Author Archives: Scalper1

Does The S&P Really Need Higher Oil?

The steady drumbeat of lower and lower Crude Oil prices continues. With the S&P 500 struggling to hit new highs in 2015, much of the blame has been placed on lower Oil prices. Do stocks really need higher Oil to perform well? The steady drumbeat of lower and lower Crude Oil prices continues. Oil’s fall from its peak in 2014 is up to an astounding 67%. This is fast approaching the largest decline in history, the 68% drop during the financial crisis of 2008-09. (click to enlarge) With the S&P 500 struggling to hit new highs in 2015, much of the blame has been placed on lower Oil prices. If only Oil prices were higher, say the pundits, stocks would be soaring. But how accurate is this story? Do stocks really need higher Oil to perform well? Let’s take a look back at history. We have data on Crude Oil (Generic First Futures via Bloomberg) going back to March 1983. The monthly correlation to the S&P 500 since then? Essentially zero (.05). Looking at the rolling 1-year correlation, we can see there are times where Oil and equities are positively correlated and other times when they are negatively correlated. (click to enlarge) During the financial crisis of 2008 and its aftermath, the correlation between equities and Crude became more consistently positive and higher than in prior cycles. Why? A deflationary, depression-like collapse was the major fear in 2008, and lower Crude prices that year were said to be a harbinger of bad things to come. When that theory did not materialize in 2009, the opposite was said to be true. The rally in Crude was thought to be a positive, indicating reflation and stronger global growth. This relationship would persist until 2014 when Crude began its most recent collapse. Since then, while equities have struggled to hit new highs, there has been little overall correlation with Oil. This is more in line with history, as evidenced by the table below displaying calendar year returns in Crude Oil and the S&P. Some thoughts on their unpredictable relationship: From 1984-87, Crude declined every year while the S&P advanced. The S&P continued to advance in 1988 and 1989 while Crude rebounded. Then, in 1990, the S&P experienced its only down year in the 1982-99 period while Crude Oil was up 30%. From 1994-96 the S&P and Crude moved up together. From 1997-98, Crude declined while the S&P experienced two strong years. The 2000-02 Bear Market in stocks displayed no obvious correlation to Crude. From 2003-07, Crude and the S&P rose together during the commodities boom. In the 2008 deflationary collapse, they declined together and during the 2009-11 reflation they rose together. In the past two years, as Crude has suffered one of its worst declines in history, the S&P is higher. So do U.S. stocks really need higher Oil prices to generate a positive return? The answer based on the historical evidence is clearly no. Why? Because it is not clear exactly what a higher or low Crude price means for the overall economy and an S&P 500 Index where the Energy sector which comprises less than 10%. Most studies show that the U.S. economy (and U.S. consumer), as a net consumer of commodities, ultimately benefits from lower Oil and Gas prices. Similarly, companies outside of the Energy spectrum benefit from lower input costs. Ultimately, the correlation between Crude and stocks depends on why Crude is moving higher and lower, which is difficult to ascertain in the moment. It only becomes clear in hindsight. Certainly a crash in Crude as we saw in 2008 which was an indication of a collapse in global demand was not going to be a positive for the U.S. equity market. However, a crash in Crude due to increasing supply and alternative forms of Energy could very well be construed as positive for markets. Is that the case today? Again, we’ll only know in hindsight. Ironically, while the fear of the day is over lower Crude Oil prices, historically the opposite situation has been more harmful for markets and the economy. If we look back at history, 1-year spikes in Crude above 90% occurred in 1987, 1990, 2000, and 2008. All of these spikes were associated with equity Bear Markets and the 1990, 2000, and 2008 spikes associated with U.S. recessions. So perhaps the greater fear should be not a continued slide in Crude but a spike higher. (click to enlarge) That is not to say that some stability or a bounce in Crude in 2016 would not be welcomed by U.S. stocks. It most likely would if the rise could be attributed to an increase in global demand. But predicting whether and why Crude rises and falls is not an easy game to play. Harder still is predicting its impact on stocks. This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. CHARLIE BILELLO, CMT Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mitial funds nd separate accounts. He is the co-author of three award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms. Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant certificate.

