The Economy and Bond Market Radar (July 30, 2012)

Sunday, July 29th, 2012

The Economy and Bond Market Radar (July 30, 2012)

After hitting a new low on Tuesday, Treasury yields bounced back sharply on Friday as ECB president Mario Draghi vowed to do whatever it takes to save the euro. This news sparked a “risk on” rally driving risky assets higher and bond prices lower. Yields on Spanish 10-year government bonds reversed course and dropped sharply on the news as it appears the likelihood of a sovereign default has diminished.

Strengths

• In addition to the ECB news discussed above, there was a front page story in the Wall Street Journal earlier this week that was widely believed to be leaked from the Fed to prep the market for potential Fed policy actions as soon as next week. Monetary policy-makers are taking action around the globe.
• Second quarter GDP grew 1.5 percent. While this is a slow level of absolute growth, it modestly beat expectations.
• Several homebuilding companies reported earnings this week which indicated orders in the second quarter were very robust.

Weaknesses

• June durable goods orders ex-transportation fell 1.1 percent, indicating broad-based weakness.
• The U.K. economy contracted by 0.7 percent in the second quarter, while Mexico’s economy shrank by 0.36 percent in May.
• Markit’s July eurozone manufacturing Purchasing Managers Index (PMI) fell to the lowest level since June 2009. The more traditional PMI reports will be released next week, but the indications obviously look weak.

Opportunity

• The Fed and ECB are both talking about additional monetary stimulus. Interest rates are likely to remain very low for the foreseeable future.

Threat

• Europe remains a wildcard with the markets shifting focus on a weekly basis.

Tags: Bond Market, Bond Prices, Durable Goods Orders, Ecb President, Fed Policy, Government Bonds, Homebuilding Companies, Mario Draghi, Market Radar, Markit, Monetary Policy, Pmi, Policy Actions, Purchasing Managers Index, Quarter Gdp, Risky Assets, Shifting Focus, Stimulus, Treasury Yields, Wall Street Journal
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U.S. Equity Market Radar (July 16, 2012)

Saturday, July 14th, 2012

U.S. Equity Market Radar (July 16, 2012)

The S&P 500 Index rose 0.16 percent this week driven by a strong rally on Friday as Chinese GDP was in line with expectations and earnings from JP Morgan were well received after recent intense attention surrounding a recently acknowledged trading loss. Along with financials, defensive areas such as utilities and healthcare tended to outperform.

Strengths

• The financial sector was the best performer rising 1.62 percent with J.P. Morgan rising 6.4 percent as the company reported earnings on Friday that were well received by the market.
• The utility sector wasn’t far behind with broad-based gains as 30 of 31 S&P 500 constituents rose for the week.
• The best individual stock performer this week was Diamond Offshore which rose 7.57 percent. Other deepwater offshore drillers were also strong on reports of increased rig tender activity and the signing of a deep water contract by Noble Corp. at attractive levels.

Weaknesses

• The technology sector lagged as negative preannouncements from Lexmark International, Applied Materials and Advanced Micro Devices. In addition, Acer (the world’s third largest computer maker) cut its 2012 PC shipment forecast.

• The materials sector also lagged as Freeport-McMoRan fell by more than 5 percent on China slowdown concerns and Alcoa falling by 3.65 percent on disappointing earnings results.
• Lexmark International was the worst performer this week, falling by more than 24 percent as the company preannounced second quarter results and reduced forecasts due to weaker demand in Europe.

Opportunity

• We saw additional monetary easing this week with rate cuts from Brazil and South Korea after a barrage of activity last week with rate cuts from the European Central Bank (ECB) and Bank of China, along with more quantitative easing from the Bank of England. These government policy actions are positive for the equity markets and risky assets in general.

Threat

• While policy makers in Europe have made strides to stabilize the economic situation, many risks remain and the situation remains very fluid.
• China has now cut interest rates for the second time in a month, which likely indicates the conditions on the ground remain challenging.

