Tag Archives: georgia

Driving In Neutral

By Neuberger Berman Asset Allocation Committee So far, 2016 has been characterized by stomach churning swerves in market direction with little actual change in levels. When the Asset Allocation Committee recently met to update our views for the coming 12 months, most participants felt that a variety of factors was in effect, setting a speed limit on big directional market moves. The most obvious of those factors is the Federal Reserve (Fed), which now looks set to deliver only two rate hikes this year, when as recently as December the market expected as many as four. FOMC policy makers seem willing to let the dollar act as a substitute for further tightening while they await stronger economic data and evidence of core inflation growth that’s closer to their 2 percent target. The coupling of oil and equity prices is acting as another governor on higher valuations, making it hard for risk assets to sustain advances. Elsewhere, other major central banks are seemingly stuck in neutral against an uninspiring economic backdrop. European Central Bank (ECB) chief Mario Draghi received a chilly response in suggesting no further rate cuts would be coming after unveiling a new easing package in early March. In Japan, there is a genuine crisis of confidence in quantitative easing efforts now that negative rates have only produced similarly negative feedback. Meanwhile, China is caught between the need for additional stimulus and adherence to its reform agenda, increasing the risk of a significant devaluation of the yuan. In light of these constraints, the Committee believes that the recent rebound in equity prices, while welcome, needs evidence of rising earnings and improving economic fundamentals to continue. At the same time, we observe that the market has been experiencing rapid rotations among sectors and across asset classes, creating significant divergences that may yield opportunities to add value within and across individual categories. As such, with little visibility over the coming three to six months, we favor an approach of continued selectivity in pursuing risk asset opportunities through trades within asset classes rather than large directional bets, and to wait for pullbacks to consider adding to positions. Outside of non-U.S. developed market equities, the Committee maintained its neutral stance on U.S. and emerging market equity and adjusted its outlook for master limited partnerships (MLPs) to a neutral position. We are maintaining an underweight view of most developed market government securities because of our view that low yields do not compensate for the risk of higher rates, and remained cautious on emerging market debt with a bias toward hard currency sovereigns. Global Equities Among Few “Slightly Overweight” Calls History has shown that U.S. equities (as measured by the S&P 500) have often benefited when the Fed is in the midst of a tightening cycle. The main reason is that corporate earnings tend to rise as the economy strengthens, offsetting the impact of higher borrowing costs. But if you look at what’s happening during this cycle, average price-to-earnings ratios have declined by a full percentage point in the face of tepid to flat earnings growth. This fact was not lost on the Committee, which voted to maintain its neutral stance on U.S. equities even as most members expressed their belief that the country will avoid another recession for the time being. On the other hand, the Committee believes that global equities–and particularly those in developed markets outside the U.S.–may provide more opportunities over the coming 12 months. Despite the latest ECB posturing on rates, evidence is growing that past stimulus is providing a tailwind for growth. Business confidence continues to be decent, credit demand is rising, and corporate profits have yet to recover to post-crisis levels as they have done in the U.S. Among fixed-income assets, the Committee continues to favor high yield given current prevailing yields and the outlook for credit quality. But given the likelihood for ongoing fallout from weakness in the energy sector, we continue to prefer short-duration issues and higher-rated credits, at least for the near term. We feel clients looking for additional fixed-income exposure may want to consider shifting their exposures in assets such as core European bonds, burdened by negative yields, to high yield and select portions of the emerging market debt universe. Move to “Neutral” on MLPs The move to neutral from slightly overweight on MLPs was a difficult one given our prevailing belief that investors had unfairly punished the asset class amid ongoing weakness in energy markets. Many market participants have been caught off-guard by both the depth and persistence of that weakness, and the Committee feels that further declines in commodity prices in recent months have increased the potential for additional restructuring in the energy sector and added to the downside risks faced by midstream operators in particular. Broader Array of Risks The Committee agreed that a step-devaluation of the Chinese yuan remains the centerpiece risk in the investment outlook over the coming 12 months, but other downside scenarios featured more prominently. Chief among these was the risk that the Fed proceeds with tightening too quickly and undermines confidence in market liquidity, and that emerging markets such as Brazil create a contagion effect for developed market risk assets. Political risks are also rising, including the possibility of “Brexit” as the UK holds a June referendum on membership in the EU, and uncertainty around the U.S. presidential election. Driving in neutral can still get you down the road, but not without shifting into “drive” from time to time. In the months ahead, we believe it will be important to be vigilant for opportunities to add during market pullbacks and pursue trades within broad asset categories when the associated risks are acceptable. We believe the value of active management may be more evident during periods when asset allocators have little cause for conviction, and we anticipate that a firm hand on the wheel over the coming months will be key in helping navigate this uneven terrain. This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results. The views expressed herein are generally those of Neuberger Berman’s Asset Allocation Committee which comprises professionals across multiple disciplines, including equity and fixed income strategists and portfolio managers. The Asset Allocation Committee reviews and sets long-term asset allocation models, establishes preferred near-term tactical asset class allocations and, upon request, reviews asset allocations for large diversified mandates and makes client-specific asset allocation recommendations. The views and recommendations of the Asset Allocation Committee may not reflect the views of the firm as a whole and Neuberger Berman advisors and portfolio managers may recommend or take contrary positions to the views and recommendation of the Asset Allocation Committee. The Asset Allocation Committee views do not constitute a prediction or projection of future events or future market behavior. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. A bond’s value may fluctuate based on interest rates, market conditions, credit quality and other factors. You may have a gain or a loss if you sell your bonds prior to maturity. Of course, bonds are subject to the credit risk of the issuer. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (NYSE: AMT ) and/or state and local taxes, based on the investor’s state of residence. High-yield bonds, also known as “junk bonds,” are considered speculative and carry a greater risk of default than investment-grade bonds. Their market value tends to be more volatile than investment-grade bonds and may fluctuate based on interest rates, market conditions, credit quality, political events, currency devaluation and other factors. High Yield Bonds are not suitable for all investors and the risks of these bonds should be weighed against the potential rewards. Neither Neuberger Berman nor its employees provide tax or legal advice. You should contact a tax advisor regarding the suitability of tax-exempt investments in your portfolio. Government Bonds and Treasury Bills are backed by the full faith and credit of the United States Government as to the timely payment of principal and interest. Investing in the stocks of even the largest companies involves all the risks of stock market investing, including the risk that they may lose value due to overall market or economic conditions. Small- and mid-capitalization stocks are more vulnerable to financial risks and other risks than stocks of larger companies. They also trade less frequently and in lower volume than larger company stocks, so their market prices tend to be more volatile. Investing in foreign securities involves greater risks than investing in securities of U.S. issuers, including currency fluctuations, interest rates, potential political instability, restrictions on foreign investors, less regulation and less market liquidity. The sale or purchase of commodities is usually carried out through futures contracts or options on futures, which involve significant risks, such as volatility in price, high leverage and illiquidity. This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions. © 2009-2016 Neuberger Berman LLC. | All rights reserved

