Tag Archives: ideas

Have Silver Prices Reached A Bottom? ETFs In Focus

There is no doubt that silver has taken cues from the recent free fall in gold prices amid concerns of an interest rate hike by the Fed in their December meeting. A rising interest rate environment lowers the appeal for zero-yielding precious metals like silver. Spot silver prices were recovering for most of October but started dropping from the end of the month following the Fed’s hawkish meeting and stellar jobs report. After enjoying a short-term spike in the wake of the gruesome Paris terror attack last Friday, spot silver prices fell again to its three-month low this week and are currently down more than 9% year to date and below the one-year high by 22%. Therefore, it remains a matter of debate whether silver prices are really crashing or have already reached their bottom. There are a number of factors which indicate that silver prices will indeed rebound and that too even strongly. First, although there is a strong chance of an interest rate rise, the most recent Federal Open Market Committee (“FOMC”) meeting hinted that the hike will be soft. This has led to a pullback in the U.S. dollar and again brightened the prospect of precious metals as an investment asset. Second, recent growth forecasts suggested that the global economic slowdown is more pronounced than expected. Recently, the Organization for Economic Co-operation and Development (“OECD”) cut its 2015 global growth forecast to 2.9% from 3% expected earlier. The sluggish growth will largely be due to China, which is projected to grow by 6.8% in 2015, its lowest in 25 years. Precious metals like gold and silver are considered as an excellent economic hedge during a prolonged period of economic downturn, as investors prefer them over riskier assets such as stocks. The present slide in silver prices also presents a good buying opportunity. Finally, since silver is used in a number of key industrial applications, China’s economic slowdown is expected to hurt its demand. However, the white metal is expected to draw leverage from its use as the best metallic conductor in solar panels. About 3 million ounces of silver are required to generate one gigawatt of electricity from solar energy. Increasing government efforts to curb carbon dioxide emissions are boosting the demand for solar panels across the world. Most of the demand is likely to come from China, which is expected to become the world’s largest installer of solar panels this year. Despite the white metal hitting a three-year low price this week, silver mining ETFs rebounded in the last five days (as of November 19, 2015). Investors should closely monitor the movement of these ETFs as the rally is expected to continue in the coming days. Global X Silver Miners ETF (NYSEARCA: SIL ) This ETF follows the price and yield performance of the Solactive Global Silver Miners Index, measuring the performance of the silver mining industry. The fund holds 25 stocks in its basket. Industrias Penoles Cp, Silver Wheaton Corp. (NYSE: SLW ) and Tahoe Resources Inc. (NYSE: TAHO ) are the top three holdings in the fund with allocations of 11.59%, 11.17% and 11.08%, respectively. The top 10 holdings account for 74.24% of the fund’s assets. The ETF is also highly focused on Canadian firms with a 57.96% share, followed by U.S. (12.34%) and Mexico (11.15%). SIL has gathered about $131 million in assets and trades in an average volume of roughly 78,000 shares per day. It charges 65 bps in fees from investors per year. The product lost 29.7% so far this year but was up 4.4% in the past five days. iShares MSCI Global Silver Miners (NYSEARCA: SLVP ) This ETF tracks the price and yield performance of the MSCI ACWI Select Silver Miners Investable Market Index, which provides exposure to companies primarily engaged in the business of silver mining in both developed and emerging markets. The fund holds 30 stocks in its basket. Canadian firms dominate the fund’s portfolio with a 59.49% share, followed by U.K. (13.52%) and the U.S. (9.58%). Silver Wheaton, Fresnillo Plc ( OTCPK:FNLPF ) and Industrias Peñoles occupy the top three positions in the basket with shares of 23.52%, 10.93% and 7.54%, respectively. The top 10 holdings comprise 71.4% of the fund. Notably, the fund also offers some exposure to the broader precious metals and minerals sector (29.72%) and gold (9.23%), apart from silver (60.84%). The product has amassed over $12 million in its asset base and trades in a paltry volume of around 17,000 shares a day. It charges investors 39 bps in fees per year. The fund shed 32.1% in the year-to-date timeframe but returned 2.9% in the last five days. Original Post Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Are The Tailwinds For Stocks Turning Into Tornadoes?

