the excess return that investors had enjoyed in the S&P 500 all the way back to February 1996. The 1990 bear market wiped out the excess return of the S&P 500 all the way back to January 1987.

Recall that at the 1987 peak, the S&P 500 had quadrupled (including dividends) from the secular low of August 1982. The 1987 crash – which in terms of size was a fairly run-of-the-mill bear of -33.51% from peak to trough – was enough to wipe out nearly half of that preceding total return (do the math: [(4*(1-.3351)-1]/(4-1)-1 = -45%), and slashed the excess return that investors had enjoyed since 1982 by even more than half. This chronicle of unpleasant arithmetic can be extended indefinitely over market history. Regardless of whether stocks are in a secular bull market or a secular bear market, the mathematics of compounding are brutal where large losses are concerned.

It’s instructive that $1 invested in Strategic Growth Fund at its inception, near the beginning of the 2000-2002 bear market was worth 2.72 times the value of an equivalent investment in the S&P 500 by the end of that bear market. Likewise, $1 invested in the Fund at the beginning of the 2007-2009 bear market was worth 2.09 times the value of an equivalent investment in the S&P 500 by the end of that bear market (see The Funds page for complete performance information). Performance gaps that can arise in the overvalued but still-advancing part of the full market cycle can be dramatically recovered by defensive strategies in the declining part of the cycle, which is why we don’t pay excessive attention to short-term tracking differences when market conditions are hostile.

Of course, there’s no assurance that we’ll always achieve our objective of outperforming the market with significantly smaller drawdowns over the complete market cycle. Though we’ve certainly had far less volatility and drawdown than the S&P 500 over the most recent cycle, Strategic Growth Fund lagged the total return of the S&P 500 by just shy of 13% cumulative from the 10/09/2007 peak in the S&P 500 to its most recent peak on 04/02/2012. This outcome primarily reflected my insistence on making our hedging approach robust to Depression-era data (an effort that caused us to miss returns in 2009-early 2010 until we achieved a robust solution using ensemble methods), and the smaller issue that purchasing actual put options has been less effective in periods where central banks have seduced investors to place their faith in “Bernanke puts” and “Draghi puts.” Our 2009-early 2010 miss was not “strategic” in that we would not be similarly defensive in future cycles if presented with identical conditions and evidence. But the fact is that our present defensive stance, particularly since early March, is something that we can be expected to establish over and over again in future cycles if presented with the same evidence.

Our measures of prospective return/risk became steeply negative in early March (see Warning: A New Who’s Who of Awful Times to Invest). Since then, market conditions have satisfied a restrictive set of criteria that have been similarly negative in a very small percentage of historical observations. At present, Strategic Growth Fund is fully-hedged, with most of our index put option strikes raised within about 4% of prevailing market levels, at a cost of less than 2% of assets in time premium looking out toward late-2012. This time premium will decay if the market remains unexpectedly resilient in the coming months and we observe no shift in presently negative market conditions. That said, with an angry army of negative indicator syndromes in place, I don’t expect speculation – even on hopes of further central bank intervention – will be significantly or durably rewarded here.

Suffice it to say that our present defensiveness is an intentional and repeatable aspect of our investment strategy. There are certainly some extraordinary factors that we had to address in the most recent market cycle as a result of the credit crisis and government attempts to defend bad debt, avoid restructuring, and to extend, pretend, and print at all costs. I believe that we can manage a continuation of that policy environment well over time, though periodic frustrations may be more frequent due to short-lived “risk-on” advances. In any event, I have no belief that central bank operations (which do little more than purchase a fraction of the new additions to the mountain of global government debt and replace them with currency and bank reserves) are actually capable of making recessions, bear markets, or the basics of arithmetic things of the past.

Economic Notes

Friday’s headline non-farm payroll employment gain (establishment survey) of 163,000 jobs was surprisingly positive, but far less informative about economic prospects than investors appeared to assume. The household survey, which is used to calculate the unemployment rate, actually showed a drop in civilian employment of 195,000 jobs in July. The increase in the unemployment rate would have been greater if not for the fact that another 150,000 people left the labor force altogether and were therefore not counted as unemployed. The picture was particularly weak for workers 20 years of age and older (where 213,000 jobs were lost), but was slightly rescued by a gain of 18,000 jobs among 16-19 year-olds. While the difference between the establishment and household surveys was unusually large, these disparities aren’t entirely uncommon, and don’t have a great deal of predictive value for either series. It’s probably most accurate to say that the July employment figures were mixed.

Even focusing on the bright spot, which is the establishment survey figure, one immediate fact to note is that year-over-year growth in non-farm payrolls fell below 1.4% back in April, following a brief excursion above that level, and has remained weak since then. As the chart below indicates, a decline in year-over-year payroll employment growth below 1.4% has occurred just before, or already into, each of the past 10 recessions, with no false signals. As usual, we’re skeptical of drawing inferences from a single indicator, and this instance may be different. But given the collapse in new orders and other measures of economic activity across numerous Fed, ISM and global surveys (and a continued decline in the most leading signal that we infer from our unobserved components models), there seems to be little reason for that expectation.

Keep in mind, as we’ve noted regularly over the years, that employment is a lagging economic indicator. The “stream of anecdotes” school of economic analysis may treat every economic report as having equal weight in determining the course of the economy, but the actual sequence is generally as follows: falling consumption growth and new orders -> falling production -> falling employment. The latest employment report appears to be little more than the wagging tail of an already sick puppy, and the tail is not likely to wag that dog to health.

In contrast, the latest JP Morgan global manufacturing report observes that “production and new orders both fell for the second month running in July, with rates of contraction gathering pace.” The chart below presents the global purchasing managers index (PMI), which has now weakened to levels last seen during the last two recessions.

With regard to Europe, it’s interesting how the semantics of the phrase “everything necessary” has been used to obscure the differences between Euro-area countries when it comes to monetizing bad debt. The distinction can be seen in a comment last week by German government spokesman Georg Streiter: “The ECB president said that the ECB will do everything necessary to preserve the euro and the government will do everything politically necessary to preserve the euro.” As long as the phrase is shortened to “everything necessary,” everyone is in agreement. The differences are in the subset of actions that constitute “everything.” For the German government, it is everything politically necessary. For Finland, it is everything necessary provided that collateral is pledged for every loan. For the German courts, it is everything legally necessary. While everyone can be unanimous about their commitment to doing “everything necessary,” it’s important to recognize that “everything” means something different to each party.

Even Mario Draghi had to resort to oxymorons to explain why the ECB did not initiate bond purchases last week despite what investors had taken as a pledge to do so, saying that the endorsement of bond purchases among ECB council members was “unanimous with one reservation” (he then left to enjoy some jumbo shrimp in a plastic glass, but they were found missing, leaving Draghi and his broken fix for an enduring Euro alone together in the deafening silence).

