Tag Archives: function

Will China Pull Back Up SLV?

China’s possible economic slowdown may have contributed to the recent fall in the price of SLV. China’s demand for silver is expected to grow this year in part due to an increase in installation of solar panels. The physical demand for silver is less likely to impact the price of SLV. While all eyes are set towards the Greek debt crisis, the price of the iShares Silver Trust ETF (NYSEARCA: SLV ) has come down in the past few weeks. Some attributed the fall in prices , in part, to fears of an economic slowdown in China. Nonetheless, China’s demand for silver is still expected to rise this year. But will China pull up the price of SLV? As I have pointed out in the past, the physical demand for silver, while plays an important role in moving the price of silver, is still only secondary to the changes in the demand for silver for investment purposes. The same goes for China’s growing demand for silver. One of the main growing industries in China where the demand for silver has increased is in the photovoltaic business, i.e. the installation of solar panels. So far this year, China was able to ramp up its installation capacity – it reached 5.04 GW in the first quarter. This year, China set a high target of installing a total of 17.8 GW of solar PV. If so, this will account for nearly a third of the global solar PV installations for 2015. How much silver is needed to reach this 17.8 GW goal? According to PV-Tech , it takes nearly 80 tons of silver, or 2.8 million ounces of silver, to generate one gigawatt of electricity from solar. Considering China aims to install 17.8 GW, this means it will need around 50 million ounces of silver. On a global scale, with an estimate of 55 GW, the world’s demand for silver in the PV solar industry will be around 154 million ounces – nearly two and a half times the amount of silver consumed in this industry back in 2014; it’s also 14% of total physical demand of silver. Last year , however, this industry accounted for only 5.6% of the physical demand of silver. Moreover, the demand for silver in this industry has gone down since its peak year – 2011. Color me dubious, but I’m a bit skeptic that China will be able to reach such a high target, let alone need to ramp up its solar industry capacity so rapidly especially now that oil prices have gone down. Keep in mind, in previous years, the role of PV solar was small from the total global demand for silver. And China’s demand for silver, while important, hasn’t driven up the price of SLV in the past few years. But even if you do believe China’s demand for silver will rise and its economy isn’t slowing down, it’s still a stretch to consider this turn of events will increase the price of SLV. Thus, it’s less likely that China, even if it does increase its demand for silver, will drive up SLV. I think the drama in Greece, which has raised the uncertainty in the financial markets mainly in forex, and the potential change in the Federal Reverse’s policy in the coming months are likely to lead the way in moving the price of SLV. When it comes to the Fed, even though Yellen keeps promising it will raise rates this year, the market isn’t convinced: According to the bond market, the implied probabilities of a rate hike in September have fallen to only 14% and 50% in December. The minutes of the FOMC meeting revealed that some members still think it could be too soon to raise rates: “Most participants judged that the conditions for policy firming had not yet been achieved; a number of them cautioned against a premature decision.” Other members thought the conditions for a rate hike is plausible in the very near term: “Some participants viewed the economic conditions for increasing the target range for the federal funds rate as having been met or were confident that they would be met shortly. They identified several possible risks associated with delaying the start of policy firming. One such risk was the possibility that the Committee might need to tighten more rapidly than financial markets currently anticipate – an outcome that could be associated with a significant rise in longer-term interest rates or heightened financial market volatility.” The Greek saga could also push the rate hike to 2016 if Greece were to exit the EU; a Grexit could further raise the uncertainty in the financial markets and provide an excuse for the doves in the Federal Reserve to err on the side of caution by keeping rates low until the beginning of 2016 and see how the Greek exit plays out. China is expected to increase its demand for silver and the solar industry will likely to take a bigger role in the physical demand for silver. It’s still possible that China’s demand will grow slower mainly if its economy slows down. But as for the price of SLV, it seems less likely that even a higher growth path for China’s silver consumption will drive up, for extended periods, the price of this precious metal. (For more please see: ” Is SLV about to change course? “). Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.