Tags: Advanced Micro Devices, Applied Materials, Bank Of China, China Slowdown, Computer Maker, Diamond Offshore, Earnings Results, Freeport Mcmoran, Intense Attention, Jp Morgan, Largest Computer, Lexmark International, Market Radar, Materials Sector, Noble Corp, Offshore Drillers, Policy Actions, Risky Assets, Utility Sector, Water Contract
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U.S. Equity Market Radar (July 9, 2012)

Sunday, July 8th, 2012

U.S. Equity Market Radar (July 9, 2012)

The S&P 500 Index fell 0.55 percent this week, driven lower by a disappointing employment report on Friday. Defensive areas tended to outperform such as consumer staples and telecommunications services, along with select retail names in the consumer discretionary sector.

Strengths

• The consumer staples sector rose 0.54 percent this week as defensive tobacco stocks rose along with names such as Wal-Mart, Constellation Brands and Monster Beverage.
• The consumer discretionary sector was also able to eke out a small gain this week as discount stores such as Ross Stores and Family Dollar tended to do well. Homebuilders were also among the best performers for the week continuing a recent trend.
• The best individual stock performer this week was Netflix which rose 19.6 percent as the company announced that subscribers streamed more than 1 billion hours of video in June.

Weaknesses

• The industrials sector lagged as heavyweights such as General Electric, Emerson Electric and Joy Global all fell by more than 2.5 percent this week.

• The financial sector also lagged with Bank of America and JP Morgan both falling by more than 5 percent.
• Fossil, Inc. was the worst performer this week, falling by more than 10 percent on fears that excessive discounting and promotions at the company’s retail stores indicate soft demand.

Opportunity

• A barrage of government policy actions out this week with rate cuts from the European Central Bank (ECB) and Bank of China, along with more quantitative easing from the Bank of England, appears likely to propel the recent rally in risky assets even further.

Threat

• While policymakers in Europe have made strides to stabilize the situation, many risks remain and the situation remains very fluid.
• China has now cut interest rates for the second time in a month, which likely indicates the conditions on the ground remain challenging.

Tags: Bank Of America, Bank Of China, Constellation Brands, Consumer Discretionary Sector, Consumer Staples, Emerson Electric, Family Dollar, Fossil Inc, Joy Global, Jp Morgan, Market Radar, Netflix, Policy Actions, Retail Names, Risky Assets, Ross Stores, Sector Strengths, Telecommunications Services, Tobacco Stocks, Wal Mart
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Axel Merk: U.S. Dollar and Euro – Review and Outlook

Thursday, May 31st, 2012

by Axel Merk, Merk Funds

May 30, 2012

The analysis below is based on our letter to shareholders in the annual report of the Merk Funds*.

The 12-month period ended March 31, 2012 (the “Period”) could be described as one of contrasting halves. The first half of the Period was marked by increased pessimism and concern regarding Europe, particularly the periphery nations. In contrast, market sentiment was more optimistic through the second six-months of the Period, and markets exhibited significant strength. During the first six-months ending September 30, 2011, the market – as measured by the S&P 500 Index – returned -13.78%, while the market returned 25.89% during the second six-months ending March 31, 3012.

News emanating from Europe dominated market gyrations for the majority of the Period. Specifically, the periphery nation sovereign debt crisis and concerns surrounding its global contagion effects – particularly on countries previously considered immune to the fallout, like China – held the market’s attention. Concerns appeared more acute through the first half of the Period, where we witnessed heightened levels of market volatility and general selling of perceived risky assets. The VIX index – widely followed as a bellwether for market volatility – reached a high of 48 in August 2011, as concerns mounted regarding the Greek debt situation and focus shifted to the larger European countries, particularly Italy and Spain, where political upheaval only muddied the waters. Policy makers on this side of the Atlantic compounded the problem, with Washington leaving the decision to raise the U.S. Government’s debt ceiling to the last minute causing further market distress.

During the second half of the Period, the market appeared to ascribe a more optimistic assessment to the European situation and the global economy. Particularly in the U.S., we saw the release of many economic data points that beat consensus expectations, including notable improvements to the unemployment rate. European policy makers also appeared to alleviate the market’s concerns regarding Italy and Spain, where austerity measures were finally agreed to and put in place, while much needed clarity was provided surrounding the Greek situation when bondholders agreed to participate in a debt swap. At the same time, we witnessed a number of central banks following much easier policies through the second half of the Period. The U.S. Federal Reserve (Fed) became evermore dovish in its rhetoric regarding easing measures and extended the calendar date that low rates are anticipated to be kept in effect, moving it out to the end of 2014 from mid-2013 previously. The Bank of England expanded its quantitative easing program by £50 billion pounds and the Bank of Japan also increased its expansionary asset purchases by ¥10 trillion and concurrently set an inflation target. Additionally, the ECB expanded its balance sheet via two long-term refinancing operations (LTRO’s), together totaling over €1 trillion. All of which helped alleviate market concerns and underpinned significant strength in equity markets, as indicated above, and a substantial reduction in the VIX index, which fell to a low below 14 in March of 2012.