JPMorgan Adds To Suite Of Diversified Return ETFs

JPMorgan’s Diversified Return ETFs are strategic beta funds that seek to improve the risk-adjusted returns of diversified portfolios. Each is based on a FTSE Diversified Factor index designed to exclude expensive and low-quality stocks with weak momentum characteristics. JPMorgan’s first Diversified Factor ETFs began trading in June 2014. By December 2015, the suite had grown to include the following funds: Diversified Return Global Equity (NYSEARCA: JPGE ) Diversified Return International Equity (NYSEARCA: JPIN ) Diversified Return Emerging Markets Equity (NYSEARCA: JPEM ) Diversified Return US Equity (NYSEARCA: JPUS ) Core European Exposure The fifth member of the lineup, the JPMorgan Diversified Return Europe Equity ETF (NYSEARCA: JPEU ), began trading on December 21. The ETF is designed to serve a foundational role in a developed Europe stock portfolio by combining portfolio construction with stock selection in attempting to produce higher returns with lower volatility than traditional market cap-weighted indices. “The European recovery provides a growth opportunity for long-term investors,” said Robert Deutsch, J.P. Morgan Asset Management’s Global Head of ETFs, in a recent statement. “JPEU is constructed to allow investors to participate in the upside while also providing less volatility in down markets” Like all JPMorgan Diversified Return ETFs, JPEU tracks a FTSE Diversified Factor Index – in this case, the FTSE Developed Europe Diversified Factor Index. The index was “thoughtfully constructed” based on JPMorgan’s “active insights and risk management expertise,” according to the statement, and is rebalanced quarterly. “We are excited to partner with J.P. Morgan ETFs and together meet the growing demand among investors for a broader set of international options, by offering the FTSE Developed Europe Diversified Factor Index,” said Ron Bundy, CEO of North America benchmarks for FTSE Russell. “We continue to apply FTSE Russell’s expertise in global strategic beta indices to expand on this very important long-term relationship.” European Equity Experience JPMorgan’s James Ford and Richard Morillot, both vice-presidents, are the co-managers of the fund. JPMorgan has been investing in European markets since 1964 and manages $37 billion in European equities. “We are pleased to combine the investment expertise of J.P. Morgan with the index design capabilities of FTSE Russell, to create a product that will be attractive to investors looking for exposure to European markets, but are concerned with volatility,” said Mr. Deutsch.

Indexing Doesn’t Win When It’s Implemented Via A High Fee Advisor

I’m a big advocate of indexing strategies because they’re low fee, tax efficient and diversified approaches to allocating one’s savings. But I see a worrisome trend in the asset management business – high fee advisors endorsing low fee indexing and selling it as something different from “active” management. We should be very clear here – these high fee advisors are not much different than their high fee active brethren. The asset management business has experienced a huge shift in the last 10 years. Trillions in fund flows have moved from high fee mutual funds into low fee ETFs and index funds. The evidence behind low cost indexing has become virtually irrefutable at this point. You don’t get what you pay for.¹ In fact, in many cases you get what you don’t pay for. Unfortunately, as fund fees have declined the average management fee at the advisor level has remained relatively high. Over the last 10 years we’ve seen a huge shift in the way asset management firms generate revenue. As mutual funds grew in popularity in the 90’s many of these firms used to charge commissions or advisory fees (usually in excess of 1%) and the fund company charged you an expense ratio on top of that (also 1% or more). Most investors in a mutual fund housed at a big brokerage house were seeing 2% or more of their total return sucked out in fees. Investors in a closet index fund housed at a discount broker were still seeing a 1%+ drag on their returns. As the indexing revolution has swept over these firms the high fee closet indexing mutual funds have been increasingly swapped out for the low fee index funds. But the high fees are still there. They’re just lower high fees than the outrageous 2%+ fees that were once there. Unfortunately, what we’re seeing across the business today often involves an advisor who charges the same 1%+ fee that the mutual fund charged, but they’re selling it within the “low fee indexing” pitch. So, what you actually end up owning is a low fee indexing strategy wrapped inside of a high fee asset management service. In other words, you end up with a fee structure no different than the investor who owns the high fee mutual fund in their own discount brokerage account. The chart above shows the impact of a diversified portfolio with an average annual return of 7% in a low fee index relative to the same portfolio with a 1% and 2% fee drag. Over the course of 20 years your $100,000 investment is a full 40% lower after the 2% fee drag and 18% lower with the 1% drag. In other words, over a 20 year period you’re handing over upwards of $100,000 for a service that is now being done by truly low fee advisors like my firm, Vanguard, Schwab and the Robo advisor firms. It’s true, as Vangaurd has noted , that a good advisor can contribute up to 3% per year in added value, but in a world of low cost “good” advisors you should still be cognizant of the cost of an advisor. And to be blunt, this 1% fee structure is an antiquated fee structure and it won’t continue. To be even more blunt – investors should be revolting against it given their options. We can’t control the returns we’ll earn in the financial markets. But we can control the taxes and fees we pay in those accounts. As the investment landscape shifts and you review your 2016 finances don’t find yourself in a backwards service paying high fees for something that is now being done by a multitude of firms in a truly low fee structure. ¹ – Shopping for Alpha – you get what you don’t pay for , Vanguard