The risk of hold-n-hope at a time when valuation levels are extreme and market internals are sketchy is a recipe for disaster. In contrast, tactical shifts designed to reduce risk when valuations are extreme and market internals are weakening can lessen the adverse impact of bearish catastrophes. A breakdown in market breadth accompanied by highly overvalued equity prices should be met with a decision to reduce one’s risk exposure. Recently, I was speaking with one of the co-founders of the popular exchange-traded fund web site, ETF Database . He wanted to get my thoughts about the problems with “buy-n-hold.” I did not hesitate to give him an earful. Rather than chronicle my conversation in its entirety, or reiterate my commentary from dozens of previous articles on the topic, readers may wish to contemplate the risk of holding onto a permanent portfolio at this moment. Indeed, the risk of hold-n-hope at a time when valuation levels are extreme and market internals are sketchy is a recipe for disaster. For instance, assume that your approach to investing is to hold 80%, 90% or 100% in U.S. stocks for the next 30 years. Your reasoning? Stocks are extremely unlikely to lose value over a 10-year span, let alone a 30-year period. Unfortunately, at this particular juncture in the bull market cycle, current stock valuations suggest that it is quite possible, if not probable, that the asset class will lose HALF of its value in the next bear market. Why is it worth considering 50% depreciation in stock prices? It happened in 2000. It happened in 2007. And the recent extremes in the median price-earnings ratios (P/E) and median price-sales ratios (P/S) actually went beyond the peaks hit in 2000 and in 2007. What happens, then, if your portfolio is worth HALF of what it was worth at the bull market top. If you are fortunate enough to witness an 8-year bull market compounding at 9% from the bearish bottom, you will only find yourself back at the starting gate. Even Steven. And that’s after realizing a remarkable 9% compounded for eight years! Keep in mind, the break-even scenario described above also implies that one never wavered on the hold-n-hope approach. You never once panicked. You never once sold. You never came to the conclusion at any point that the return of your principal was more important to you than the return on your principal. Eight years. Same dollars in your accounts, though they would have less purchasing power due to inflation. Heck, at that time, people will be thinking about who they might like to replace President Hillary Clinton as she is rounding the bases of her second term. (That’s not a prediction… just an effort at some humor.) In contrast, tactical shifts designed to reduce risk when valuations are extreme and market internals are weakening can lessen the adverse impact of bearish catastrophes. An individual who loses HALF of his/her account value needs 100% to recover. The individual who only loses 20% requires 25% to be made whole. If that takes a year or two or even three, the individual would have 60 more months in the hypothetical 8-year bull cycle to grow his/her account value substantially. Hold-n-hope advocates disparage the notion that one can reduce exposure to riskier assets (or raise them) in a manner that might prove successful. Doing so, they claim, amounts to little more than sporadic market timing. That is incorrect. Had one simply used extreme valuations alongside deteriorating market internals to reduce exposure to U.S. stocks in 2000 and 2007, they’d have preserved more of their account values for enhanced long-term compounded growth. Consider valuations at the start of the year 2000. The trailing twelve month P/E (34.0) and trailing 10 year P/E (44.2) for the S&P 500 had been hitting never-before-seen extremes in history. In the same vein, the New York Stock Exchange Advance Decline (A/D) line was buckling at an increasingly rapid pace; the downward slope of its 200-day moving average indicated fewer and fewer participants in the “New Economy” bull. The deterioration in market breadth coupled with extreme overvaluation prior to the March 2000 bearish beginnings provided ample opportunity for investors to lower risk exposure. What’s more, since the improvement that occurred for the NYSE A/D line in the broader stock market in 2001 as well as 2002 was not accompanied by improvement in the NASDAQ A/D Line – and since there was little improvement in fundamental value – maintaining a lower risk profile for longer was warranted. Now let’s turn our focus to the year 2007. By the middle of that year, the trailing twelve month P/E (20.0) and trailing 10 year P/E (27.3) had been signaling caution. A wide variety of other valuation methodologies were also indicating a severely overpriced backdrop. As if that weren’t enough, the NYSE A/D Line began