My impression regarding the Euro remains unchanged – liquidity will not durably counter insolvency, and the solvency problem among peripheral European countries is too great to be addressed without debt restructuring. ECB purchases of distressed sovereign debt would most likely have to be permanent purchases, and would therefore represent a fiscal transfer at the expense of stronger countries that would prefer to use the proceeds of money creation for the benefit of their own citizens. Doing those purchases indirectly – the ECB buying the debt of an ESM with a banking license, and the ESM buying distressed debt – does not change the arithmetic. Very reasonably, Germany is only willing to mutualize the debts of its neighbors if it can exert centralized authority over their fiscal policies – in Angela Merkel’s words “liability and control belong together.” But while Europe is geographically united, it is culturally and politically diverse, and a surrender of national sovereignty to the required extent is unlikely.

As a result, the Euro is likely to be pulled apart, and the tensions will probably be greatest across geographic and socioeconomic fault lines. From a geographic perspective, Finland (which insists on good collateral even for EFSF actions) and Italy (where popular sentiment against the Euro is strongest) have the greatest divide. From a socioeconomic standpoint, Germany (which is strongly anti-inflation and more oriented toward free enterprise) and the southern European states of Greece, Italy, Spain and Portugal (which have high debt ratios, heavily socialized economies, and very fragile banks) seem to be the furthest apart. The real question is who will get the Euro if the wish-bone snaps – the stronger more solvent states, or the weaker more inflation-prone states. Until the answer is clear, it will be difficult to anticipate the future direction of the Euro’s value. I would expect the least amount of systemic disruption in the event of an exit from the Euro by the stronger European countries, but that would also be associated with the maximum amount of Euro depreciation as the remaining members are left to inflate as they (and the ECB) please. All of this will be extraordinarily interesting, but it will not be easy.

Market Climate

As of last week, the Market Climate for stocks remained among the most negative 0.6% of historical observations, holding us to a tightly defensive stance. Strategic Growth remains fully hedged, with a staggered-strike position that raises the strike prices of the put option side of our hedge within a few percent of prevailing levels, at a cost of less than 2% of assets in time premium looking out to very late-2012. The Fund’s day-to-day returns can be expected to primarily reflect changes in the value of this time premium and day-to-day performance differences between the stocks held by the Fund and the indices we use to hedge. Strategic International also remains fully hedged. Strategic Dividend Value remains hedged at about 50% of the value of its stock holdings. Strategic Total Return continues to carry a duration of about one year in Treasury securities, with about 10% of assets in precious metals shares, and a small percentage of assets in utility shares and foreign currencies.

Copyright © Hussman Funds

Tags: Aunt Minnies, Bear Market, Bull Bear, Bull Markets, Erasers, Excess Return, Going All The Way, Horizons, Hussman, Hussman Funds, Investment Objectives, John Hussman, Market Advance, Market Losses, Naught, Necessary Feature, Risk Ratio, Syndromes, Treasury Bill, Trough, Valuations
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Run of the Mill (Hussman)

Monday, June 4th, 2012

by John Hussman, Hussman Funds

Since late-February, our estimates of the market’s prospective return/risk tradeoff (over a set of horizons from 2 weeks to 18 months) have persistently held in the worst 0.5% of all historical observations. It’s always important to emphasize that we try to align ourselves with the average return/risk profile that has historically accompanied the particular set of investment conditions we observe at each point in time, but that the outcome in any specific instance may not reflect the average return, and may even fall outside of what we view as the likely range of outcomes. That said, the awful behavior of the market in recent weeks is very run-of-the-mill in terms of how similarly unfavorable conditions have usually been resolved historically, and there is no evidence that this awful prospective course has changed much. The chart I included three weeks ago in Dancing at the Edge of a Cliff presents similar periods for historical perspective.

It’s probably needless to say that last week’s decline improved valuations modestly – we presently estimate prospective 10-year total returns (nominal) for the S&P 500 about 5.5% annually, based on our standard methodology. Most bear markets have historically ended only after prospective returns moved above 10% (including bear markets in periods of very low interest rates, and also including 2009). Moreover, regardless of whether interest rates have been high or low, extended secular bear markets have ended – and secular bull market advances have begun – only when prospective 10-year returns have reached about 20% annually (see Too Little To Lock In for a chart on this). So it won’t come as a surprise that we don’t view a 5.5% annual prospective total return as having much investment merit. You don’t “lock in” prospective stock market returns – you ride them out, and holding on for the expectation of a 5.5% prospective annual return is likely to involve a very bumpy 10-year ride.

Investors with most of their assets already invested and unhedged should hope that prospective market returns move no higher than about 8% through the completion of the present cycle, since even touching a prospective return of 10% in the interim would require an S&P 500 in the mid-800′s. Though I think it’s plausible that we’ll establish prospective returns consistent with the start of a secular bull market at some point in the next few years, actually quoting the associated level for the S&P 500 would only strain credibility here. Investors have forgotten so much after just 3 years time that it seems fruitless to talk about secular lows that only occur every 30-35 years (even if the last secular low was all the way back in 1982).

At this point, the S&P 500 has achieved a cumulative total return of less than 10% since April 2010. Meanwhile, of course, there remains a great deal of faith in the “Bernanke put,” because even though it’s fairly obvious that QE has done nothing durable for the economy or the financial markets over the last couple of years, a hit of QE might at least be good for a few months of “risk on” delirium. If the American public can’t get thoughtful economic leadership, at least Wall Street’s speculative junkies can hope for a little taste of Q from Sugar Daddy.

One of the problems with QE here, however, is that it would essentially represent fiscal policy for the benefit of speculators, at taxpayer expense. To see this, note that the 10-year Treasury yield is now down to less than 1.5%. One wonders how Bernanke would be able to argue, with a straight face, that this is not low enough. Nevertheless, a 10-year bond has a duration of 8 years – meaning that each 100 basis point fluctuation in interest rates is associated with a change of about 8% in the price of the bond. So if you buy the bond and hold it for a full year, an interest rate change of of 1.5/8 = .1875, or less than 20 basis points, is enough to wipe out the annual interest and leave you with a negative total return.

So at this point, if the Fed buys Treasury bonds, it will predictably lose money – after interest – unless interest rates rise less than 20 basis points a year during the period that the Fed holds those bonds. Over the past year, the standard deviation of week-to-week changes in the 10-year Treasury yield has been about 13 basis points, so 20 bips over the course of a full year is nothing. Whether or not a speculator is willing to take a bet on lower yields, it’s highly unlikely that the Fed could buy Treasury bonds here at a yield of 1.5% and ever expect to unload its portfolio later at even lower yields, because yields would shoot higher merely on the anticipation of Fed liquidation.

