Tag Archives: china

Will The Labor Market Bring Down GLD?

Summary Demand for gold has come down in the past quarter. Russia and China have recorded huge losses due to their purchases of gold in the past year. But the big question will remain what’s next for the demand for gold as an investment. It will all boil down to the Fed and the timing of raising rates. The price of GLD could come down in the short run, if the NFP report shows a stronger-than-expected gain. Even though the gold market hasn’t done well this year, shares of SPDR Gold Trust (NYSEARCA: GLD ) remained nearly flat in the past month. The Fed’s decision to keep rates unchanged, the rally of the U.S. dollar and the fall in long-term U.S. treasury yields in the past month have dragged the price of GLD in different directions. The demand for gold continues to fall with Russia and China recording huge losses for their gold positions. Nonetheless, demand for gold in ETFs such as GLD will keep falling if the U.S. economy shows signs of a recovery that will bring the Fed closer to raise rates. Russia and China, among the two largest buyers of gold in recent years, have caused these countries to lose around $5.4 billion, according to Bloomberg . Russia has increased its gold reserves by more than 10% since the beginning of year. But the ongoing fall in gold prices may lead these countries to curb down their purchases of gold. In any case, gold consumption continues to fall: According to the Gold Council, total gold demand declined by 12% in Q2 2015, year on year. Most of the drop in demand came from jewelry and bars. ETFs kept selling off gold. Further, GLD’s gold hoards fell by nearly 4% since the beginning of the year. Source of data: Gold Council Looking forward, the main event of the week will be the release of the non-farm payrolls report. In the past, this report (the difference between NFP jobs gains and market expectations) tended to move the price of GLD, as presented in the table below. (click to enlarge) Source of data: U.S. Bureau of Labor Statistics and Google finance Last month, the employment report presented a 173,000 gain in jobs, which was below market expectations. And still GLD prices slightly declined. This time, the market estimates a gain of 202,000 jobs. If the report were to present a greater-than-expected gain in jobs, this could result in fall in GLD prices. The report will be among the last three for the year. And they could bring the Fed closer towards raising rates in December. If the report presents another gain of below 200,000 in jobs and annual growth in wages – which is also a concern for the Fed – remains in the 1.9%-2.3% range, as it did in the past year, the odds of raising rates will keep falling. For now, the implied probabilities for a rate hike in October remain very low at 11%; for December the probabilities are only 35%. So the market remains unconvinced about the Fed’s intent to raise rates, despite the recent speech Yellen gave, in which she stated again that she and her colleagues at the FOMC expected to see a rate hike this year. The gold market remains stagnant, as the market isn’t convinced what’s up ahead for the Fed’s policy. The U.S. dollar’s recovery, which, in part, relates to the grim global economic outlook, is keeping down the price of GLD. But, as the Fed delays its rate hike, the gold market stays put for now. If we were to see stronger-than-expected jobs report, however, the tides could turn and the odds of a rate hike could rise, which may fuel additional selloff in gold. For more, please see” GLD Continues to lose its appeal ”

