Tag Archives: european

Crash Imminent Warning Removed By NIRP Crash Indicator

The NIRP Crash Indicator’s signal changed from its pre-crash or crash imminent Orange to its Yellow cautionary reading level on the close of the market on May 9, 2016. The signal had gone from Yellow to Orange prior to the U.S. stock market’s opening on April 28. During the eight day period that the indicator’s reading was Orange ended on May 9, 2016, the S&P 500 went from 2095.15 to 2058.69, a decline of 1.7%. The signal went to Orange from Yellow because the exchange rates of the yen versus both the euro and the US dollar had stabilized during the week ended May 6, 2016. Additionally, both the euro and the dollar appreciated by more than 1.1% versus the yen on Monday May 9, 2016. Please note: For the NIPR Crash indicator to change from the crash imminent Orange or a crash Red reading to Yellow requires that the exchange rate between the yen and dollar be stable for an extended period of time or that the dollar and euro advance significantly versus the yen. An increase in the indicator’s reading from Yellow to Orange requires a steady advance or a significant one day advance for the yen versus the dollar. The NIRP Crash Indicator was developed in February 2016, from my research on the Crash of 2008. My research revealed the metrics that could have been used to predict the Crash of 2008 and its V-shaped reversal off of the March 2009 bottom. See my Seeking Alpha “Japan’s NIRP Increases Probability of Global Market Crash” March 4, 2016 report. The metrics are now powering the indicator. Information about the NIRP Crash Indicator and the daily updating of its four signals ( Red: Full-Crash; Orange: Pre-Crash; Yellow: Caution; Green: All-Clear) is available at www.dynastywealth.com . Since inception the NIRP Crash Indicator’s signals have proven to be very reliable. Throughout the entire month of March, the signal for the NIRP Crash Indicator had remained at the cautionary Yellow and the S&P 500 experienced little volatility as compared to the extremely volatile first two months of 2016. For the month of March, the S&P 500 increased by 4%. The indicator’s reading went from Yellow to Orange after the market’s close on Friday April 1, 2016 . For the following week ended April 8, 2016, the S&P 500 experienced its most volatility since February of 2016 and closed down 1.5% for the week. The signal’s second Orange reading occurred before the market’s April 28, 2016 open. From the Thursday, April 28 open to the Friday, April 29 close, the S&P 500 declined by 1.2%. The S&P 500 (NYSEARCA: SPY ) and the Dow 30 (NYSEARCA: DIA ) ETFs closing at their lowest prices since April 12, 2016 on April 29. See also my SA post “NIRP Crash Indicator’s Sell Signals Very Reliable for April 2016″ May 3, 2016. The primary metric powering the NIRP Crash Indicator are sudden increases in volatility for exchange rates of the yen versus the dollar and other currencies. The significant appreciation in the yen versus the dollar in 2008 accurately predicted the crash of 2008, and the recent declines of the markets to multi-year lows in August of 2015 and February 2016. In my April 11, 2016 ” Yen Volatility Is Leading Indicator For Market Sell-Offs ” SA post and my video interview below entitled “Yen Volatility Causes Market Crashes”, I provide further details on the phenomenon of the yen being a leading indicator of market crashes. The rationale for the for yen volatility or its appreciating significantly versus the dollar being a leading indicator of crashes is because the Japanese yen and the U.S. dollar are the world’s two largest single country reserve currencies. For this reason, the yen is the best default safe-haven currency utilized by investors during any U.S. and global economic and market crises. When crises unfold, historically the U.S. dollar — by far the world’s most liquid and largest safe-haven currency — is susceptible to dramatic declines until the storm has passed. Savvy investors know that the U.S. is, unquestionably, considered the world’s leading economy and markets. They know that upon a crash of the U.S. stock market, the initial knee-jerk reaction would be a simultaneous crash of the U.S. dollar versus the world’s second leading single-nation currency. The yen is currently the default-hedge currency. Even though the euro, arguably, ranks with the U.S. dollar as the world’s top reserve currency, it is not the preferred hedge against the greenback. The euro is shared by 19 of the European Union’s member countries that have wide-ranging social and economic policies, and political persuasions. For this reason, and also because Japan is considered to be one of the most fiscally conservative countries on the planet, the default currency is the yen. The U.S. dollar does not experience extended crashes versus the Swiss franc and the British pound during times of crises because each of the underlying countries has economies much smaller than Japan’s. From my ongoing research coverage of the spreading