As a result, Treasury debt purchased by the Fed here would almost certainly result in capital losses, at taxpayer expense, and those capital losses would be an implicit subsidy to speculators who sold those bonds to the Fed at elevated prices. Of course, “sterilized QE” – where the Fed would buy bonds, and then pay banks 0.25% interest to keep the balances on reserve – would involve an even larger subsidy, and would then require only a 15 basis point move to put the Fed into loss mode.

“QE3 – subsidizing banks and bond speculators at taxpayer expense” – there’s a pithy slogan. That doesn’t mean the Fed will refrain from more of its recklessness (which will be nearly impossible to reverse when it becomes necessary to do so), but does anyone actually believe by now that QE would improve the economy, durably elevate risky assets beyond a few months, or materially relieve global debt strains?

Despite the uncertainties, our game plan remains fairly straightforward. As I noted two weeks ago in Liquidation Syndrome, “there may be latitude to take a more constructive stance between the point that any new monetary intervention produces an improvement in our measures of market internals, and the point where we re-establish an overvalued, overbought, overbullish syndrome. Without a material improvement in valuations or market action here, we remain defensive. Undoubtedly, the best outcome would be a strong improvement in valuations, followed by signs of improvement in our measures of market action, which is the typical sequence of events that complete a market cycle and can launch a very favorable investment environment.

Tags: Bear Markets, Decline, Expectation, Historical Perspective, Horizons, Hussman Funds, Investment Conditions, John Hussman, Low Interest Rates, Methodology, Nbsp, Periods, Point In Time, Prospective Course, Risk Profile, Secular Bull Market, Stock Market, Tradeoff, Unfavorable Conditions, Valuations
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Trade Idea of the Week: Gold Rush … To The Exit

Tuesday, May 22nd, 2012

Gold Rush … to the Exit

by Wade Guenther, Horizons ETFs
Gold bullion was the poster child for lofty returns in 2011, boasting a 10.06% increase over the tumultuous period, December 31, 2010 to December 30, 2011. Surprisingly, the gold producer returns lagged gold bullion returns in 2011 with the NYSE Arca Exchange Gold BUGS Index and the S&P/TSX Global Gold™ Index achieving -13.01% and -14.32% returns respectively over the same period.

How can we profit from understanding the gold bullion and the gold producer relationship?

Gold Spot, NYSE Arca Exchange Gold BUGS and S&P/TSX Global Gold™ Index Returns: 2007 – 2012 (Click to enlarge)

Source: Bloomberg, between May 7, 2007 and May 8, 2012.

Gold bullion experienced daily increases 54.16% of the time over the measurement period, May 7, 2007 to May 8, 2012. The NYSE Arca Exchange Gold BUGS Index and the S&P/TSX Global Gold™ Index had daily increases 49.23% and 46.89% of the time, respectively over the same period.

The difference between gold bullion and gold producer returns became exacerbated when gold bullion returns were negative. Gold bullion experienced daily decreases of -1.00%, or less, 16.90% of the time between May 7, 2007 and May 8, 2012. However, the NYSE Arca Exchange Gold BUGS Index and the S&P/TSX Global Gold™ Index had daily decreases of -1.00%, or less, 32.90% and 31.53% of the time respectively, over the same period. The frequency of daily losing periods for gold producers was almost 2 times greater than the frequency of losing periods for gold bullion.

Over the shorter reference period, of August 22, 2011 to May 8, 2012, gold bullion reached a high $1897.60 $USD/oz. on August 22, 2011 and had a -13.32% return and an annualized standard deviation of 18.97%.

Gold Spot, NYSE Arca Exchange Gold BUGS and S&P/TSX Global Gold™ Index Returns: August 22, 2011 to May 8, 2012 (Click to enlarge)

Source: Bloomberg, between August 22, 2011 and May 8, 2012.

There is a noticeable divergence between gold bullion and the gold producer returns over this shorter gold bullion downtrend. The NYSE Arca Exchange Gold BUGS Index and the S&P/TSX Global Gold™ Index experienced -30.77% and -27.82% returns respectively between August 22, 2011 and May 8, 2012. The volatility of the indices were significantly higher than gold bullion with a 30.36% and 29.82% annualized standard deviation for the NYSE Arca Exchange Gold BUGS Index and the S&P/TSX Global Gold™ Index respectively, over the same measurement period.

There is a positive outlook, from analyst’s consensus, for the gold producers with higher expected earnings per share in the second and third quarters of fiscal 2012.

NYSE Arca Exchange Gold BUGS and S&P/TSX Global Gold™ Index Fiscal 2012 Actual and Estimated Quarterly Earnings and Dividends

Source: Bloomberg, as of May 8, 2012.

Actual = Trailing 3 month actual weighted average earnings for the index members
Q Est = Index weighted average of the member estimates for the current quarter
Q+1 Est = Index weighted average of the member estimates for the next quarter
Q+2 Est = Index weighted average of the member estimates for the two quarters forward

Generally, analysts are forecasting dividends to decrease which could be considered a growth indicator because companies may use the retained dividends to invest in higher yielding investment opportunities versus distributing cash to the public.

The ratio between the gold producers and gold bullion also becomes an interesting metric.

Gold Producer-to-Gold Bullion Ratio: 2007 – 2012 (Click to enlarge)

Source: Bloomberg, between May 7, 2007 and May 8, 2012.

The gold producer-to-gold bullion ratio was 0.178, as of May 8, 2012. The last significant low gold producer-to-gold bullion ratio was a value of 0.215 on October 27, 2008. Following the October 2008 low gold producer-to-gold bullion ratio, the S&P/TSX Global Gold™ Index increased 120.36% between October 27, 2008 and February 18, 2009 whereas gold bullion increased by only 34.77% over the same period.