Compelling Case For Investing In India Focused ETFs

India has overtaken china as the fastest growing economy (of significance) in the world. One should take notice and start investing in India focused ETFs. With commodity prices falling off the cliff, India stands to gain as it is one of the major importers of all major commodities. There is a reasonable chance of double-digit growth in India compared to the low single digits in other parts of the world. The summary above highlights the reasons for my bullish stance on the Indian equity market, the next leader in this growth deprived world. “Bull markets”, they say, often climb a wall of worry and “bear markets” crash even with a lot of optimism. There is one question everyone would like an answer to – as the Dow Jones starts scaling back from its peaks of above 18,000 to today’s closing of slightly above 16,300 – “Will the bull market last?” History shows that most bull markets have come on the back of rising profits, lower interest rates, and tapering inflation. The present bull market, which can be termed the “Fed bull market”, has taken the Dow Jones from the lows of 8,000 to the peaks of 18,000 on the back of lacking company profits (for most part of the rising market), negative to very low inflation, and almost zero interest rates. The bull market was further given a “turbo boost” with additional liquidity through bond purchases (or simply printing money) – similar to cars in Formula 1 getting an extra boost out of their KERS systems to help accelerate from 0-60 mph. The worrying part of this bull market is that it was kick-started after bringing interest rates to almost zero and on the back of no inflation. The even bigger worry is that the stubborn inflation doesn’t want to go above the 1% mark, forget the 2% target the Fed has in mind. In the midst of all this, a no rate hike decision would only postpone the inevitable deflation scenario and only help fuel asset prices to even higher peaks. A good market correction might just be the best thing the equity markets need at this point. The problems are not that of the United states alone. France has been downgraded on growth fears ( WSJ article ), the UK is growing at less than 1% , Japan is going in and out of negative growth for the past few quarters, and Germany is growing at 0.5%. It seems growth is struggling to make a comeback in any of the developed economies (the US seems to be far better with 3.9% the past quarter). Remember, these are growth numbers reported after taking extreme measures to boost growth; to still have such numbers, in most cases not even inching 1%, is disheartening. At this point, the growth engine that all countries were feeding off, China, has given the biggest scare in over a decade with growth rates coming off the double digits to 7%. We need a new leader and clearly it is not coming from the developed markets. Amidst all the noise of crude at less that $50 and rate hikes looming, no wages growing, commodity prices crashing, and a currency war – we need another leader to replace China. Herein lies the central point I wish to make in this article. India can be the next China. With a solid political majority at the Upper house and one of the fastest growing economies in the world (faster than China with recent data), India is in a sweet spot. India imports 75% of its crude – crude prices have fallen more than half in the past one year. India is a net importer of commodities like gold, silver, zinc and other metals all of which are in severe bear markets India is one of a handful of countries in the world that have the ultimate “luxury” of inflation (approx. 5-6% in 2015), something most countries in the world wish they had. Interest rate in India has peaked at 9% last year and is on its way downwards after 2 rate cuts already implemented this year. The current account deficit (imports – exports) is sharply lower from over 4% to 1.2% in the past 18 months. The fiscal budget is balanced, and with oil at $50, it only looks better. The government has started a spending heavily on infrastructure and other investment activities. The economy has just started picking up and might be the growth engine we are all desperately looking forward to. Bull markets come on the back of rising profits, lower interest rates, and tapering inflation. Start a good investing plan on ETFs that invest in India, such as the iShares S&P India Nifty Fifty Index ETF (NASDAQ: INDY ), the iShares MSCI India Index ETF (BATS: INDA ), and the WisdomTree India Earnings ETF (NYSEARCA: EPI ). India has to be separated from the emerging market pack as they offer a lot more than any of the other BRICS countries do. Brazil and China rely heavily on the export of commodities, whereas India is an importer. Russia is almost in recession and with all the troubles it has with sanctions and currency, etc., it cannot be in the same basket for a while now. South Africa has struggled to live up to its potential with such wide corruption. The downside risk to these funds is going to be excessive volatility in the stock markets that no emerging market fund is immune to. The solidity of any of the developed countries will never be seen in any of the emerging market equities. Any jitters in the plans of government spending can lead to more volatility since that is the kick start needed for growth to pick up. Rains have been playing spoilsport the whole time and can have short-term effects on the earnings of some companies. Any spike in inflation to unmanageable levels will invariably halt the downward trend of interest rates and that will be a huge roadblock to reviving growth. The INR (Indian Rupee) has more potential for stability during these times than most other emerging markets. With the dollar appreciating, there is still a positive for India-focused ETFs. These funds invest in the “Nifty50” Index that has earnings of almost 50% coming in US dollar terms – heavyweight software and pharma industry players like Infosys, TCS, Sun Pharma make up a sizeable percentage of the index along with banks that have sizeable dollar earnings. The Indian story should be a part of every investor’s long-term portfolio.