negative rates and the devastating effect that they could potentially have on the global banking system, the probability is high that the major global stock indices including the S&P 500 will begin a significant decline by 2018 at the latest. My April 11, 2016 article entitled, “Negative Rates Could Send S&P 500 to 925 If Not Eliminated” , provides details about the potential mark down of the S&P 500 likely being in stages. I highly recommend you also watch my 9 minute, 34 second video interview with SCN’s Jane King entitled “Why Negative Rates could send the S&P 500 to 925”. In the video, I explain the math behind why the S&P 500’s declining to below 1000 may be the only remedy to eliminate the negative rates. The video also reveals some of my additional findings on the crash of 2008. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Monday Morning Memo: Passive – Smart – Smarter – Active

By Detlef Glow Click to enlarge The Evolution of the European ETF Industry When the first exchange-traded fund (ETF) was introduced to the markets, it was clear that the aim of the portfolio manager was to track the returns of the underlying index of the fund as closely as possible. But since a fund faces some restrictions, such as transaction costs or limits on the maximum weighting of a single security in the portfolio, that are not applicable for the underlying index, the difference between the returns of the index and the ETF are in some cases quite significant. Since the investment industry (and therefore also the ETF industry) is always trying to optimize its processes, ETF promoters started to develop portfolio management techniques to minimize tracking error and the tracking differences of the ETFs. The Generation 2.0 ETFs not only aimed to track the performance of the underlying index as closely as possible, the managers also attempted to optimize the returns with modern portfolio management techniques to achieve additional income that contributed to their outperformance over the index. Looking at ETFs that try to generate outperformance the “old fashioned way,” the additional income must be seen as tracking error and therefore as a negative fact. These returns were, firstly, non regular returns. Secondly, modern portfolio management techniques such as securities lending or dividend optimization strategies added an additional layer of risk to the portfolio, for which the ETF investor might have not been compensated properly. Even though the quality of ETF returns has evolved significantly, there are still a number of critics around, since it seems in some cases to be easy to beat market-capitalization-weighted benchmarks. In other cases, such as with bond indices, critics say that market capitalization is the wrong way to build an index. These criticisms have led to the development of alternative weighted indices, ranging from simple equally weighted indices to highly complex methodologies that might employ quantitative and qualitative factors to determine the weighting of the securities in the index. But, even though some promoters offer ETFs that track an alternative weighted index, these kinds of products have not found their way into the portfolios of mainstream investors. But there was and still is scientific evidence that there are some factors in the markets-such as momentum, quality, size, and value-that investors can exploit to generate higher returns than those from a market-cap-weighted index. The introduction of these factors into the mainstream ETF industry started after the financial crisis of 2008 with the first minimum variance ETFs that suited the needs of investors looking for equity portfolios that don’t show as much volatility as their underlying markets. To make these products more appealing for investors, the ETF industry called these kinds of funds “smart beta funds.” The popularity of these products led to a race in the search for new factors that can be exploited by investors, since the index and ETF promoters wanted to offer new products to their clients. But the “new factors” found by the researchers were mainly market abnormalities that disappeared shortly after they were found, or the additional returns were too small to exploit in a profitable way, since transaction costs were eating away the premium. One of the major concerns of investors with regard to smart beta ETFs is that all the factors employed do not deliver consistent outperformance. In other words, smart beta ETFs show longer periods of underperformance that make it necessary for the investor to switch at the right time between different factors to avoid the longer periods of underperformance in their portfolio. But since the right timing is the hardest call in the portfolio management process, especially for retail investors, it seems likely that a number of investors shy away from these products. In the next product generation, the index and ETF industry are attempting to make the smart beta products even smarter by combining different factors. The products improve the