Tag Archives: economy

RSX: My Prediction For 2016

The next year is around the corner, and it’s high time to look at RSX prior to the Russian holidays. Oil stays low and poses a major threat to the economy. At current oil price levels, RSX is overvalued. Those who follow the Market Vectors Russia ETF (NYSE: RSX ) closely probably know that I’ve been bearish on Russia the whole year. Lately, I’ve been commenting on the tensions between Russia and Turkey , the impact of the continuing oil price decline on the Russian economy and the exchange rate of the Russian ruble. As the year ends, it’s logical to make a prediction for 2016 and leave the topic to develop until the end of January. Why the end of January? First and foremost, the Russian Central Bank will announce its key interest rate on January 29, 2016. In its next meeting, the Central Bank won’t have the luxury of waiting and will have to either support the economy by cutting the 11% rate or choose the course of supporting the ruble and leave the rate or even increase it. I think that this will be the pivotal moment. Also, keep in mind that Russia has long New Year holidays that last from January 1 up to January 10. In practice, low volume trading and muted business life typically last from the last week of December up to the “Old New Year” on January 14. To those interested, the “Old New Year” date is the New Year date in Julian calendar, which was observed in Russia until 1918, when Gregorian calendar was implemented. Expect increased volatility and false moves during this period. It is clear that the main determinant for both the Russian market and the Russian economy is the oil price. If you believe that oil will go to $70 – $80 per barrel in 2016, then you should clearly buy RSX or other Russian ETF. I am in the bearish camp for oil, at least for 2016. My base-case scenario for Brent oil is $40 at best, and I think that oil will first go lower and could rebound only at the end of 2016. My main point is that if oil stays at current levels, the Russian market is significantly overvalued and will drift lower. Here’s why. We’ve yet to see more action from the Central Bank, but I think that at current oil levels we will not get to the ruble-denominated oil price of 3150 which is needed for the budget. This will lead to extreme devaluation of the national currency. For example, if this was to happen right now, the ruble would have dropped from 71 rubles per dollar to 85 rubles per dollar. This is too much, as Russia still depends heavily on imports (this statement was previously challenged by some readers, but I stand by my views and tried to explain them in more detail in the comments sections of previous articles). I think that the resulting exchange rate will likely be a compromise between the needs of the budget (and all the export companies, which are the majority of the Russian stock market) and the needs of curbing inflation. My prediction is that the ruble will settle in the area which allows 2900 – 3000 rubles per barrel of oil, implying 10.5% – 14% downside for the currency and for the dollar-denominated RSX. Also, I believe that constraints that low oil puts on the Russian economy are not fully reflected in the price of RSX. The Central Bank is predicting that GDP contraction will slow to 0.5% – 1.0%, but I think that these are optimistic figures. In the current oil price environment, there is no way to balance the interest of export-oriented companies, which are the majority of RSX holdings , and the economy. This problem will result in damage to every Russian company. All in all, I think that RSX is overvalued by 15% – 20% at current oil price levels. The downside increases if oil drops further, and such a drop will likely lead to a catastrophic liquidations of positions and a huge drop of RSX. On the other hand, if oil manages to deliver a major rally, the whole thesis will go bust. The next year is already behind the corner, so we will soon know how the thesis plays out.

