Tag Archives: federal-reserve

Preserve Your Capital By Including Precious Metals In Portfolio

We are witnessing a horrible run in stock markets across the world. January was terrible, with all leading global indices ending in red territory. China’s benchmark Shanghai Stock Exchange slumped about 25%. The tumult has continued in February as virtually every sector, from biotech to energy and from banking to tech-has struggled. With stock markets getting hammered on daily basis, it will not be surprising to find majority of investors’ portfolios may have taken a big blow. Nouriel Roubini, noted American economist, in a recent interview ruled out that the global economy is in danger of confronting 2008 financial crisis-like situation. Nonetheless, there are not many good signs for a healthy global economy. The oil market is witnessing a carnage, emerging markets are in doldrums as a result of sliding commodity prices and capital flight, and China is slowing down. German economy, Europe’s growth engine, faltered significantly in December as industrial production lost momentum. The U.S. economy, by and large, is chugging along nicely but ambiguity over the Federal Reserve’s next round of interest rate hikes and anxiety over the run up to Presidential elections, should keep markets under tight leash. Against this backdrop, it is very likely that market participants will have a very low risk appetite. As a result, the market sentiment could remain bearish for most part of the year. Still, investors can safeguard their capital and minimize risks by including safe-haven assets such as precious metals ETFs in their portfolios. For instance, consider, Physical Precious Metal Basket Shares Trust ETF (NYSEARCA: GLTR ). The ETF, in the backdrop of the meltdown in precious metals markets as a result of stronger dollar, slumped about 20% in 2015. The situation, however, has changed dramatically this year. The ETF is up about 10%, year-to-date, performing almost on par with gold and silver and way better than other assets. The investment objective of this fund is that the shares should reflect the value of physical gold, silver, platinum and palladium in the proportions held by the trust. As of February, physical gold constitutes about 60% of the portfolio, silver accounts for about 28% of total assets, while platinum and palladium make roughly 12% of total assets. Barring palladium, which is still struggling, all other precious metals are expected to perform reasonably well this year. Gold, as I discussed earlier, stands to gain for many reasons. Firstly, the slump in oil prices amid supply glut would keep investors wary of riskier assets and create demand for safe-haven bets. Earlier this month, gold vaulted to a 7 ½ month high as investors moved their money towards safer assets. Besides, there is growing speculation that the pace of rate hike will much slower than previously anticipated. Lower interest rates would encourage investors to shift their money towards non-interest yielding assets such as precious metals. And finally, although, physical gold market has relatively low influence over prices than paper gold market, drop in mining activities, due to years of low-price environment, should also propel gold prices. Silver, meanwhile, should continue to march ahead, as the white metal, typically tends to have a positive price correlation with gold. Platinum performed badly last year. It sunk about 27%. However, it has begun the year strongly. Gaining about 4.75%, year-to-date, the metal should perform better this year as the demand from the automobile sector is likely to remain robust. Also, as I discussed earlier citing the World Investment Council report published in September, platinum mining activities in South Africa are expected to halt for next two years. This is because; an extended period of low-price environment has forced miners to drastically cut down CAPEX. 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Wild Week In The Market And How Investing Is Like Buying Groceries

Last week, along with some sharp turns in the market, came some interesting comments on Federal Reserve policy and markets from Ray Dalio, the investment guru and world’s largest hedge fund manager. Dalio, the founder of Bridgewater Associates feels that the Federal Reserve, while they may raise interest rates soon, will be forced to enact another round of Quantitative Easing (QE). QE is the purchase of assets by the Federal Reserve to stimulate the economy. It increases the size of the Fed’s balance sheet and provides support to equity prices. Much like in 1936, the Fed finds themselves painted into a corner and addicted to quantitative easing. In 1936 the Fed raised rates for the first time since the 1929 stock market crash and that tighter monetary policy caused a recession which sent equity prices tumbling. Will the Fed do that again? They are certainly trying to avoid that but must get interest rates above zero. Dalio expects a major easing from the Fed. Could we see rising interest rates courtesy of the Federal Reserve AND QE? We are contingency planners and must provide for all outcomes. On Monday of last week the S&P 500 was over 4 standard deviations away from its 50 Day Moving Average (DMA). That is a level that would denote an extreme move in a short amount of time. The last time that this occurred was in August of 2011 when the United States sovereign debt was downgraded. The following week the S&P 500 rallied over 7%. We felt that Monday was an appropriate time to put cash to work for our more aggressive clients. By the end of the week we had seen a 6.3% rally in the S&P 500 from its lows and we felt that taking some profits in a tax efficient manner was appropriate. History has shown that sharp selloffs like this tend to have reflex rallies that are prone to failure. Having seen sharp declines investors are likely to scale back risk exposure and that produces overhead resistance to stock prices. We would not be shocked and are quite prepared for the downside in prices to resume this week. Now is a very good time to reassess one’s appetite for risk and whether that is commensurate with one’s risk exposure. If you didn’t sleep well last week you need to have less risk in your portfolio. If the market selloff didn’t interfere with your zzzz’s or you felt like buying on the dip then your risk is either okay or could be increased. Take some time and think about how you reacted last week. It is going to be another fun filled week. These are the times that we thrive on and live for. Dislocations in markets provide opportunity. You can see things as problems or opportunities. If you are prepared then it is an opportunity. We are prepared with an underweight in equities and quite happy with market moves lower and dislocations. We are shopping for groceries and want to see lower prices. As Warren Buffett has often said, “Why would anyone want higher stock prices”? Know that we have room in our basket and are looking for groceries in the discount aisle. Share this article with a colleague