Going forward, we consider that central banks around the world are likely to err on the side of further monetary policy easing. Our analysis finds that the composition of voting members on the Fed’s Federal Open Market Committee (FOMC) is more dovish in 2012 compared to 2011 and is set to become even more dovish in 2013¹. We therefore consider it very likely that rates will be kept low for an extended period of time in the U.S. and, should economic fundamentals deteriorate, further easing policies may be put in place. Elsewhere, the Bank of Japan appears committed to generating inflation via easing policies, while the Bank of England appears to be more concerned about deflation despite the existence of what we deem to be elevated inflationary pressures (as measured by the consumer price index). We consider it likely that the Bank of England announces further stimulus measures should economic growth in the United Kingdom disappoint. At the same time, there is renewed pressure on the ECB to purchase periphery nation debt to stave off further fiscal deterioration in the region. While ECB President Draghi appears committed to provide the banking system with unlimited levels of liquidity (through the two three-year LTRO facilities), pressure is mounting to intervene directly through the Securities Market Program (SMP) and buy the likes of Spanish debt. Notwithstanding, the ECB is likely to do everything in its power to stop the financial industry from collapsing, which may mean further liquidity provisions, such as the LTRO’s already seen.

All of which should serve to underpin those currencies most correlated with the outlook for economic growth and of countries set to benefit from increases in the price of commodities and precious metals. We believe as central banks continue to follow expansionary, inflationary policies, that those assets exhibiting the greatest monetary sensitivity should benefit – such as commodities, natural resources and precious metals. As such, we favor the currencies of commodity producing nations, such as Australia, Canada and New Zealand. In particular, we do not consider that China will experience too severe a slowdown in economic growth – the recent announcement to expand the trading band of its currency should be seen as a signal that policy makers there believe the risks to the economy have satisfactorily abated. We think Australia and New Zealand are well situated to benefit from ongoing Asian economic strength, while both countries’ fiscal positions are in stark contrast to the U.S. and Europe, for all the right reasons. Canada, too, should benefit from ongoing commodity price appreciation, and is well placed should the U.S. economy continue to pick up steam ahead of consensus forecasts.

In Asia, we continue to favor the currencies of nations who are producing more value-added goods and services while concurrently focusing on the development of the domestic economy as a source of long-term sustainable economic growth. China in particular checks these boxes. We consider building inflationary pressures brought about by increases in global commodities and a tightly managed currency, may ultimately force the Chinese into allowing the currency to float more freely². While there have been recent hiccups regarding China’s upcoming leadership transition, the ultimate goal of the Communist Party remains intact: to maintain social stability, so as to remain in power. We believe there are several aspects to this notion, none the least being the support of strong, sustainable economic growth and the containment of inflationary pressures. Regarding the latter: should inflation get out of hand, the risk of social upheaval may become elevated. China’s close management of the dissemination of any news discussing the “Arab Spring” uprisings is indicative of the strength of its resolve in maintaining social stability. One of the contributing factors causing the “Arab Spring” was runaway inflation.

In China and other Asian nations, allowing the respective currencies to float more freely may act as a natural valve in alleviating the inflationary pressures being experienced. Moreover, we consider China and countries such as Malaysia, Singapore, South Korea and Taiwan to have the pricing power to allow their currencies to appreciate. These countries now produce relatively higher value-add goods and services compared to other Asian nations; therefore we believe they have the ability to pass on price pressures to the end consumer – Western consumers. With a concurrent focus on the development of their domestic economies, we believe Asian nations will eventually be less reliant on exports to the West, with a renewed focus on domestic demand, as well as demand within Asia, as a source of future growth. The result may be stronger Asian currencies over the medium to long-term, while western nations may experience increases in import prices going forward.