showing significant and persistence weakness as 2008 had been getting underway. Not paying attention to the breakdown resulted in unnecessary pain for investors. Again, a breakdown in market breadth accompanied by highly overvalued equity prices should be met with a decision to reduce one’s risk exposure. One does not have to short the market or seek to eliminate risk entirely. However, it is sensible to insure against the possibility of monstrous loss. What’s more, when improving market internals occur in conjunction with more favorable stock valuations – as they did in 2002 and 2009 – one can rebalance back to a target allocation. So what are the circumstances for today’s valuations and today’s market internals? Not so hot. As I mentioned earlier, the median price-earnings ratios (P/E) and price-sales ratios (P/S) actually surmounted the peaks at the end of the last two bull market cycles – the metrics went beyond the valuation peaks hit in 2000 and in 2007. Corporate earnings have now fallen from a height of $106 in 2014 to current levels of $95.4 on the S&P 500 for a 10% decline. They’ve fallen for two consecutive quarters and they are expected to fall in Q4 in what has been dubbed an “earnings recession.” The trailing 12-month P/E Ratio is 22.7, while the average since 1870 is 16.6. Meanwhile, the PE10 at 26 sits in highest quintile, implying that equities are severely overpriced. What about forward 12 month P/Es? Aren’t they still attractive? Although this “guestimate” methodology did little to help folks avoid the staggering losses of 2000 and 2007, the forward P/E of 17.2 right now is higher than it was in 2007 and it is well above the Goldman Sachs 35-year average (13.0). Naturally, perma-bulls and buy-n-hold advocates alike have endeavored to paint a prettier picture. Just exclude energy from earnings per share. For that matter, exclude corporations with 50% or more of their profits coming from overseas, and the earnings picture brightens considerably. Now how silly is the mistake of “Ex energy” or “Ex foreign exposure?” That’s akin to tossing the double-digit earnings expansion of the health care sector because the results are too wonderful. That’s about as sensible as removing the positive contributions from the consumer discretionary sector, since the savings at the pump have presumably gone into spending online or eating at restaurants or purchases at the auto mall. Conjuring up “Ex energy” is like putting lipstick on an elderly pig or providing a face lift for an aging dog. (Yes… those politically incorrect references.) Remember, “Ex-tech” discussions were floating around in 2000. “Ex-financials” were popular with analysts in 2007. If you’re going to argue “Ex energy” earnings per share today, then you should have ran with this line of thinking when crude traded north of $105 per barrel. Bottom line? It is true that valuations only carry weight when stock tailwinds turn to stock tornadoes; it is accurate than decidedly overpriced equities could thrive until they become insanely priced. Nevertheless, booms become busts and the current bull cycle is no different. It follows that preparing for a bust involves monitoring the forces that drive valuations as well as monitoring market internals. For instance, we know that ultra-low borrowing costs over the last seven years have fueled everything from consumer purchasing activity to mortgage refinancing to real estate speculation to corporate share buybacks. The question an astute investor may wish to pursue is whether or not corporations will even be positioned to take on more debt to buy back their shares going forward. Total corporate debt has more than DOUBLED since pre-crisis levels of 2007, while the average interest paid on debt for corporations has jumped from 3.5% in 2007 to 4.5%. That’s right. Corporations are paying more and more of the money they make/borrow to service TWICE as much debt at HIGHER interest rates than they were paying in 2007. Meanwhile, the Federal Reserve’s upcoming directional shift will make it more expensive to borrow new money in the bond market, hampering stock buybacks as cash flow from sales continues to decline. For the time being, an allocation to S&P 500 proxies like the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is holding up admirably. If you are over-allocated to riskier segments of the equity markets or higher-yielding bond markets, take your small gain or “tax-loss harvest” the small loss. Valuations for small caps in the iShares Russell 2000 ETF (NYSEARCA: IWM ) are even more troubling than their larger-cap brethren. The rising price ratio for the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ): iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) also indicates investor preference for perceived safety. 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.