Is Hope For Active Management Right Around The Corner?

By DailyAlts Staff Investors are looking closely at the role of active management relative to passive investing products such as indexed ETFs, and for good reason: Between March 2009 and the end of 2014, less than one-third of active managers beat the broad stock market’s returns. Why should investors pay management fees for active products that fail to generate positive alpha? Perhaps they shouldn’t, but Neuberger Berman’s Juliana Hadas, CFA, and Andrea Pompili argue that the major factors that have contributed to active managers’ underperformance over the past five years are about to change, and that the investment environment is likely to become much more hospitable to active managers in the very near future. Ms. Hadas and Ms. Pompili make their case in the recently published whitepaper, Can Active Management Make A Combeback? “Post-financial crisis underperformance by active portfolio managers is easily explained and, we believe, only temporary,” they write, before outlining three major fundamental factors suppressing active managers’ returns: Unprecedented central bank stimulus leading to ultra-low interest rates; The magnitude of the bull market in U.S. stocks since 2009; and Flows into passive investment vehicles, such as index ETFs. Ultra-Low Interest Rates Ms. Hadas and Ms. Pompili argue that the Federal Reserve’s policy of keeping benchmark interest rates near 0% have created “valuation distortions in the market.” When companies can borrow at low interest rates, they can finance expansion with debt, rather than with cash flow from operations. What’s more, low interest rates narrow the valuation gulf between near term and more distant cash flows, making further out and more speculative cash flows comparatively more attractive than they would be in a higher interest rate environment. The good news for active managers is that the Fed appears to be preparing for an interest rate hike some time in 2015; quite possibly as early as June. Higher interest rates will result in higher financing costs, thereby sharpening the distinction between firms that have been generating profits with easy money financing, and those that have been generating profits through efficient operations. This discrepancy between companies will make it easier for active managers to beat the broad market’s beta returns, whereas the low level of return dispersion in the U.S. stock market over the past five years has made generating alpha difficult. The Stock Bull Market Since ’09 Low interest rates have helped propel the bull market in stocks since 2009, since low financing costs make it easier for U.S. companies to generate profits. According to Ms. Hadas and Ms. Pompili, 70% of the S&P 500’s returns over the past 20 years have been based on earnings, and with earnings generally easier to come by, there has been a low level of dispersion between U.S. large-cap stocks. Another way low interest rates have contributed to the bull market in stocks has been by suppressing bond yields, and thereby encouraging greater risk-taking by income-oriented investors. Stocks are generally viewed as riskier assets than bonds, and investors are taking on greater risk in the face of bond yields well below 3%. But with interest rates expected to rise later this year, that trend is likely to reverse, which should provide opportunity for active investment managers. Passive Indexing Trends With U.S. large-cap stocks generally trending higher over the past five years, it has been more difficult for active managers to beat the market’s “average” (beta) returns. This is a function of the math: If the S&P 500 returns 30% above the risk-free rate of return, and an active manager had a portfolio with a beta of 0.9, then the portfolio would have to generate more than 3% alpha to outperform the market. But if the S&P 500 only exceeded the risk-free rate by 5%, then an active portfolio would only have to generate a little more than 0.5% alpha to beat the market. In somewhat of a vicious cycle, this mathematical reality has led more investors to dump funds into passive index funds, but these funds are inadvertently momentum investments, since they’re market cap-weighted. Investors buying the SPDR S&P 500 ETF (NYSEARCA: SPY ), for example, buy into all 500 components of the S&P 500 in proportion to their index weightings, without regard to the specifics of each company. Large companies that get even larger end up taking up a greater share of the index. Should the markets turn, and active management delivers, then the trend of migrating to indexed ETFs may slow. Conclusion As Ms. Hadas and Ms. Pompili point out, the performance of active managers versus the broad market’s benchmarks tends to be cyclical and to improve during less exuberant bull markets. Once interest rates begin rising, the “valuation distortions” caused by “aggressive central bank easing” will likely reverse, in the view of the whitepaper’s authors, “creating a market environment in which underlying company fundamentals start to once again matter more.”