If you believe that gold bullion returns will be positive and gold producer returns will be negative:
- HUG (1x): 100% exposure to gold bullion
- HBU (2x): 200% leveraged exposure to gold bullion
- HIG (1x): 100% inverse exposure to the S&P/TSX Global Gold™ Index
- HGD (2x): 200% leveraged inverse exposure to the S&P/TSX Global Gold™ Index

If you believe that gold bullion returns will be negative and gold producer returns will be positive:
- HBD (2x): 200% leveraged inverse exposure to gold bullion
- HGU (2x): 200% leveraged exposure to the S&P/TSX Global Gold™ Index

If you believe that gold producers will experience higher volatility than gold bullion:
- HEP (1x): Exposure to a portfolio of gold producer securities with a buy-write covered call strategy

If you believe that the price of gold bullion will experience higher volatility than gold producers:
- HGY (1x): Exposure to gold bullion with a buy-write covered call strategy

The views expressed herein are of a general nature and this Trade Idea is not and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

ETF Performance as of April 30, 2012

Wade Guenther, CFA
ETF Research Analyst
Horizons Exchange Traded Funds

HUG Investment Objective
The Horizons COMEX® Gold ETF (“HUG”) seeks investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to the performance of the COMEX® gold futures contract for a subsequent delivery month. Any U.S. dollar gains or losses as a result of the HUG’s investment will be hedged back to the Canadian dollar to the best of the HUG’s ability. If HUG is successful in meeting its investment objective, its net asset value should gain approximately as much, on a percentage basis, as any increase in the COMEX® gold futures contract for a subsequent delivery month when the COMEX® gold futures contract for that delivery month rises on a given day. Conversely, HUG’s net asset value should lose approximately as much, on a percentage basis, as the COMEX® gold futures contract for a subsequent delivery month when the COMEX® gold futures contract for that delivery month declines on a given day.

HEP Investment Objective
The investment objective of the Horizons Enhanced Income Gold Producers ETF (“HEP”) is to provide unitholders with: (a) exposure to the performance of an equal weighted portfolio of North American based gold mining and exploration companies; and (b) monthly distributions of dividend and call option income. Any foreign currency gains or losses as a result of HEP’s investment in non-Canadian issuers will be hedged back to the Canadian dollar to the best of its ability.

HEP invests primarily in a portfolio of equity and equity related securities of North American companies that are primarily exposed to gold mining and exploration and that, as at each semi-annual rebalance date, are amongst the largest and most liquid issuers on the TSX in that sector. HEP will rebalance, on an equal weight basis, the portfolio of constituent securities on each semi-annual rebalance date.

To mitigate downside risk and generate income, HEP will generally write covered call options on 100% of its portfolio securities. Covered call options provide a partial hedge against declines in the price of the securities on which they are written to the extent of the premiums received.

HGY Investment Objective
The investment objective for Horizons Gold Yield ETF (“HGY”) is to provide Unitholders with: (i) exposure to the price of gold bullion hedged to the Canadian dollar, less the ETF’s fees and expenses; and (ii) tax-efficient monthly distributions, and (iii) in order to mitigate downside risk and generate income, exposure to a covered call option strategy on 33% of the securities of the Gold Portfolio. The level of covered call option writing to which HGY is exposed may vary based on market volatility and other factors.

HIG Investment Objective
The Horizons BetaPro S&P/TSX Global Gold Inverse ETF (“HIG”) seeks daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to one times (100%) the inverse (opposite) of the daily performance of the S&P/TSX Global Gold™ Index.

HBU and HBD Investment Objectives
The Horizons BetaPro COMEX® Gold Bullion Bull Plus ETF (“HBU”) and the Horizons BetaPro COMEX® Gold Bullion Bear Plus ETF (“HBD”) seek daily investment results equal to 200% the daily performance, or inverse daily performance, of COMEX® Gold Bullion, before fees and expenses. HBU and HBD are denominated in Canadian dollars, as the U.S. dollar exposure of the underlying index is hedged daily.

HGU and HGD Investment Objectives
The Horizons BetaPro S&P/TSX Global Gold Bull+ ETF (“HGU”) and the Horizons BetaPro S&P/TSX Global Gold Bear+ ETF (“HGD”) seek daily investment results equal to 200% the daily performance, or inverse daily performance, of the S&P/TSX Global Gold™ Index, before fees and expenses. The Index consists of securities of global gold sector issuers listed on the TSX, NYSE, NASDAQ and AMEX.

The views expressed herein may not necessarily be the views of AlphaPro Management Inc., Horizons ETFs Management (Canada) Inc. or Horizons Exchange Traded Funds Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

Tags: Annualized Standard Deviation, Bloomberg, Decreases, ETFs, Global Gold, Gold Bugs, Gold Bullion, Gold Index, Gold Producer, Gold Producers, Gold Rush, Gold Spot, Horizons, Index Returns, Measurement Period, Nyse Arca, Nyse Index, Poster Child, Tsx, Tumultuous Period
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Dancing at the Edge of a Cliff (Hussman)

Sunday, May 13th, 2012

In recent weeks, I’ve emphasized that our estimate of prospective market return/risk in stocks has slipped into the most negative 0.5% of historical data (reflecting a range of horizons from 2 weeks to 18 months). Last week that estimate actually deteriorated, but I am reluctant to make comments on such a small sample, as the only more negative estimate in post-Depression history was on September 16, 2000. Even in the conditions that match the worst 2% of our return/risk estimates (which is the part of the tail we have been in since late-February), the market has lost an average of 20-25% just in the following 6-month period. As much as I try to maintain equanimity – focusing on the average outcome of a particular set of market conditions rather than the specific instance at hand – it is very difficult to do so at present.

The green bands in the chart below depict all of the points since 1980 in the neighborhood of present conditions – having a nearly similar prospective return/risk profile, coupled with a particularly hostile “exhaustion syndrome” that has been a hallmark of the worst market outcomes in recent decades. The blue line shows the S&P 500 Index. As I noted in Goat Rodeo, “what this combination picks up is an already fragile set of market internals that has enjoyed an ‘exhaustion rally’ that both exceeds earnings growth and is met with overbullish sentiment.”

I usually show longer-term charts, but there are no green bands prior to 1987. Before that point, valuations were never been as extended as they are today – on the basis of normalized earnings – except in the quarters leading up to the 1929 crash. Exhaustion syndromes prior to 1987, while still very hostile to stocks, didn’t occur in valuation conditions as rich as we have today. It’s worth noting that there is a very narrow band in 2006 that was followed by a decline of only a few percent, but even the seemingly benign instances in 1998 and early 2000 represented losses exceeding 10%. I suspect we’re at risk of something far more significant. Importantly, the drivers of our market risk estimates are largely independent of our measures of recession risk. This may provide some insight into why my concerns have become so strident in recent weeks.

Present market risks involve a confluence of factors. First, valuations remain unusually rich. Though prospective returns are better than at the 2000 and 2007 peaks, valuations remain more elevated than at any point prior to the late-1990′s bubble, save for the period before the 1929 plunge. Notably, valuations only seem “reasonable” on the basis of “forward operating earnings” if one ignores the fact that profit margins are 50-70% above historical norms, and are dependent on unsustainably large fiscal deficits and depressed household saving in order for that to continue (see Too Little to Lock In).