Regarding the U.S. dollar, we consider the more dovish FOMC voting member composition to be a negative for the currency, as it will likely lead to more expansionary policies relative to global central bank counterparts. In our view, the aforementioned debt ceiling debacle is just one increment in the ongoing marginal deterioration of the U.S.’s safe haven status; concurrent degradation to the long-term sustainability of the U.S.’s fiscal situation may ultimately erode confidence that the U.S. will honor its future obligations. Importantly, we do not doubt these obligations will be fulfilled, but the manner in which they are likely to be fulfilled gives us grave cause for concern. In our assessment, future obligations are unlikely to be met through much needed austerity measures, either from spending cuts or revenue increases, as neither side of the political aisle has shown a willingness to comprehensively and satisfactorily address the issues. Rather, future obligations are likely to be met through the path of least resistance: inflation. Said another way, devaluation of the currency.

We continue to believe the currency asset class may provide investors with the opportunity to access enhanced risk-adjusted returns and valuable diversification benefits. We are excited about the outlook for the asset class and believe many investment opportunities continue to exist in the space.

Please make sure to sign up to our newsletter to be informed as we discuss global dynamics and their impact on currencies. Please also register for our upcoming Webinar on June 13 where we will discuss the investment strategy and objectives of the Merk Absolute Return Currency Fund. We manage the Merk Funds, including the Merk Hard Currency Fund. To learn more about the Funds, please visit www.merkfunds.com.

Axel Merk

Manager of the Merk Hard Currency Fund, Asian Currency Fund, Absolute Return Currency Fund, and Currency Enhanced U.S. Equity Fund, www.merkfunds.com

Tags: Bellwether, Contagion Effects, Debt Ceiling, Debt Crisis, Debt Situation, Economic Data, ETF, ETFs, European Situation, Global Contagion, Global Economy, India, Letter To Shareholders, Market Gyrations, Market Sentiment, Market Volatility, Merk, Optimistic Assessment, Periphery, Pessimism, Political Upheaval, Risky Assets, Sovereign Debt, Vix Index
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The Three-Part Case for Commodities (Koesterich)

Tuesday, May 22nd, 2012

With both gold and broader commodity indices down significantly month to date, many investors are asking if they should lower or even remove their commodity exposure. I believe the answer is no.

First, it’s useful to put the recent weakness in perspective. Both gold and a broad basket of commodities are down roughly 10% over the past three months. While the losses represent a significant correction, they are in line with the performance of equity markets over the same time period. Even more importantly, here are three reasons for maintaining a strategic exposure to commodities.

1.) Diversification: Commodities typically behave differently from paper assets like stocks and bonds even as correlations between all risky assets have risen in recent years. In fact, based on historic relationships, it doesn’t take a large allocation to commodities – it typically takes less than 10% – to improve the risk-adjusted returns of a strategic portfolio.

2.) Inflation: Commodities tend to perform best when inflation is rising. As I mentioned last week, while I see little risk of double-digit inflation in the near-term, inflation is not completely dead. Core inflation in the United States is rising at 2.3% year over year, a 3 ½-year high. Given the US fiscal position and the unconventional nature of recent monetary policy, there is a non-trivial risk that we may see more than 2.3% inflation over the next decade. Over the long term, even modest inflation would erode purchasing power. Commodities can offer an effective hedge against this scenario.

3.) Potential tailwind from monetary policy: While commodities have suffered recently, the performance hasn’t been awful. The S&P Goldman Commodities Index is down roughly 5% year to date. Meanwhile, gold was up around 2% through the end of last week, returns that still compare favorably with most equity markets outside of the United States.

One reason for the resilience, as I’ve written before, is that commodities and gold generally benefit when real interest rates are negative. In such a rate environment, there’s no opportunity cost for holding commodities, and commodity returns tend to be higher. At least historically, the level of real interest rates has been far more important to commodity returns than either inflation or the dollar. In fact, over the past twenty years, the variation in real interest rates explains roughly 60% of the variation in the annual return of gold. To the extent the Fed, and most other major central banks, are determined to keep real rates negative for the foreseeable future, we’ll be in an environment supportive of commodities, particularly gold.