How To End Index Gaming

There was an article at Bloomberg on gaming additions to and deletions from indexes , and at least two comments on it ( one , two ). You can read them at your convenience; in this short post I would like to point out two ways to stop the gaming. Define your index to include all securities in the class (say, all U.S.-based stocks with over $10 million in market cap), or Control your index so that additions and deletions are done at your leisure, and not in any predictable way. The gaming problem occurs because index funds find that they have to buy or sell stocks when indexes change, and more flexible investors act more quickly, causing the index funds to transact at less favorable prices. You never want to be in the position of being forced to make a trade. The first solution means using an index like the Wilshire 5000 , which in principle covers almost all stocks that you would care about. Index additions would happen at things like IPOs and spinoffs, and deletions at things like takeovers — both of which are natural liquidity events. Solution one would be relatively easy to manage, but not everyone wants to own a broad market fund. The second solution remedies the situation more generally, at a cost that index fund buyers would not exactly know what the index was in the short-run. Solution two destroys comparability, but the funds would change the target percentages when they felt it was advantageous to do so whether it was: Make the change immediately, like the flexible investors do, or Phase it in over time. And to do this, you might ask for reporting waivers from the SEC for up to x% of the total fund, whatever is currently in transition. The main idea is this: you aren’t forced to trade on anyone else’s schedule. The only thing leading you would be what is best for your investors, because if you don’t do well for them, they will leave you. Now, that implies that if you were to say that your intent is to mimic the S&P 500 index, but with some flexibility, that would invite easy comparisons, such that you would be less free to deviate too far. But if you said your intent was more akin to the Russell 1000 or 3000, there would be more room to maneuver. That said, choosing an index is a marketing decision, and more people want the S&P 500 than the Wilshire 5000, much less the US Largecap Index. So, maybe with solution two the gaming problem isn’t so easy to escape, or better, you can choose which problem you want. Perhaps the one bit of practical advice here then is to investors — choose a broad market index like the Wilshire 5000. At least your index fund won’t get so easily gamed, and given the small cap effect over time, you’ll probably do better than the S&P 500, even excluding the effects of gaming. There, a simple bit of advice. Till next time. Disclosure: None