Second, market internals have deteriorated, with an uncomfortably familiar “two-tier” profile developing between a handful of speculative momentum stocks and the broader market. Coupled with an active new issues calendar, near-panic levels of selling by corporate insiders, heavy beta exposure among mutual funds and institutional managers, record-low mutual fund cash levels, and advisory bearishness at just 20.5% (a level last seen before the steep 2011 decline), there appears to be a lopsided exposure to risk among speculators, and a divestment among issuers.

Third, as I’ve frequently noted, the best way to extract meaningful signals and reduce noise in volatile data is to draw those signals from the joint behavior of several indicators. While these methods range from the simple to the complex, we’ve frequently presented variously defined sets of indicators (see An Angry Army of Aunt Minnies) that capture some particular investment environment (such as an overvalued, overbought, overbullish market where favorable drivers have begun to drop away). In recent weeks, we’ve seen several of these hostile syndromes emerge, as I’ve detailed in prior weekly comments.

Tags: Earnings Growth, Equanimity, Exhaustion, Goat, Hallmark, Horizons, Hussman, Instances, Market Internals, Market Outcomes, Present Conditions, Quarters, Risk Estimates, Risk Profile, Rodeo, Sentiment, September 16, Term Charts, Valuations, Worth Noting That
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Too Little to “Lock In” (Hussman)

Monday, April 2nd, 2012

Too Little to “Lock In”

by John P. Hussman, Ph.D., Hussman Funds

We’ve regularly observed that corporate profit margins (and economy-wide, profits as a share of GDP) have a strong tendency to “mean revert” over time – specifically, elevated profit margins are associated with unusually weak earnings growth over the following 5-year period, and depressed profit margins are associated with unusually strong earnings growth over that horizon (see last week’s comment, A False Sense of Security ). Notably, the ratio of corporate profits to GDP is presently nearly 70% above its historical norm. Of course, the most common valuation methods used by Wall Street analysts (whether they use the “Fed model” or “forward operating earnings times arbitrary P/E multiple”) rely almost exclusively on estimates of year ahead earnings. Embedded in these toy models is the quiet assumption that current profit margins will be sustained indefinitely.

By contrast, a wide range of measures that use “normalized” fundamentals of one form or another are extraordinarily stretched. Andrew Smithers recently took note of the elevated levels of cyclically adjusted P/E ratios and price to replacement cost (“q”) and observed “As of 8th March, 2012, with the S&P 500 at 1365.9 , the overvaluation by the relevant measures was 48% for non-financials and 66% for quoted shares. Although the overvaluation of the stock market is well short of the extremes reached at the year ends of 1929 and 1999, it has reached the other previous peaks of 1906, 1936 and 1968.”

At 1400 on the S&P 500, the market’s overvaluation has now reached 70% on these measures, which have a far stronger correlation with subsequent market returns than the Fed Model or other unadjusted methods using forward operating earnings. This is particularly true over horizons of 4 years or longer. As a side note, since the reliance on forward operating earnings is now an established Wall Street practice, Valuing the S&P 500 Using Forward Operating Earnings details how to improve the reliability of market valuations based on these figures.

We presently estimate a nominal total return on the S&P 500 averaging 4.1% annually over the coming decade. This modestly exceeds the yield available on a 10-year Treasury, but by a small margin that – outside the late 1990′s bubble period – has previously been seen only during the two-year period approaching the 1929 peak, between 1968-1972 (which was finally cleared by the 73-74 market plunge), and briefly in 1987, before the crash of that year.

While it’s true that interest rates are depressed, apparently setting a low “bar” for equities, an additional question one should ask is whether interest rates themselves are “fair” in the sense of being adequate compensation for long-horizon risks. For example, back in 1982, stocks had a reasonable 10-year prospective risk-premium versus bonds, but both were priced to achieve extraordinarily strong returns. Presently, stocks have a weak 10-year prospective risk-premium versus bonds, but both are priced to achieve unsatisfactory returns. In 1982, investors had an incentive to lock in either, and were served well regardless of their choice. At present, investors have no reasonable incentive at all to “lock in” the prospective returns implied by current prices of stocks or long-term bonds (though we suspect that 10-year Treasuries may benefit over a short horizon due to continued economic risks and still-unresolved debt concerns in Europe, which has already entered an economic downturn).

It’s also inadvisable to view the present 4.1% projected (nominal) 10-year return on the S&P 500 as if it is some sort of “yield,” because even that expected return involves the risk of significant volatility and severe short-horizon loss.

But don’t low interest rates at least limit the potential downside in stocks, allowing stocks to remain at elevated valuations that are consistent with similarly low prospective returns? On that question, the historical record is instructive. Since 1930, the 10-year Treasury yield has been below 3% nearly 30% of the time. In 78% of those periods, the prospective 10-year total return on the S&P 500 exceeded 10% (based on our standard estimation method). In fact, the 10-year Treasury yield has historically been below 2.5% about 15% of the time (primarily in the period prior to 1952) and in fully 94% of those periods, the prospective 10-year total return on the S&P 500 exceeded 10%. The belief that prospective equity returns are tightly linked to bond yields is largely an artifact of the 1980-1998 period (when both enjoyed a persistent decline during a long period of disinflation), and is far less evident in broad market history.

Ignore the fact that long-term “secular” bull market advances have invariably started from valuations implying prospective 10-year total returns of nearly 20% annually (which is precisely why the secular advances that follow are so durable). The market decline required to build in prospective returns of that magnitude seems too extreme to even contemplate. Indeed, we estimate that the S&P 500 would presently have to decline by nearly 40% simply to reach valuations consistent with prospective 10-year total returns of 10% annually. It’s an open question whether we’ll see that level of prospective return in the next market cycle, but even if we touch that level of prospective returns 5 or 6 years from now, stocks will have gone nowhere in the interim (including dividends). Investors would need to have a terribly short memory in order to rule out that sort of risk. Last week’s valuation chart may be a useful reminder of where we stand relative to history.

On the subject of profit margins, James Montier at GMO published a nice piece last week, using a little-known national income identity (the Kalecki profits equation) to demonstrate that:

Profits = Investment – Household Saving – Government Savings – Foreign Savings + Dividends

Some might object that this is simply an identity (true by definition) and doesn’t imply causality. That’s a reasonable point, but as with all analysis, it’s not enough just to toss out an objection and walk away – you’ve got to go to the data and find out the truth. So let’s do that.

We can actually simplify things a bit to make the point more intuitive. As we’ve shown before, gross private investment has a very strong relationship with the current account deficit (“foreign savings”). Specifically, large increases in gross private investment are almost invariably financed by running a trade deficit in goods and services, and importing foreign savings to make up the difference. Meanwhile, dividends tend to be very smooth, so they don’t introduce a lot of variability to the equation.