To be sure, commodity prices are likely to remain volatile – along with just about every other risky asset – in the near term as investors worry about the potential for a disorderly default by Greece impacting the global economy. However, for investors, especially those currently underweight commodities, now may very well be a good long-term buying opportunity (potential iShares solution: NYSEARCA: IAU).

Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog. You can find more of his posts here.

Source: Bloomberg

Past performance does not guarantee future results. Diversification and asset allocation may not protect against market risk.
iShares Gold Trust (“Trust”) has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus and other documents the Trust has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting www.iShares.com or EDGAR on the SEC website at www.sec.gov. Alternatively, the Trust will arrange to send you the prospectus if you request it by calling toll-free 1-800-474-2737.

Investing involves risk, including possible loss of principal. The iShares Gold Trust (“Trust”) is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act. Shares of the Trust are not subject to the same regulatory requirements as mutual funds. Because shares of the Trust are intended to reflect the price of the gold held by the Trust, the market price of the shares is subject to fluctuations similar to those affecting gold prices. Additionally, shares of the Trust are bought and sold at market price not at net asset value (“NAV”). Brokerage commissions will reduce returns.
Shares of the Trust are intended to reflect, at any given time, the market price of gold owned by the Trust at that time less the Trust’s expenses and liabilities. The price received upon the sale of the shares, which trade at market price, may be more or less than the value of the gold represented by them. If an investor sells the shares at a time when no active market for them exists, such lack of an active market will most likely adversely affect the price received for the shares. For a more complete discussion of the risk factors relative to the Trust, carefully read the prospectus.
Following an investment in shares of the Trust, several factors may have the effect of causing a decline in the prices of gold and a corresponding decline in the price of the shares. Among them: (i) Large sales by the official sector. A significant portion of the aggregate world gold holdings is owned by governments, central banks and related institutions. If one or more of these institutions decides to sell in amounts large enough to cause a decline in world gold prices, the price of the shares will be adversely affected. (ii) A significant increase in gold hedging activity by gold producers. Should there be an increase in the level of hedge activity of gold producing companies, it could cause a decline in world gold prices, adversely affecting the price of the shares. (iii) A significant change in the attitude of speculators and investors towards gold. Should the speculative community take a negative view towards gold, it could cause a decline in world gold prices, negatively impacting the price of the shares.
Shares of the iShares Gold Trust are not deposits or other obligations of or guaranteed by BlackRock, Inc., and its affiliates, and are not insured by the Federal deposit Insurance Corporation or any other governmental agency.
BlackRock Asset Management International Inc. (“BAMII”) is the sponsor of the Trust. BlackRock Investments, LLC (“BRIL”), assists in the promotion of the Trust. BAMII and BRIL are affiliates of BlackRock, Inc.

Tags: Amp, Commodities, Commodity Indices, Core Inflation, Correlations, Diversification, Fiscal Position, Goldman, Monetary Policy, Nbsp, Paper Assets, Purchasing Power, Resilience, Risk Adjusted Returns, Risky Assets, Same Time Period, Stocks And Bonds, Tailwind, Term Inflation, Three Months
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The Big Easing

Friday, May 4th, 2012

by Daniel Gros, Center for European Policy Studies, via Project Syndicate

BRUSSELS – More than three years after the financial crisis that erupted in 2008, who is doing more to bring about economic recovery, Europe or the United States? The US Federal Reserve has completed two rounds of so-called “quantitative easing,” whereas the European Central Bank has fired two shots from its big gun, the so-called long-term refinancing operation (LTRO), providing more than €1 trillion ($1.3 trillion) in low-cost financing to eurozone banks for three years. For some time, it was argued that the Fed had done more to stimulate the economy, because, using 2007 as the benchmark, it had expanded its balance sheet proportionally more than the ECB had done. But the ECB has now caught up. Its balance sheet amounts to roughly €2.8 trillion, or close to 30% of eurozone GDP, compared to the Fed’s balance sheet of roughly 20% of US GDP.