5 Ways To Beat The Market: Part 4 Revisited

Summary •In a series of articles in December 2014, I highlighted five buy-and-hold strategies that have historically outperformed the S&P 500 (SPY). •Stock ownership by U.S. households is low and falling even as the barriers to entering the market have been greatly reduced. •Investors should understand simple and easy to implement strategies that have been shown to outperform the market over long time intervals. •The fourth of five strategies I will revisit in this series of articles is consistent dividend growth investing which has seen these stocks produce higher risk-adjusted returns over time. In a series of articles in December 2014, I demonstrated five buy-and-hold strategies – size, value, low volatility, dividend growth, and equal weighting, that have historically outperformed the S&P 500 (NYSEARCA: SPY ). I covered an update to the size factor published on Wednesday, posted an update to the value factor on Thursday, and published an update on the low volatility anomlay on Friday. In that series, I demonstrated that while technological barriers and costs to market access have been falling, the number of households that own stocks in non-retirement accounts has been falling as well. Less that 14% of U.S. households directly own stocks, which is less than half of the amount of households that own dogs or cats , and less than half of the proportion of households that own guns . The percentage of households that directly own stocks is even less than the percentage of households that have Netflix or Hulu . The strategies I discussed in this series are low cost ways of getting broadly diversified domestic equity exposure with factor tilts that have generated long-run structural alpha. I want to keep these investor topics in front of the Seeking Alpha readership, so I will re-visit these principles with a discussion of the first half 2015 returns of these strategies in a series of five articles over five business days. Reprisals of these articles will allow me to continually update the long-run returns of these strategies for the readership. Dividend Aristocrats While people can complicate investing in a myriad of ways, only two characteristics ultimately matter – risk and return. My personal and professional investing revolves around the simple maxim of trying to earn incremental returns for the same or less risk. The strategy highlighted below has accomplished this feat over long time horizons, and is easily replicable in financial markets. In addition to the bellwether S&P 500, Standard and Poor’s produces the S&P 500 Dividend Aristocrats Index . (Please see linked microsite for more information.) This index, which is replicated by the ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA: NOBL ), measures the performance of equal weighted holdings of S&P 500 constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years. To put this into perspective, the average S&P 500 constituent now stays in the index for an average of only eighteen years , so the list of companies who have had the discipline and financial wherewithal to pay increasing dividends for an even longer period is necessarily short at 52 companies (10.4% of the index). Detailed below is a twenty-year return history for this index relative to the S&P 500. The Dividend Aristocrats have produced higher average annual returns, outperforming the S&P 500 by 2.4% per year. This approach has also produced returns with roughly three-quarters of the risk of the market, as measured by the standard deviation of annual returns as demonstrated in the cumulative return profile graph and annual return series detailed below: (click to enlarge) (click to enlarge) Source: Standard and Poor’s’ Bloomberg Notably, the Dividend Aristocrats outperformed the S&P 500 in every down year for the latter index (see shading above), gleaning part of its outperformance through lower drawdowns in weak market environments. Another notable factor of the dividend strategy is that when it underperformed the S&P 500 by the largest differential (1998, 1999, and 2007) the market was headed towards large overall losses. Maybe then it is a negative sign that the underperformance of the Dividend Aristocrats in the first half of 2015 was its largest since the 2007 top. The Dividend Aristocrats posted their first negative return for a half-year since 2010. Perhaps, this correlation between Dividend Aristocrat underperformance and market tops is spurious and not a leading indicator, but it makes sense that prior to the tech bubble burst in the early 2000s that the Dividend Aristocrats naturally featured less recent start-ups because of the long performance requirements for inclusion. It also makes sense that when markets were heading to new all-time highs in 2007, the market correction in 2008 would be less severe for the high quality constituents in the Dividend Aristocrats index, which have demonstrated the ability to manage through multiple business cycles. I have now dedicated several paragraphs to dividend growth investing in companies with a policy to offer consistent and growing dividends without addressing the elephant in the room. Do dividends matter?! Certainly academics have long contested that dividends should not matter to the value of the firm, and can even be inefficient given shareholder taxation. Absent taxes, investors should be indifferent between a share buyback and a dividend, which are different forms of the same transaction – returning cash to shareholders. Paying dividends when the firm has projects that can earn a return above their cost of capital would lower the value of the firm over time. Merton Miller, Nobel Prize winner and one of the fathers of capital structure theorem, tackled the debate in a 1982 paper entitled ” Do Dividends Really Matter .” My takeaway from his qualitative analysis is that paying consistently rising dividends is a discipline that ensures that the company is appropriately levered and making well planned investment decisions. In Friday’s update article on exploiting the Low Volatility Anomaly , I demonstrated that lower risk stocks have outperformed the broader market and higher risk stocks over the last twenty plus years in markets around the world. The business model of Dividend Aristocrats must be inherently stable and produce continual free cash flow through the business cycle or these companies would not be able to maintain their record of paying increasing dividends for over a quarter century. The return profile of the Dividend Aristocrats is much more correlated to the S&P Low Volatility Index ( SPLV , r= 0.92) than the S&P 500 (r = 0.84 ), which lends credence to the strategy’s low volatility nature and stability through differing market environments. I have chosen to detail the Dividend Aristocrats and Low Volatility stocks separately because I believe part of the strong performance of the Dividend Aristocrats is also attributable to the fifth factor tilt highlighted in my concluding article in this series update to be published tomorrow. Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I am/we are long NOBL, SPLV, SPY. (More…) 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.