Don’t Be This Guy

Take a look at this picture, which I took a few years ago, on a Friday afternoon, on a New York/New Jersey ferry. After a long and stressful work week (it was 2008), the gentleman in the photo was more than a little inebriated (i.e., could barely stand up), probably the victim of an early happy hour. Now, you should also know that these ferries are fast, and the winds on the river are strong – the wind is often strong enough to blow glasses off your face. This poor soul had urgent business that was unable to wait for the trip across the river, so he walked to the front of the ferry, unzipped, and relieved himself over the bow-directly into what was probably a 35-knot headwind. Though this happened a while ago, the lesson and the aftermath made a lasting impression (probably more so on the people who did not see it coming and did not step out of the spray). Though few of us might commit the Technicolor version of this error, financial commentators do it all the time, in other ways. I spent some time this weekend doing a lot of reading – everything from social media, “big” media, gurus and pundits, and paid research. It was interesting to see the commonalities across the group (a less kind assessment might be “groupthink”), but I saw one error repeatedly: Attempts to catch or call a trend turn with no justification. This error can be hazardous to your financial health, so let me share a few thoughts. Why we are always looking for the turn I think there are good reasons why traders are always looking for the end of the trend. Many of us who do this are competitive and contrary in the extreme. I joke with people that I could have a conversation like this: Me: “Look at the pretty blue sky.” You: “Yes, that really is a pretty color of blue.” Me (now concerned because I agree with someone else): “Well… is it really blue? Isn’t it more blue green? And we know it’s essentially an optical illusion anyway…” This tendency is natural and pretty common among traders. On one hand, it’s a very good thing – you will do your own work, be naturally distrustful of outside opinions and cynical about information, and will work to think critically about everything. But it’s also a weakness because it makes us naturally inclined to see any market movement and think that the crowd is wrong. The crowd is not always wrong; often, they are right and they are right for a very long time. I think this is a simple reason why so many of us are always looking for the turn – many traders (not all) are simply wired to be contrary and to think in a contrary way. We are different, and we want to stand apart from the crowd. For many of us, this is a part of our personality and we must learn to manage it, and to understand that it is the lens that can distort everything we see. Trading lessons and psychology Beyond this element of personality, there are also some trading and market related reasons why we are always looking for a turn. There’s a misguided idea that we have to catch the turn to make money. Decades of trend following returns (for example, the Turtles) have proven that you don’t have to catch the turn; it’s enough to take a chunk out of the middle. There’s also a natural inclination to be angry and distrustful of a move we missed – if we see a long, extended, multi-month trend in which we are not participating, it’s natural to be scornful of those who did participate and to look for reasons the trend might be ending. Many classical chart patterns are taught and used out of context. Any trend will always show multiple “head and shoulders” patterns, and inexperienced chartists will not hesitate to point these out. The problem with poorly defined chart patterns (out of context) is that you can see anything you wish to see in a chart – it’s always possible to justify being long, short, or flat a market, so it’s always possible to find evidence to support whatever you want to do, at least in the absence of clearly defined trading rules and objectives. Another problem is that many traders use tools that are supposed to somehow measure extremes. Overbought/oversold indicators, sentiment indicators, ratios, bands – the problem is that these all measure the same thing, in a different way. If I get an oversold signal from sentiment, RSI, and some Fibonacci extension, I do not have three signals – I only have one because the tools are so tightly correlated. This is important to understand – if we don’t understand this (the correlation of inputs into a trading decision), then we will have false confidence in our calls, and performance will suffer. Better to know you don’t know than to think you know more than you do. Commentators and asymmetrical payoffs If a trader places a trade, she makes money if the trade is profitable and loses money if it is not. This is simple, logical, and just. However, for a commentator (blog writer, research provider, TV personality, guru, etc.), the payoffs are very different – the public remembers the times we are right, and very quickly forgets the times we are wrong. The fact there even are permabears (people who have been bearish stocks for decades) who are called to be on TV and in the paper when the market goes down is proof of this fact. It’s possible to run a newsletter or blog business for years making outrageous claims that never come true such as “end of the financial world,” “the coming crash,” “how to protect your assets from the coming seizures,” etc. The crazier and more outlandish the forecast, the better: If someone says the S&P is going down 500 points tomorrow and he’s wrong, no one will long remember because it was a dumb call. If, however the S&P should, for some reason, go down 500 points, that person is, instantly and forever, the expert who “called the crash.” In fact, if that forecast doesn’t come true but there’s some mild decline in the next few months, creative PR can still tie the forecast in. Why does this matter? You can read blogs and listen to commentators, but read with skepticism. Realize that the person writing has a reason for calling ends of trends and turns. Your trading account, however, has a different standard: If you lose more on your losing trades than you make on the sum of your winners, that’s going to be a problem, in the long run. Finding ends of trends I’ve written about this before, so I will just point you to the relevant posts. One way I have found to avoid the situation where I’m going against the trend is to require some clear signal from the market that the trend might have ended. There are specific patterns that can help: (exhaustion, climax, three pushes, failure tests, price rejection), and then seeing the change of character (new momentum in the other direction) to set up a pullback in the possibly new trend is key. (Start reading here for ideas on evaluating and catching a possible turn.) In the absence of that sequence: 1) something to break the trend and 2) new counter-trend momentum and change of character, the best bet is to not try to fade the trend and to wait for clear signals. Let me leave you with a few charts of current markets, with only one question: What direction is the trend in each of these markets? Most of the time, that’s all the commentary we need. And that guy back at the top of this post? Yeah, don’t be that guy.