But there is a qualitative difference between the two that is more important than balance-sheet size: the Fed buys almost exclusively risk-free assets (like US government bonds), whereas the ECB has bought (much smaller quantities of) risky assets, for which the market was drying up. Moreover, the Fed lends very little to banks, whereas the ECB has lent massive amounts to weak banks (which could not obtain funding from the market). In short, quantitative easing is not the same thing as credit easing. The theory behind quantitative easing is that the central bank can lower long-term interest rates if it buys large amounts of longer-term government bonds with the deposits that it receives from banks. By contrast, the ECB’s credit easing is motivated by a practical concern: banks from some parts of the eurozone – namely, from the distressed countries on its periphery – have been effectively cut off from the inter-bank market.

A simple way to evaluate the difference between the approaches of the world’s two biggest central banks is to evaluate the risks that they are taking on. When the Fed buys US government bonds, it does not incur any credit risk, but it is assuming interest-rate risk. The Fed acts like a typical bank engaging in what is called “maturity transformation”: it uses short-term deposits to finance the acquisition of long-term securities. With short-term deposit rates close to zero and long-term rates at around 2% the Fed is earning a nice “carry,” equal to about 2% per year on bond purchases totaling roughly $1.5 trillion over the course of its quantitative easing, or about $30 billion.

Read on …

Copyright © Project Syndicate

Tags: Balance Sheet, Big Gun, Central Banks, Daniel Gros, ECB, Economic Recovery, Federal Reserve, Financial Crisis, Government Bonds, Massive Amounts, Periphery, Project Syndicate, Qualitative Difference, Ris, Risky Assets, Term Interest, Trillion, Two Shots, Us Federal Reserve, Us Gdp
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Proceed With Caution in the Hunt for High Yield

Tuesday, April 3rd, 2012

Given high yield credit’s recent rally and surge of inflows, I’m now getting a lot of questions about whether or not the asset class still looks appealing.

While high yield provides an attractive pickup in yield and I’m maintaining my neutral view of the sector, I believe the easy money has probably already been made and the asset class no longer looks cheap. As such, over high yield, I prefer investment grade credit and municipals.

As high yield credit is highly correlated with equities, it’s hardly surprising that the asset class has rallied sharply since fall lows, taking part in the strong rebound in stocks and other risky assets. The iShares iBoxx $ High Yield Corporate Bond Fund (NYSEARCA: HYG) is up more than 12% from its early October closing low. Past performance does not guarantee future results. For standardized performance, please click here. And of course, this surge in price has been accompanied by a surge in flows. Year to date, $6.5 billion has flowed into high yield exchange traded funds, with half going to HYG.

Following this rally, the yield to maturity for high yield is roughly 7% or nearly a 500 basis point premium to the 10-year Treasury. That’s close to fair value given the following analysis.

When you look at the historical spread between high yield and the 10 year-Treasury, spreads typically tighten as expectations for the economy improve. They widen when investors are worried about a recession and credit quality.  In the past, economic indicators have explained roughly 50% of the variation in where high yield spreads relative to Treasuries, testifying that the economic situation has been a key driver of spreads LQDhistorically.

A comparison of high yield spreads with leading indicators today suggests that high yield should be yielding roughly 500 bps more than the yield on the 10-year Treasury, fairly close to current levels.

To be sure, I don’t believe investors should avoid high yield. Investors in high yield are still picking up significant incremental yield, and given strong corporate balance sheets, I don’t expect any significant pickup in default rates. But as the asset class no longer appears as inexpensive as it was last fall, I wouldn’t advocate aggressively putting new money to work in high yield.

Instead, I prefer investment grade and high quality municipals. I hold overweight views of both asset classes, which still appear relatively cheap versus Treasuries. Take investment grade credit, which is a nice substitute for those looking to lower their exposure to Treasuries. While high yield spreads have contracted by 250 bps since last fall, spreads for investment grade credit have not come in nearly as much.

Investors can access investment grade credit through the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEARCA: LQD) and they can access municipals through the iShares S&P Short Term National AMT-Free Municipal Bond Fund (NYSEARCA: SUB) and the iShares S&P National AMT-Free Municipal Bond Fund (NYSEARCA: MUB).

Source: Bloomberg

The author is long LQD and MUB

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.

Bonds and bond funds will decrease in value as interest rates rise. High yield securities may be more volatile, be subject to greater levels of credit or default risk, and may be less liquid and more difficult to sell at an advantageous time or price to value than higher-rated securities of similar maturity. A portion of a municipal bond fund’s income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains, if any, are subject to capital gains tax.