A Stock Market Breather Before A Big-Time Bullish Breakout? Not Bloody Likely

It is unsettling to deal with the probability that we are closer to a bearish decline in stocks than a bullish reboot. However, if one prepares for inevitable depreciation in overvalued asset prices, buying low becomes less intimidating. At the current moment, far too many folks are being led astray by talking points they hear on CNBC and Bloomberg. History and probability do not favor the idea that stock markets will magically grind higher. It is unsettling to deal with the probability that we are closer to a bearish decline in stocks than a bullish reboot. Investment account values will wane. Household net worth will diminish. And when stock prices near their lowest ebb, the typical investor will decide that buying is impractical. However, if one prepares for inevitable depreciation in overvalued asset prices, buying low becomes less intimidating. For example, in spite of the exceptionally poor rap that trend-following techniques receive from the mainstream financial media, a decision to “stand down” when the 50-day crossed below the 200-day in the previous stock bear provided a remarkably desirable return OF capital. A subsequent decision to embrace risk when the 50-day crossed above the 200-day provided a remarkably desirable entry point for a return ON capital. Selling the S&P 500 near 1500 (a.k.a. “selling high”) and purchasing it again near 900 (a.k.a. “buying low”) helped one successfully transition from capital preservation to capital appreciation. At the current moment, far too many folks are being led astray by talking points they hear on CNBC and Bloomberg. For instance, popular shows regularly trot out analysts who insist that that market is “grinding higher.” First of all, which market is grinding higher? The Dow Industrials, Dow Transports, S&P 500, S&P 400, Russell 2000 and New York Stock Exchange (NYSE) Composite are all lower than they were one year ago. (Note: Ironically enough, the Fed’s last asset purchase actually occurred on 12/18/2014, making 12/17/2015 the end of a full trading year.) It follows that the only significant U.S. index that has made genuine progress since the end of the Federal Reserve’s quantitative easing (QE3) is the NASDAQ . Even there, progress is less impressive when one weights the components of the NASDAQ equally, rather than rely on the super-sized weightings of Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ) and Alphabet (NASDAQ: GOOG ). This is evident in the deterioration of the First Trust NASDAQ-100 Equal Weight Index ETF (NASDAQ: QQEW ):the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) price ratio. Why is the lack of meaningful progress in so many U.S. stock barometers – the Dow Industrials, Dow Transports, S&P 500, S&P 400, Russell 2000, NYSE Composite – being overlooked? The most common answer that I am hearing is the prospect of a “breather.” A proverbial “pause” for U.S. stocks in the middle of a bullish cycle. The problems with the “breather” belief are numerous. For one thing, where consolidation has occurred during previous “pauses,” the number of advancing stocks on the exchanges relative to the the number of declining issues usually move higher. Consider the euro-zone crisis in the summertime of 2011 – the last time stocks experienced anything close to a sharp correction. The NYSE Advance/Decline Line (A/D) offered ample signs of a healthier stock market with a series of “higher lows” and “higher highs.” In essence, the number of advancers began to eviscerate the number of decliners. If one is inclined to believe that the current stock bull is merely catching its breath for a second wind, shouldn’t we see the same kind of improving breadth here in 2015? Like we did in 2011? Yet, over the past year, more stocks in the US have been declining than advancing for the first time since 2009. Moreover, the NYSE A/D Line is not currently demonstrating the kind of resilience that previous bullish rallies demonstrated. A second shot across the “breather” bow is the earnings environment. Combine the strong dollar, low commodity prices, higher borrowing costs, and we’re about to see our third consecutive quarterly decline in S&P 500 earnings. That has not occurred since the systemic financial collapse. What’s more, the profitability concerns are wreaking havoc on traditional valuations; that is, you cannot see a 14% decline in year-over-year earnings , as well as a third consecutive quarter of earnings deterioration, and anticipate anything other than expensive stocks becoming even pricier. A third dilemma for the “breather” believers? The rest of the world’s stock markets are trading near the levels they were trading when the S&P 500 hit 1867 back in August. Or worse. Many of the world markets are trading at even lower prices than the August lows for the S&P 500 . How about the world’s 4th largest economy in the United Kingdom? The i Shares MSCI United Kingdom ETF (NYSEARCA: EWU ) is far beneath its 200-day moving average and hardly shows any indication that it is ready to rally back to new 52 -week highs. Of course, history only rhymes, it does not repeat. There’s no way to know what will transpire with any certainty. Yet history and probability do not favor the idea that stock markets will magically grind higher. (They haven’t for the last year.) History and probability do not favor a bullish breakout to new records when manufacturing is contracting, earnings and sales are declining, and global economic hardships are increasing. Here is one final item to digest. Several years ago, the U.S. Department of Transportation’s Bureau of Transportation Statistics produced a study that showed how its transportation index “…led slowdowns in the economy by an average of four to five months.” Is there anything in the activity of a similar index – the longest running stock index in U.S. history, the Dow Jones Transportation Index – that suggests U.S. stocks are gearing up for a breakout above all-time highs? Does a 17.25% price drop show that stocks are grinding higher or lower? Keep a little cash on hand. Not only will it help you sleep better at night, but it will give you the confidence to buy good stuff lower down the road. D isclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