common smart beta ETFs. In other words, they make the smart beta concept even smarter, since the factors described above do not deliver outperformance at any particular time. One of the aims of this approach is to build a portfolio that is either in different factors at the same time or that tries to switch between factors at the right time, i.e., to unburden the investor from the timing decision in order to capture as much premium from a single factor as possible. From these semi-actively managed portfolios it is only a small step to a fully active managed portfolio wrapped in an ETF structure. Even though some market observers would label this a scandal, the introduction of actively managed ETFs will be the next logical step for the industry. Even though the first ETF following an actively managed index in Europe wasn’t a success at all, a view to the other side of the Atlantic shows that actively managed ETFs can be successful. PIMCO was able to generate very high inflows when it launched its first actively managed ETF in the U.S. The success of PIMCO might be the reason more and more promoters of actively managed funds are preparing to enter the ETF market. From my point of view this makes a lot of sense, since the ETF wrapper is a very efficient structure that opens up new distribution methods for active managers. And, I don’t see a valid reason why promoters should not try to distribute their funds through all possible channels. But to be successful active ETF managers must not only have good products, they also must build the right infrastructure for trading their funds. To be successful in the ETF industry there needs to be more than a well-known name and the listing of products on an exchange. I strongly believe this introduction will work; we already see a number of active managed funds listed by market participants on the “Deutsche Börse” in Frankfurt. At the beginning the fund promoters did not support trading their funds on exchanges and in some cases tried to close down the trading, since they felt this distribution channel would offend their established distribution channels. Those times are over, but it is still not common to buy or sell a mutual fund on an exchange unless the fund has been closed for some reason. From my point of view the trading of actively managed ETFs will become a very common way to buy mutual funds for all kinds of investors, once fund promoters officially start to use this market as a distribution channel. It is not a question of if we will see actively managed funds traded as ETFs, it is only a question of when we will see this happen. The views expressed are the views of the author, not necessarily those of Thomson Reuters Lipper.

Pakistan Likely To Enter MSCI Emerging Markets Index

MSCI is considering reclassifying the Pakistani equity market from frontier to emerging market status on June 14th, 2016. MSCI – a leading provider of research-based indexes and analytics – announced that it will release on June 14, 2016, shortly after 11:00 p.m. Central European Summer Time (CEST), the results of the 2016 Annual Market Classification Review. As a reminder, three MSCI Country Indexes are currently included on the review list of the 2016 Annual Market Classification Review: MSCI China A and MSCI Pakistan Indexes for a potential reclassification to Emerging Markets and MSCI Peru Index for a potential reclassification to Frontier Markets. It is important to note that MSCI is not the only index provider that classifies markets but is considered the reference benchmark for many markets. MSCI and other index providers base their market classification on a number of quantitative measurable and comparative criteria while aiming to avoid qualitative and/or subjective criteria. PAKISTAN: ECONOMY IN FOCUS Pakistan is a country with a population of 190 million people. Pakistan’s GDP stands at USD 250 billion (Year 2015). Pakistan’s economy continued to pick up in the fiscal year 2015 as economic reform progressed and security improved. Inflation markedly declined, and the current deficit narrowed with favorable prices for oil and other commodities. Despite global headwinds, the outlook is for continued moderate growth as structural and macroeconomic reforms deepen. Selected economic indicators (%) – Pakistan 2015 2016 Forecast 2017 Forecast GDP Growth 4.2 4.5 4.8 Inflation 4.5 3.2 4.5 Current Account Balance (share of GDP) -1.0 -1.0 -1.2 Source : Asian Development Bank CPEC : THE GAME CHANGER FOR PAKISTAN China Pakistan Economic Corridor (CPEC) is a mega project of USD 46+ billion, taking the bilateral relationship between Pakistan and China to new heights. The project is the beginning of a journey of prosperity for Pakistan and China’s Xinjiang. The economic corridor is about 3,000 kilometers long consisting of highways, railways and pipelines that will connect China’s Xinjiang province to the rest of the world through Pakistan’s Gwador port. The investment on the corridor will transform Pakistan into a regional economic hub. The corridor