What remains then is a fairly simple assertion: the primary way to boost corporate profits to abnormally high – but unsustainable – levels is for the government and the household sector to both spend beyond their means at the same time.

If we go to the data, we see the link between profit margins and deficits in the quarterly figures, but the tightest relationship is actually a causal one – large government deficits (as a percentage of GDP) coupled with weak household savings rates result in temporarily high corporate profit margins, with a lead of about 4-6 quarters.

The conclusion is straightforward. The hope for continued high profit margins really comes down to the hope that government and the household sector will both continue along unsustainable spending trajectories indefinitely. Conversely, any deleveraging of presently debt-heavy government and household balance sheets will predictably create a sustained retreat in corporate profit margins. With the ratio of corporate profits to GDP now about 70% above the historical norm, driven by a federal deficit in excess of 8% of GDP and a deeply depressed household saving rate, we view Wall Street’s embedded assumption of a permanently high plateau in profit margins as myopic.

[Geek's Note: If you think in terms of equilibrium in the associated real output (actual goods and services of one sort or another), the Kalecki equation also means that the deficit-financed goods and services are essentially already spoken for, so the resulting corporate profits are not matched by similar increases in real investment. Instead, corporations accumulate claims on the government and households (i.e. they acquire a pile of government and consumer debt obligations). These obligations can only be "spent" in aggregate by the corporate sector on investment goods once households and the government begin to release a "surplus" of output by saving instead of spending beyond their means. Either that, or the trade deficit would explode as corporations accumulated investment goods by transferring their claims on the U.S. government and households to foreigners.]

A few quick economic notes. Real income declined month-over-month in the latest report, which is very much at odds with the job creation figures unless that job creation reflects extraordinarily low-paying jobs. Real disposable income growth has now dropped to just 0.3% year-over-year, which is lower than the rate that is typically observed even in recessions. Real personal consumption growth ticked up slightly from 1.6% to 1.8% year-over-year, remaining in a range that is rarely observed except in association with recession. Given the contraction in real income, we also saw a sharp downturn in the savings rate in the latest report, to the lowest level since just before the last recession. While the slight bump in consumption could help near-term corporate profits, the income dynamics aren’t supportive of a continuation at all.

Finally, we’ve been watching the new unemployment claims data for some time. Almost without fail, when a new number is released, the new claims figure for the previous week is revised upward by about 3000 or so. Last week, we saw an unusual revision in new claims data, not just for the previous week, but in months of prior releases, with upward revisions averaging about 10,000 in the most recent reports (e.g. the Feb 25 figure was revised from 354,000 to 373,000). This reflects an annual update in the seasonal factors used by the Labor Department (which is why the revisions weren’t matched by similar changes in the non-seasonally adjusted data). It’s not clear what this implies for revisions in the monthly employment figures, if anything, but our “unobserved components” models continue to suggest a general trend toward disappointments in economic data, particularly over the next 6-8 weeks. Given that so much investor enthusiasm has focused on the new claims figures, it’s interesting that the large and generally upward revisions in months of prior data seemed to go virtually unnoticed.

Market Climate

As of last week, the Market Climate remained characterized by a hostile syndrome of overvalued, overbought, overbullish, rising-yield conditions. We’ve reviewed a variety of operational definitions of this syndrome in numerous prior weekly comments. Forget about the major declines that typically followed the handful of other instances we’ve observed this syndrome in the past, including the major peaks in 1972, 1987, 2000, and 2007. Even if we look over the past two years – and despite some early signals where market weakness was postponed by extraordinary monetary interventions – we still have not observed these conditions without resulting market declines of more than 15% (one in 2010 and another in 2011) that wiped out all of the gains since the earliest signal occurred, and then some.

Monetary interventions can periodically fuel speculative runs, which defer and spread out the adjustments that result from persistent overvaluation and misallocation of capital. But they can’t get around the inevitability of those adjustments. The only real choice policy makers have is how large a bubble they choose to see collapse. On that front, we’re clearly in better shape than we were at the peaks of 2007, 2000 and 1929, but conditions are generally more hostile than they have been in the vast remainder of market history. This will change. By our analysis, now remains one of the worst times on record to assume that market risk is acceptable.

Strategic Growth and Strategic International remain fully hedged. Strategic Dividend Value remains 50% hedged, its most defensive position, and Strategic Total Return continues to carry a duration of just under 3 years in Treasuries, with about 5% of assets allocated across precious metals shares, utilities, and foreign currencies. We don’t view the prospective returns in any asset class as being desirable enough to “lock in” on an investment basis, which means that most financial risks here are essentially speculative, and rely on the emergence of investors willing to accept even lower prospective returns. Again, the one constant in the financial markets is that these conditions will change. Patient opportunism remains essential here.

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Tags: 8th March, Andrew Smithers, Assumption, Corporate Profit, Corporate Profits, Correlation, Earnings Growth, Extremes, False Sense Of Security, Fed Model, GDP, Horizons, Hussman Funds, Profit Margins, Ratios, Sense Of Security, Stock Market, Toy Models, Valuation Methods, Wall Street Analysts
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Horizons ETFS Announces March 2012 Distributions

Friday, March 23rd, 2012

HORIZONS ETFS ANNOUNCES MARCH 2012 DISTRIBUTIONS

TORONTO, March 22, 2012 – Horizons Exchange Traded Funds Inc. (“Horizons ETFs”) and its affiliate AlphaPro Management Inc. are pleased to announce the distribution amounts per unit (the “Distributions”) for certain of the Horizons ETFs family of exchange traded funds (the “ETFs”), for the period ending March 31, 2012, as indicated in the table below.

The ex-dividend date for the Distributions is anticipated to be March 28, 2012, for all unitholders of record on March 30, 2012. The Distributions will be paid in cash or, if the unitholder has enrolled in the respective ETF’s dividend reinvestment plan (DRIP), reinvested in additional units of the applicable ETF, on or about April 12, 2012.

Read Complete Press Release [PDF] - HORIZONS ETFS ANNOUNCES MARCH 2012 DISTRIBUTIONS

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HORIZONS ENHANCED U.S. EQUITY INCOME FUND ANNOUNCES MONTHLY DISTRIBUTION

TORONTO, March 22, 2012 – Horizons Exchange Traded Funds Inc. (“Horizons ETFs”) and its affiliate AlphaPro Management Inc. are pleased to announce the monthly distribution of the Horizons Enhanced U.S. Equity Income Fund (the “Fund”) for March 2012 in the amount of $0.06667 per Class A unit of the Fund. The Class A units of the Fund are listed for trading on the Toronto Stock Exchange (“TSX”) under the symbol HES.UN.