No Sales, No Profits, No Bull: What Happens When Valuations And Central Banks Collide

Total business sales – sales by wholesalers, manufacturers and retailers – have fallen 5% from their July 2014 peak of $1.365 trillion. At $1.296 trillion for January 2016, total business sales have dropped back to where they were in January of 2013 ($1.293 trillion). In fact, the erosion of total sales by American businesses are even uglier when one takes inflation into account. Over the last 20 years, whenever total business sales continued on an upward trajectory, the U.S. economy steered clear of recession. The tech wreck of 2000 and the attacks in September of 2001 resulted in a downward move for business revenue; economic contraction was not far behind. The financial crisis slammed the brakes on business sales in 2008, ushering in The Great Recession; it ended around the same time that businesses began to increase their revenue streams. Might the year-and-a-half long downturn in revenue generation through January of 2016 be an anomaly? Yes and no. Yes, it is certainly possible that we did not hit “peak sales” in July of 2014; rather, the U.S. economy may still find solid footing in the months ahead. On the other hand, take a look what happened to the U.S. dollar via PowerShares DB Dollar Bullish (NYSEARCA: UUP ) beginning in July of 2014. After years of trading near decade lows, the greenback rocketed 25% against major world currencies. The result? U.S. exporters struggled to sell their wares, commodity prices collapsed and foreign stocks never quite recovered. The dollar’s vertical move adversely impacted earnings as well. Consider earnings-per-share (EPS) for the S&P 500. More than half of the profits at S&P 500 corporations emanate from overseas, where significantly devalued currencies hindered the proverbial “bottom line.” Specifically, earnings hit a high water mark in Q3 2014 (July-September). Earnings have been falling ever since. Everything comes back to the dollar’s epic ascent in the third quarter of 2014. Slumping sales. Slumping earnings. Even the top for non-U.S. equities. Take a look at Vanguard FTSE All World ex U.S. (NYSEARCA: VEU ). Between July 1, 2014 and May 21, 2015, the exchange-traded tracker plummeted and recovered. However, it was unable to claim higher ground. Worse yet, VEU has depreciated substantially since the S&P 500 set a record high in May of last year. The effect becomes even more noticeable when we isolate a region like Europe via Vanguard Europe (NYSEARCA: VGK ) or a sovereign like the United Kingdom via iShares United Kingdom (NYSEARCA: EWU ). Whereas U.S. market highs can be traced back to ten-and-a-half months ago (May 21), VGK and EWU have never recovered their July 2014 glory. A cynic might say, “Who cares if most of the world’s equities have been declining for 21 months?” After all, the S&P 500 is within a stone’s throw of recapturing its all-time record (2130) at 2060. Yet one of the reasons for the violent 14% correction of the S&P 500 in January through mid-February was the threat that the dollar would soar to new heights if the Federal Reserve kept its pledge to hike rates four times in 2016. It has since lowered the bar to two, and many believe they’d be lucky to get away with one. Unfortunately, the Fed may be caught in a pickle. Former Dallas Fed president Richard Fisher acknowledges that the institution deliberately created a wealth effect by front-loading a rally in stocks and real estate. The problem with doing so? Wealth effects eventually reverse themselves on the back-end, and the back-end typically begins at valuation extremes. Make no mistake about it. We are sitting on valuation extremes. Based on estimates of as-reported earnings for the S&P 500’s first quarter of 2016 ($89.4), the current price-to-earnings ratio is at 23. Even the non-GAAP, adjusted operating earnings ($100.6) is a lofty 20.5. And low interest rates alone are not a panacea for exorbitant valuation levels. Business sales stagnation. Prolonged profit weakness. And an economy that has been growing at a much slower pace over the last six months (1% or less) – far more lethargic than the 2% growth since the end of the Great Recession? Central banks have the power to prop up asset prices. Nevertheless, asset price reflation can quickly shift to deflation, particularly when revenue and earnings subside. Disclosure: 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.