will be a confidence booster for investors and attract investment not only from China but other parts of the world as well. Other than transportation infrastructure, the economic corridor will provide Pakistan with the telecommunications and energy infrastructure. MSCI INDICES AND PAKISTAN – A QUICK RECAP It is important to mention that between 1994-2008, Pakistan was part of the MSCI Emerging Markets Index. After the Balance of Payment crisis in 2008, KSE was shut down for 4 months after which the country was kicked out of the Emerging Markets Index. In May 2009, Pakistan was added back in the MSCI Index, but this time it was added in the Frontier Markets Index. In June last year, MSCI put Pakistan up for official review regarding inclusion into the Emerging Markets Index. Now, as per today’s press release, MSCI will make its decision whether to upgrade or not on 14th of June. RECAP: THE MSCI PAKISTAN INDEX Click to enlarge Click to enlarge Click to enlarge Click Here for MSCI Fact Sheet INDEX METHODOLOGY The index is based on the MSCI Global Investable Indexes (GIMI) Methodology – a comprehensive and consistent approach to index construction that allows for meaningful global views and cross regional comparisons across all market capitalization size, sector and style segments and combinations. This methodology aims to provide exhaustive coverage of the relevant investment opportunity set with a strong emphasis on index liquidity, investability and replicability. The index is reviewed quarterly – in February, May, August and November – with the objective of reflecting change in the underlying equity markets in a timely manner while limiting undue index turnover. During the May and November semi-annual index reviews, the index is rebalanced and the large and mid capitalization cutoff points are recalculated. SOME IMPORTANT NUMBERS/STATS Click to enlarge WHAT TO LOOK FOR IF PAKISTAN ENTERS MSCI EMERGING MARKETS INDEX? If the decision is positive, emerging markets funds with 40-50 times the capital of frontier funds will be forced to have a look at Pakistan. In our view, this is an opportunity with a risk-reward skewed heavily towards the positive side. PSX – Pakistan Stock Exchange – currently trades at 9.0x earnings; companies have grown faster than their regional peers in USD over the last ten years. Should Pakistan enter MSCI Emerging Markets, it does so at more than 40% P/E discounts to its Asian EM peers. We don’t believe this is sustainable, hence calls for a positive re-rating of the valuations. ETFs IN FOCUS: Several ETFs and mutual funds invest in emerging markets; on the other hand, a small number of ETFs focus on frontier markets. For comparison purpose, we are taking BlackRock Capital ETFs. BlackRock Capital offers the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ), asset base of which is approx USD 25 billion when compared to BlackRock Capital’s iShares MSCI Frontier 100 Index ETF (NYSEARCA: FM ), asset base of which is merely USD 420 million. It is important to note that the fund size of most of the frontier markets ETFs are very small when compared with emerging markets ETFs. Hence, we don’t see any major selling pressure from the liquidation of frontier market funds which are invested in Pakistan, as that selling will be absorbed easily by the emerging market funds. In fact, emerging markets funds will bring in more liquidity in the market, hence, providing frontier market funds an easy exit. OUR STANCE We are of the view that it is likely that Pakistan will be given a green signal for entering MSCI Emerging Markets on June 14th, 2016. We caution against the notion that reclassification is a panacea for market ills or underperformance. Typically, reclassification (both upgrades and downgrades) have followed or been accompanied by economic and financial policy reforms, including improvements in market infrastructure. It is these more fundamental and structural reforms that attract and retain international investors and boost the confidence of domestic investors. Reclassifications are best viewed as signaling a confirmation of policy reforms and changes in market conditions. Hence, an identification problem may arise whereby improved market conditions are attributed to market reclassification decisions, whereas they are due to policy actions and reforms which lead to a reclassification. Similarly, we note that reclassification may have perverse effects if there is an ‘overshooting’ effect whereby speculation leads to higher prices in advance of a reclassification, over and above what would be justified by market/ economic fundamentals. Prices then adjust on the actual reclassification event. As highlighted in the article, Average Annual Revenue and Net Profit Growth of companies listed in Pakistan have been phenomenal between 2005-2015. Moving forward with CPEC in place, Pakistan’s inclusion in the MSCI Emerging Markets Index will be beneficial for both local as well as global investors. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.