Want Some New Geography In Your Portfolio? ECON Is Fairly Unique

Summary ECON is heavily focused on consumer goods and services across the emerging markets. The holdings are unfortunately heavily concentrated into single companies. The companies come from a very diverse group of countries that offer investors exposure that they would struggle to replicate. The high expense ratio creates a problem from long term returns but investors could use the fund with tolerance bands to ensure buying low and selling high. One of the funds I’m examining is the EGShares Emerging Markets Consumer ETF (NYSEARCA: ECON ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio The expense ratio is a massive .83%. That is just incredibly heavy, but we should keep looking through the fund to see what is unique about the ETF. Industry (click to enlarge) The sector exposure is fairly simple. I’d rather see a further break down within the Consumer Goods and Consumer Services to establish “Staples” relative to “Discretionary” firms. I would be more interested in using an international ETF that focused on consumer staples than consumer discretionary companies. Largest Holdings (click to enlarge) The largest holding is over 10% of the portfolio and the rest of the top 10 are all greater than 3.5%. Investors may start to wonder where the expense ratio is going because it shouldn’t be going to trading expenses when the portfolio is so complicated. Geography (click to enlarge) This is easily the best part of the portfolio in my opinion. With the exception of China you aren’t likely to find many ETFs that are going to overweight the rest of these countries. The nice thing about this selection is that it creates excellent diversification. The one drawback to using diversification this way is that correlations increase dramatically during periods of crisis so the actual benefits to the portfolio value during a major correction won’t be as substantial as it should be. The other concern here is that I don’t like seeing China as a major weighting here. I’ve been a bear on China since summer. Their market moved up dramatically earlier in the year and has been correcting fairly hard. I’d rather avoid that source of risk in the current environment, but a few months can dramatically move prices and result in a very different assessment. Aside from my concerns about the Chinese economy, I would give this ETF a very solid 10 of 10 on incorporating countries that are often very low weights in an investor portfolio. Keep in mind that these emerging markets should be a fairly small weight in the investor portfolio, so a heavy allocation to ECON would be extremely dangerous. This kind of geographic diversification should be limited to no more than 5% to 10% of the portfolio, but I would want investors to be very aware of the risks before they went towards that 10% allocation. Building the Portfolio The sample portfolio I ran for this assessment is one that came out feeling a bit awkward. I’ve had some requests to include biotechnology ETFs and I decided it would be wise to also include a the related field of health care for a comparison. Since I wanted to create quite a bit of diversification, I put in 9 ETFs plus the S&P 500. The resulting portfolio is one that I think turned out to be too risky for most investors and certainly too risky for older investors. Despite that weakness, I opted to go with highlighting these ETFs in this manner because I think it is useful to show investors what it looks like when the allocations result in a suboptimal allocation. The weightings for each ETF in the portfolio are a simple 10% which results in 20% of the portfolio going to the combined Health Care and Biotechnology sectors. Outside of that we have one spot each for REITs, high yield bonds, TIPS, emerging market consumer staples, domestic consumer staples, foreign large capitalization firms, and long term bonds. The first thing I want to point out about these allocations are that for any older investor, running only 30% in bonds with 10% of that being high yield bonds is putting yourself in a fairly dangerous position. I will be highlighting the individual ETFs, but I would not endorse this portfolio as a whole. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. Because a substantial portion of the yield from this portfolio comes from REITs and interest, I would favor this portfolio as a tax exempt strategy even if the investor was frequently rebalancing by adding new capital. The portfolio allocations can be seen below along with the dividend yields from each investment. Name Ticker Portfolio Weight Yield SPDR S&P 500 Trust ETF SPY 10.00% 2.11% Health Care Select Sect SPDR ETF XLV 10.00% 1.40% SPDR Biotech ETF XBI 10.00% 1.54% iShares U.S. Real Estate ETF IYR 10.00% 3.83% PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB 10.00% 4.51% FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT 10.00% 0.16% EGShares Emerging Markets Consumer ETF ECON 10.00% 1.34% Fidelity MSCI Consumer Staples Index ETF FSTA 10.00% 2.99% iShares MSCI EAFE ETF EFA 10.00% 2.89% Vanguard Long-Term Bond ETF BLV 10.00% 4.02% Portfolio 100.00% 2.48% The next chart shows the annualized volatility and beta of the portfolio since October of 2013. (click to enlarge) Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. You can see immediately since this is a simple “equal weight” portfolio that XBI is by far the most risky ETF from the perspective of what it does to the portfolio’s volatility. You can also see that BLV has a negative total risk impact on the portfolio. When you see negative risk contributions in this kind of assessment it generally means that there will be significantly negative correlations with other asset classes in the portfolio. The position in TDTT is also unique for having a risk contribution of almost nothing. Unfortunately, it also provides a weak yield and weak return with little opportunity for that to change unless yields on TIPS improve substantially. If that happened, it would create a significant loss before the position would start generating meaningful levels of income. A quick rundown of the portfolio I put together the following chart that really simplifies the role of each investment: Name Ticker Role in Portfolio SPDR S&P 500 Trust ETF SPY Core of Portfolio Health Care Select Sect SPDR ETF XLV Hedge Risk of Higher Costs SPDR Biotech ETF XBI Increase Expected Return iShares U.S. Real Estate ETF IYR Diversify Domestic Risk PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB Strong Yields on Bond Investments FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT Very Low Volatility EGShares Emerging Markets Consumer ETF ECON Enhance Foreign Exposure Fidelity MSCI Consumer Staples Index ETF FSTA Reduce Portfolio Risk iShares MSCI EAFE ETF EFA Enhance Foreign Exposure Vanguard Long-Term Bond ETF BLV Negative Correlation, Strong Yield Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. (click to enlarge) Conclusion ECON has some very interesting geographical concentrations. While the regression shows a fairly high correlation with the S&P 500, the ETF has had a very weak return over the last 5 years which is precisely the opposite of what I would say about the S&P 500. When comparing the correlation between returns, occasionally unrelated assets can appear to have a substantially higher level of correlation due to the daily measurements of returns or due to negative shocks creating a bias in the data. The correlation with EFA is fairly strong though. Investors using ECON would be wise to take advantage of temporary deviations by preparing a plan to rebalance in advance. Ideally that plan would focus on tolerance ranges rather than the frequency of rebalancing. In short, if they assigned a 5% allocation to ECON, they might rebalance the position whenever it exceeded 6% of the portfolio or fell below 4% of the portfolio. While I like the geographic diversification in this portfolio, it is not enough to justify paying a substantially higher expense ratio. Over the longer term, I think the best chance for this ETF to provide solid returns is for shareholders to plan to use the rebalancing strategy to ensure that they are buying in low and selling high. If an investor is willing to rebalance that way and accept modern portfolio theory, it would be ironic if they still felt that a very high expense ratio fund was going to offer superior returns over the long haul.