The distribution represents an 8.00% annualized yield on the Fund’s initial public offering price of $10.00 per Class A unit. The March distribution ex-dividend date is anticipated to be March 28, 2012, for all Class A unitholders of record on March 30, 2012. The distribution is payable on April 12, 2012.

Read Complete Press Release [PDF] – HORIZONS ENHANCED U.S. EQUITY INCOME FUND ANNOUNCES MONTHLY DISTRIBUTION

For further information:
Martin Fabregas, Investor Relations, (416) 601-2508 or 1-866-641-5739.

Tags: Complete Press, Distribution Amounts, Distributions, Dividend Reinvestment Plan, Drip, Equity Income Fund, ETF, ETFs, Ex Dividend Date, Exchange Traded Funds, Fabregas, Horizons, Initial Public Offering, Investor Relations, Management Inc, Offering Price, Press Release, Toronto March, Toronto Stock Exchange, Tsx
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Horizons ETFs Announces February 2012 Distributions

Wednesday, February 22nd, 2012

HORIZONS ETFS ANNOUNCES FEBRUARY 2012 DISTRIBUTIONS

TORONTO, February 21, 2012 – Horizons Exchange Traded Funds Inc. (“Horizons ETFs”) and its affiliate AlphaPro Management Inc. are pleased to announce the distribution amounts per unit (the “Distributions”) for certain of the Horizons ETFs family of exchange traded funds (the “ETFs”), for the period ending February 29, 2012, as indicated in the table below.

The ex-dividend date for the Distributions is anticipated to be February 27, 2012, for all unitholders of record on February 29, 2012. The Distributions will be paid in cash or, if the unitholder has enrolled in the respective ETF’s dividend reinvestment plan (DRIP), reinvested in additional units of the applicable ETF, on or about March 12, 2012.

[Complete Press Release] Horizons ETFs Announces February 2012 Distributions
HORIZONS ENHANCED U.S. EQUITY INCOME FUND ANNOUNCES MONTHLY DISTRIBUTION

TORONTO, February 21, 2012 – Horizons Exchange Traded Funds Inc. (“Horizons ETFs”) and its affiliate AlphaPro Management Inc. are pleased to announce the monthly distribution of the Horizons Enhanced U.S. Equity Income Fund (the “Fund”) for February 2012 in the amount of $0.06392 per Class A unit of the Fund. The Class A units of the Fund are listed for trading on the Toronto Stock Exchange (“TSX”) under the symbol HES.UN.

The distribution represents an 8.07% annualized yield on the Fund’s initial public offering price of $10.00 per Class A unit. The February distribution ex-dividend date is anticipated to be February 27, 2012, for all Class A unitholders of record on February 29, 2012. The distribution is payable on March 12, 2012.

[Complete Press Release] Horizons Enhanced U.S. Equity Income Fund Announces Monthly Distribution

HORIZONS GOLD YIELD FUND ANNOUNCES FEBRUARY 2012 DISTRIBUTION

TORONTO, February 21, 2012 – Horizons Exchange Traded Funds Inc. (“Horizons ETFs”) and its affiliate AlphaPro Management Inc. (“AlphaPro”) are pleased to announce the monthly distribution rate for the Horizons Gold Yield Fund (the “Fund”) for February 2012 in the amount of $0.07780 per Class A unit and Class F unit of the Fund. The Class A units of the Fund are listed for trading on the Toronto Stock Exchange (“TSX”) under the symbol HGY.UN. The Class F units of the Fund are not publicly listed.

This distribution rate, which is equivalent to $0.9336 per annum or a yield of 9.34% per annum on the initial issue price of $10.00 per Class A unit and Class F unit. The February distribution ex-dividend date is anticipated to be February 27, 2012, for all Class A and Class F unitholders of record on February 29, 2012. The distribution is payable on March 12, 2012.

[Complete Press Release] Horizons Gold Yield Fund Announces February 2012 Distribution

For further information:
Martin Fabregas, Investor Relations, (416) 601-2508 or 1-866-641-5739.

Tags: Complete Press, Distribution Amounts, Distributions, Dividend Reinvestment Plan, Drip, Equity Income Fund, ETF, ETFs, Ex Dividend Date, Exchange Traded Funds, Gold Fund, Horizons, Initial Public Offering, Management Inc, Offering Price, Press Release, Toronto Exchange, Toronto Stock Exchange, Tsx, Yield Fund
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Unusual Drawdown Risk (Hussman)

Tuesday, February 21st, 2012

Unusual Drawdown Risk

by John P. Hussman, Ph.D., Hussman Funds

In order to estimate likely returns and risks in the financial markets, our general approach is to identify a set of historical instances that match current conditions on a broad range of important dimensions (in practice, using an “ensemble approach” that randomizes over scores of subsets of historical data). We then look at various features of that cluster, including the average return that followed over various horizons, the deepest loss over various horizons, and the overall spread of those outcomes. In general, the clusters include a mix of both positive and negative outcomes, resulting in moderate estimates of expected return and moderate estimates of risk. In some cases, the average return across the cluster of instances is very positive, and the individual instances show few negative outcomes at all. That sort of condition justifies a very aggressive investment position. In contrast, since the late-1990′s, the average returns of the clusters have been quite poor, with a preponderance of negative outcomes in historical instances having similar characteristics.

There have been a few exceptions, including the bulk of 2003 (and on the basis of the ensemble methods we presently use, the period between early-2009 and early 2010 – see Notes on Risk Management for details on our unpleasant “miss” during that period). But generally speaking, market conditions since the late-1990′s have supported a defensive investment stance much more often than is typical on a historical basis. Of course, the near-zero total return of the S&P 500 since the late-1990′s, coupled with two separate market losses of more than 50%, is a reflection that on average, concerns about poor return and high risk during this period have been well-placed.

In reviewing market conditions this week, what strikes me most is the pattern that emerges when we look across various horizons, from 2 weeks out to 18 months. When we examine the average 2-week outcome that has historically followed periods that cluster with present conditions, the average outcomes are negative, but not strikingly so. Specifically, the expected return is in the lowest 26% of all historical observations, but that average return is only about -1%, a figure that is overwhelmed by typical short-term noise. That’s another way of saying that guessing the market’s outcome over the next couple of weeks is like guessing the throw of a very slightly biased pair of dice.

But the profile starts to change significantly as we move out the investment horizon. Looking out 5 weeks, for example, the prospective return falls into the lowest 8% of historical observations. Now, this could certainly change on the basis of shifts in various market conditions, but here and now, the 5-week horizon is more defensive than we’ve seen in the other 92% of historical data.

Most striking, though, is what we observe on the basis of prospective drawdown (the deepest loss the market experiences within a given horizon) looking out over the coming 18 months. On that front, the present drawdown estimate is in the worst 1.5% of all historical observations.