Successful ETF Launches Of Q1

The ETF industry is growing by leaps and bounds irrespective of whether the markets are on a bull or bear run. Thanks go largely to unique strategies, creativity, transparency, diversification benefits, enhanced tax competences, low turnover and low cost. In fact, ETFs are now considered as a preferred investment vehicle across the globe over mutual funds and hedge funds. U.S. ETFs have gathered about $2.2 billion of capital so far in 2016, as per etf.com . Though it is much lower than $59 billion inflows seen in the year-ago period, both existing and new issuers remain active in binging innovative products to the market. About 37 ETFs have been launched in the first quarter, taking the total number of ETFs to 1,863 and total assets to over $2.1 billion. Below, we highlight four ETFs that have gathered maximum attention from investors and have a huge potential to dominate the market in the coming months. SPDR SSGA Gender Diversity Index ETF (NYSEARCA: SHE ) Several researches found that companies that have female employees in the top brass have a tendency to outperform the market. As per the latest study from market index provider MSCI , companies with boardrooms featuring “strong female leadership” have generated 36.4% greater return on equity since 2009 than male-dominated companies. A new study by Quantopian, a Boston-based trading platform, has revealed that companies with female CEOs in the Fortune 1000 generated 226% better returns than the S&P 500 over the past 12 years (read: Women Leaders ETFs Head to Head: WIL vs. SHE ). Given the long history of outperformance, investors have shown their eagerness to add female-centric companies to their portfolio. This is easily depicted by the successful debut of SHE, which has attracted nearly $265 million in assets since its inception on International Women’s Day. It is the most popular ETF launch of Q1. The fund offers exposure to the companies that have managed to recruit and retain women in leadership positions by tracking the SSGA Gender Diversity Index. Holding 140 stocks in its basket, it is moderately concentrated in the top firms with each holding less than 6.6% share. In terms of sector, financials, healthcare, information technology, consumer discretionary, and industrials occupy the top five positions with double-digit exposure each. The fund charges 20 bps in annual fees and trades in solid volume of 310,000 shares a day on average. PowerShares DWA Tactical Multi-Asset Income Portfolio (NASDAQ: DWIN ) Amid heightened uncertainty and volatility, investors are seeking to employ strategies that could fetch higher returns with lower risk to their portfolio. This has raised the appeal for multi-asset ETFs, which offer huge diversification benefits by investing across different asset classes having low correlations with each other. These products aim to provide a high level of current income with stability and potential for long-term appreciation while they simultaneously avoid the downside risk of specific asset classes (read: Multi-Asset ETFs to Counter Volatility ). As a result, DWIN has become extremely popular among investors in its first month of debut having amassed $35.5 million in AUM. It is a fund of five funds and tracks the Dorsey Wright Multi-Asset Income Index, which seeks to capitalize on seven different income-producing market segments including corporate bonds, emerging market debt, dividend stocks, MLPs, REITs, and preferred shares based on relative strength and current yield criteria. Currently, each of the five ETFs in the basket accounts for around 20% of the assets, making the portfolio highly diversified. The fund is quite expensive, charging 69 bps in fees and expenses while volume is light at around 40,000 shares. ETRACS 2xMonthly Leveraged S&P MLP Index ETN Series B (NYSEARCA: MLPZ ) This is a leveraged ETN targeting the MLP corner of the broad energy segment. It delivers twice (2x or 200%) the returns of the monthly performance of the S&P MLP Index. Launched on February 8, the note is catching investors’ eye amid wild swings in oil prices. This is because most MLPs, which are engaged in the processing and transportation of energy commodities such as natural gas, crude oil, and refined products, are best positioned to withstand the decline in oil prices and be the major beneficiaries of an oil boom in the long term. These have relatively consistent and predictable cash flows, making them safer and less risky than other plays in the broader energy space. Additionally, the leveraged factor tacked on it is encouraging investors to make big gains on quick turns in oil prices. MLPZ has gathered about $34.9 million in its asset base since its inception but trades in light volume of about 30,000 shares. Expense ratio comes in at 0.95%. ETRACS 2xMonthly Leveraged Alerian MLP Infrastructure Index ETN Series B (NYSEARCA: MLPQ ) MLPQ is also a leveraged MLP ETN launching on February 8 and providing two times exposure but tracks the Alerian MLP Infrastructure Index. It saw slightly lower inflows of $34.7 million and even lower average daily volumes than MLPZ. However, it charges lower fees by 10 bps. Link to the original post on Zacks.com