4 Simple Actions To Consider After Fed Liftoff

We finally have liftoff. This week, after months of anticipation, the Federal Reserve (Fed) initiated its first rate hike in nearly a decade , raising the Fed Funds Rate by 25 basis points (bps). Why not a bigger blast off? The Fed has made it clear that rate “normalization” will happen gradually, meaning rates will likely remain below historical averages for the foreseeable future. But while it may take years to get back to a 4 to 5 percent Fed Funds rate, higher rates are on their way. The good news for investors is that just a few simple actions can help you prepare your bond and equity portfolios for this new rising rate environment . In the wake of the Fed’s decision, here are four such moves you may want to consider. 1. Consider Your Duration While longer-duration bonds can provide portfolio diversification benefits, shortening the duration of your bond portfolio can potentially help manage losses due to rising interest rates. Remember, duration is a measure of a bond’s sensitivity to interest rate changes. The longer the duration, the more a bond’s price is impacted. When interest rates change, a bond’s price will change in the opposite direction by a corresponding amount. For example, if a bond’s duration is 5 years and interest rates rise 1 percent, you can expect the bond’s price to fall by approximately 5 percent. Therefore, bonds with higher duration generally have greater price volatility and the potential for losses when rates rise . 2. Focus on Credit Instead of owning only Treasuries, you may want to focus on adding credit exposure. Credit exposure adds credit risk (the risk that the issuer won’t pay you back) to a portfolio, but it mitigates some interest rate risk. In addition, investors are compensated for taking more credit risk with higher yields, so increasing exposure to higher quality credit risk may enhance income and offset potential price declines due to rising rates. 3. Shift to Cyclical Sectors It’s important to remember that when rates rise, it’s not just bonds that are affected. Equities are affected too. Higher rates mean that borrowing money becomes more expensive, so it’s harder for businesses and consumers to finance everyday needs. As such, traditionally defensive sectors, like utilities and telecommunications, typically become increasingly vulnerable in a rising rate environment due to their existing large debt positions. At the same time, higher rates generally are a sign of an improving economy, boosting the case for adding exposure to cyclical sectors, which have tended to outperform when the economy is strong. I prefer to get cyclical exposure through two sectors: U.S. technology and U.S. financials (excluding rate-sensitive REITs). With their large cash reserves, U.S. mature tech companies are much less vulnerable to rising rates than companies in more debt-laden sectors mentioned above. In addition, tech sector revenues may increase if economic growth continues to expand and consumers and businesses spend more. Meanwhile, for some financial institutions, like banks, rising rates could mean higher profits, as net interest margins may increase. 4. Seek New Sources of Income You may also want to take a look at your dividend strategies when interest rates rise. Although traditional high dividend payers (think the utilities and telecom sectors) have performed strongly in recent years, they’ve become quite expensive by most valuation metrics. And the previously low interest rate environment paved the way for many of these defensive businesses to load up on debt to expand their operations, while continuing to pay high dividends to investors. As such, many of these companies will likely come under pressure when rates rise. In contrast, dividend growth stocks have historically demonstrated less interest rate sensitivity and may be an attractive way to maintain yield in a rising rate environment. In contrast to high dividend payers, they tend to be more reasonably valued and have more potential to sustainably grow dividends over time. So, although rates are expected to moderately increase, you can prepare your portfolio now for a rising rate environment by considering simple actions such as these. These simple steps may help to insulate your investments while also capturing new opportunities. Funds, such as the iShares Floating Rate Bond ETF (NYSEARCA: FLOT ), the iShares Short Maturity Bond ETF (BATS: NEAR ) and the iShares 1-3 Year Credit Bond ETF (NYSEARCA: CSJ ), can provide credit exposure with short duration. Meanwhile, the iShares U.S. Technology ETF (NYSEARCA: IYW ), the iShares U.S. Financial Services ETF (NYSEARCA: IYG ) and the iShares Core Dividend Growth ETF (NYSEARCA: DGRO ), can provide exposure to the U.S. technology sector, the U.S. financials ex-REITs sector and dividend growers, respectively. This post originally appeared on the BlackRock Blog.