Tags: 10 Year Treasury, asset class, Basis Point, Bond Fund, Bps, Corporate Bond, Credit Quality, Easy Money, Economic Indicators, Economic Situation, ETF, ETFs, Exchange Traded Funds, high yield, Hyg, Ishares, Leading Indicators, Municipals, Neutral View, Risky Assets, Treasuries, Yield To Maturity
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Gartman: “Buy Assets Across the Board in Yen Terms”

Wednesday, March 21st, 2012

In today’s Globe and Mail, Martin Middlestaedt says the Japanese yen’s 40-year bull market is at a turning point. He also writes about betting against (shorting) the yen and in favour of risky assets. The recent decline (Dennis Gartman believes this is a trend to hitch hike on) of the yen is not only a welcome break for Japanese exporters, and currency speculators wishing to capitalize on its falling valuation; it is a welcome development (risk-on) for hedge funds, as it provides a basis for a resurgence in short-yen carry trades.

Here are some snippets:

- Dennis Gartman, is convinced that the long advance of the yen is finally over. He’s urging investors to sell the currency short, a trade he thinks will work for years as Japan’s economic problems continue to grow and the currency takes a drubbing.
- “I think it’s the trade of the next 10 years,” says Mr. Gartman of the Gartman Letter, a market advisory service. “The yen is doomed fundamentally. Japan just has so many problems, none of which are going to go away anytime soon.”
- Its government debt is twice the size of its GDP, the scariest ratio in the developed world. To make matters worse, its lofty currency is an obstacle for its exporters, it has been fighting persistent deflation, and its population is aging rapidly.
- “This is one of the slowest moving train wrecks in the history of finance, but we’re just not quite sure when it clicks over,” says Andrew Busch, global currency strategist at Bank of Montreal’s investment arm.
- Camilla Sutton, chief currency strategist at Scotia Capital, says sentiment “used to be quite bullish for yen for a very long time,” but the market view has “turned wildly negative just over the last few weeks.”
- Much of the yen weakness occurred after the Bank of Japan said in February that it would buy ¥10-trillion worth of government bonds – in effect printing money to finance the government’s debt.
- Another approach advocated by Mr. Gartman has been to buy futures contracts on gold and other commodities and simultaneously sell Japanese yen futures. If he buys contracts representing $1 million in gold, he then sells futures contracts on yen worth $1 million. “You create your own synthetic derivative” that allows purchases of assets in yen terms, he says of the strategy. “Generally I think you should buy assets in yen terms across the board.”
- These somewhat complicated trades will have supersized payouts if the yen falls and the various commodities rise, but will suffer large losses if the yen strengthens and commodity prices weaken.
- Mr. Gartman says there is an additional reason the yen will likely continue to be weak: Japanese companies want a cheaper currency to make exports more competitive. “Clearly, the Japanese corporate structure wants a weaker yen. They’re obviously cheering this on.”

Source: Globe and Mail

Tags: Andrew Busch, Bank Of Japan, Bank Of Montreal, Currency Speculators, Currency Strategist, Dennis Gartman, Development Risk, Directional Flow, Equilibrium Equation, Gartman Letter, Global Currency, Globe And Mail, Globe Mail, Government Bonds, Hitch Hike, Investment Arm, Japanese Exporters, Japanese Yen, Moving Train, Printing Money, Risky Assets, Scotia Capital, Train Wrecks, Welcome Development
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Three Supports for a Higher Equity Market (Ryan Lewenza)

Monday, February 13th, 2012

TD Waterhouse’s U.S. Equity Analyst, Ryan Lewenza, has just released his team’s latest outlook for U.S. equities, titled, “Three Supports for a Higher Equity Market.”

Here are the highlights from the report. The entire contents follow in the slidedeck below (fullscreen for the better read, or download):

· The recovery in the U.S. stock market since the March 2009 lows has been driven by three key supports: 1) liquidity injections by global central banks, 2) improving economic momentum, and 3) strong corporate profits. In our opinion, we are currently hitting on 2.5 of those 3 supports, which is why we see the potential for further upside in H1/12. While the technical backdrop and high level of investor complacency lead us to believe a short-term pause/pullback is likely, we continue to recommend investors “buy on the dips.”