Keep in mind the distinction between the drawdown and the return over a given period. The drawdown over an 18-month period is the deepest loss experienced by the market from the current point to the lowest point within that horizon, even if the deepest loss occurs fairly early in that window. In contrast, the return over a given period is measured from the starting point to the ending point. Importantly, once we observe conditions that associate with a significant risk of drawdown, we can almost always find some point later on that provides a better entry opportunity to accept market risk.

Elevated Markets and Drawdown Risks

The chart below identifies periods in recent years where we reported market conditions as being at least “overvalued” and “overbought” in these weekly commentaries. Those two conditions alone aren’t enough, by themselves, to put the market in a “hard-negative” situation, but even those two tend to be enough to invite drawdown risk. The overvalued, overbought periods are shaded in blue on the chart below. The red lines indicate the deepest drawdown experienced by the market over the following 18 months (right scale), while the blue line charts the S&P 500 (left scale). Notably, even with weakly negative conditions – overvalued and overbought – the market has typically moved lower at some point in the next 18 months, wiping out all intervening gains. That surrender of intervening gains usually begins with a very hard and unexpected initial loss that takes out the bulk of upside progress within a period of a few days or weeks. This is a general pattern that we also see throughout market history.

Of course, our present concerns are based on a smaller and more negative subset of conditions that we’ve seen even less frequently – presently featuring not just “overvalued” and “overbought” conditions, but adding overbullish sentiment, modest but clear upward pressure on short-term and some longer-term yields, and an “exhaustion syndrome” (a combination of “whipsaw” conditions coupled with falling earnings yields – see Goat Rodeo ), which have historically had a particularly hostile aftermath, including a small set of historical plunges that include 1987, 2000 and 2008.

Tags: Aggressive Investment, Amp, Clusters, Current Conditions, Ensemble Methods, Estimates, Exceptions, Financial Markets, High Risk, Horizons, Hussman Funds, Instances, Investment Position, Market Losses, Negative Outcomes, Preponderance, Reflection, Risk Management, Subsets
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Horizons ETFS Announces January 2012 Distributions

Friday, January 27th, 2012

HORIZONS ETFS ANNOUNCES JANUARY 2012 DISTRIBUTIONS

TORONTO, January 20, 2012 – Horizons Exchange Traded Funds Inc. (“Horizons ETFs”) and its affiliate AlphaPro Management Inc. are pleased to announce the distribution amounts per unit (the “Distributions”) for certain of the Horizons ETFs family of exchange traded funds (the “ETFs”), for the period ending January 31, 2012, as indicated in the table below.

The ex-dividend date for the Distributions is anticipated to be January 27, 2012, for all unitholders of record on January 31, 2012. The Distributions will be paid in cash or, if the unitholder has enrolled in the respective ETF’s dividend reinvestment plan (DRIP), reinvested in additional units of the applicable ETF, on or about February 10, 2012.

[Complete Press Release] Horizons ETFs Announces January 2012 Distributions
HORIZONS GOLD YIELD FUND ANNOUNCES JANUARY 2012 DISTRIBUTION

TORONTO, January 20, 2012 – Horizons Exchange Traded Funds Inc. (“Horizons ETFs”) and its affiliate AlphaPro Management Inc. are pleased to announce the monthly distribution rate for the Horizons Gold Yield Fund (the “Fund”) for January 2012 in the amount of $0.07780 per Class A unit and Class F unit of the Fund. The Class A units of the Fund are listed for trading on the Toronto Stock Exchange (“TSX”) under the symbol HGY.UN. The Class F units of the Fund are not publicly listed.

This distribution rate, which is equivalent to $0.9336 per annum or a yield of 9.34% per annum on the initial issue price of $10.00 per Class A unit and Class F unit, will be applicable to the distributions declared for January, February and March 2012. The January distribution ex-dividend date is anticipated to be January 27, 2012, for all Class A and Class F unitholders of record on January 31, 2012. The distribution is payable on February 10, 2012.

[Complete Press Release] Horizons Gold Yield Fund Announces January 2012 Distribution

HORIZONS ENHANCED U.S. EQUITY INCOME FUND ANNOUNCES MONTHLY DISTRIBUTION

TORONTO, January 20, 2012 – Horizons Exchange Traded Funds Inc. (“Horizons ETFs”) and its affiliate AlphaPro Management Inc. are pleased to announce the monthly distribution of the Horizons Enhanced U.S. Equity Income Fund (the “Fund”) for January 2012 in the amount of $0.07679 per Class A unit of the Fund. The Class A units of the Fund are listed for trading on the Toronto Stock Exchange (“TSX”) under the symbol HES.UN.

The distribution represents a 9.04% annualized yield on the Fund’s initial public offering price of $10.00 per Class A unit. The January distribution ex-dividend date is anticipated to be January 27, 2012, for all Class A unitholders of record on January 31, 2012. The distribution is payable on February 10, 2012.

[Complete Press Release] Horizons Enhanced U.S. Equity Income Fund Announces Monthly Distribution

For further information:
Martin Fabregas, Investor Relations, (416) 601-2508 or 1-866-641-5739.

Tags: Annum, Complete Press, Distribution Amounts, Distributions, Dividend Reinvestment Plan, Drip, ETF, ETFs, Ex Dividend Date, Exchange Traded Funds, Horizons, Initial Issue, January 20, January 27, January February, Management Inc, Press Release, Toronto Stock Exchange, Tsx, Yield Fund
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Natcan’s Roger Rouleau Discusses Canadian Preferred Shares

Tuesday, January 10th, 2012

Roger Rouleau, Portfolio Manager, Natcan Investments, manager of the Horizons Alphapro Preferred Share ETF (HPR:TSX) shares his thoughts on Canadian preferred shares:

Questions discussed (hover over the thumbnails in the viewer for video info):
1. HPR has handily outperformed other preferred share ETFs since inception. What has drive this out-performance? Can you explain a little about why preferred share index strategies are inefficient versus a well thought out active strategy?

2. Many investors look to preferred hares as an income investment strategy. What’s your outlook for the return on preferred shares, particularly versus the corporate bond debt of the same issuers?

3. We’ve seen a couple of the large insurers, Sun Life and Manulife just complete some robust preferred share issues. Have you bought these? What’s your outlook for preferred share issues from the insurers?

Source: Horizons ETFs

Tags: Bond Debt, Canadian Preferred Shares, Corporate Bond, ETFs, Evp, Hares, Horizons, Inception, Income Investment, Index Strategies, Investment Strategy, Investments, Issuers, Natcan, Nbsp, Portfolio Manager, Preferred Share, Rouleau, Share Index, Share Issues, Sun Life, Tsx, Video Info
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