· The European Central Bank (ECB) initiated a lending program in December 2011 to European banks that were facing an escalating credit crunch. The program, called the Long-term Refinancing Operation (LTRO), involved issuing €489 billion in 3-year loans to European Banks to: 1) help them address their short term liquidity needs, and 2) engender European banks to purchase sovereign bonds, in an effort to help drive sovereign bond yields lower. The LTRO program is expected to be expanded later this month, with another €1 trillion expected to be issued to European banks. As history has clearly shown, when central banks are injecting liquidity into the system, risky assets tend to benefit, which is one important reason we remain constructive on equities in the coming months.

· The second support is the ongoing economic reacceleration in the U.S. and global economy. In the U.S., the data continues to come in above expectations, with the probability of a U.S. recession declining materially in recent months. Obviously, the key question is whether the positive momentum will continue, especially since we saw similar strength in the H1/11, which then reversed in the second half of year. For now the data remains supportive, and another factor behind our more constructive outlook for H1/12.

· Finally, as we have outlined at length in past reports, U.S corporate profits have never been stronger, helping provide an important support to equities.

U.S. Equity Strategy (Three Supports for a Higher Equity Market) – February 10, 2012

Tags: Backdrop, Bond Yields, Central Banks, Complacency, Corporate Profits, Credit Crunch, Dips, Economic Momentum, Equity Analyst, European Banks, Global Economy, Injecting Liquidity, Lows, Pullback, Recession, Risky Assets, Sovereign Bonds, Td Waterhouse, Term Liquidity, U S Stock Market
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What the Bond Market Knows That You Don’t

Friday, January 27th, 2012

by Matt Tucker, iShares

A picture is worth a thousand words:

Equity Performance vs. Bond Yields

Source: Bloomberg (1/13/11-1/16/12)

On the back of improving US economic data, equities have rallied off of autumn lows, and yet US Treasury yields have continued to surf bottom with the 10-year note trading below 2% for the first time on record.  Why haven’t interest rates recovered in support of improving data?  Do US Treasury investors know something that equity investors don’t?

The answer may lie across the pond in Europe.  The European crisis intensified significantly in the fall, causing equity markets (and most risky assets for that matter) to sell off and US Treasury rates to fall, despite the August downgrade.

The chart below shows the on-the-run credit default swap contract for a basket of European sovereign credits, including the peripheral countries.  As the chart shows, spreads widened significantly in late summer / early fall and have yet to recede meaningfully, despite grinding progress on the political front and some prominent actions by the European Central Bank to stabilize liquidity.

Source: Bloomberg

While the United States certainly has well publicized fiscal problems, it is, as our colleague Jeff Rosenberg of BlackRock Fundamental Fixed Income states, “the best house in a bad neighborhood.”  To this point, Russ Koesterich estimates that the fair level of rates for the US Treasury 10-year yield based upon historical economic relationships is around 2.5-3%.  The current yield of ~1.85% essentially reflects a liquidity or “safety” premium that investors are willing to pay in order to have relative safety in the neighborhood (protection money, if you will).  Additionally, the Fed continues with Operation Twist, which is intentionally designed to keep a lid on longer term US Treasury rates (in response to concerns that the European overhang could damage the fragile US recovery).

How long will US Treasuries stay at this level, and will they eventually move up to reflect tentatively improving economic conditions in the United States?  It all depends upon Europe.  If the European situation deteriorates from here, US equities will almost certainly retreat, and US Treasury investors will look justified in having accepted a low yield, since it was low in anticipation of this risk.  In that situation, US Treasury yields could move even lower.

If Europe claws its way out of the worst potential outcome and gets to a point of relative stability, the liquidity premium in US Treasuries will likely dissipate and yields may move to more fundamentally justified levels.  But for now, it does appear that bond market and equity market investors are making very different bets.

Past performance is not indicative of future results. Bonds and bond investments will decrease in value as interest rates rise.

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Tags: Bad Neighborhood, Bond Market, Bond Yields, Credit Default Swap, Current Yield, Economic Data, Economic Relationships, Equity Investors, Fiscal Problems, Jeff Rosenberg, Matt Tucker, Neighborhood Protection, Overhang, Protection Money, Relative Safety, Risky Assets, Swap Contract, Treasury Rates, Treasury Yields, Us Treasury
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