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U.S. Turns Hotbed Of Hiring: ETFs And Stocks To Surge

The U.S. labor market has been on a hiring spree, outperforming other economies across the globe. The economy added 292,000 jobs in December to add up to 2.65 million jobs for all of 2015. This represented the second consecutive year of strong job growth since 1999. Moreover, the unemployment rate held steady at a seven-year low of 5% for the third consecutive month. While wage growth remained tepid in December with average hourly wages declining by a penny to $25.24, it increased 2.5% for 2015, marking the best year for wage gains since the Great Recession. This shows that wage growth is definitely gaining momentum. The robust data shows that the U.S. is one of the healthiest economies in the world that has been able to withstand global uncertainty stemming from the China turmoil, a relentless slide in oil price and a strong dollar. Further, it has spread optimism into the economy, which is now likely to be able to handle another rate hike, though the Fed is unlikely to raise rates before March. Market Impact Following the upbeat job data, the U.S. stocks initially moved higher, halting a two-day rout that has wiped out $4 trillion from global equities this year. But the renewed slide in crude prices reversed overall gains, pushing the stocks in deep red at the close. Investors could take advantage of the beaten down prices and buy stocks and ETFs that are the largest beneficiaries of job gains. Below, we have highlighted some of the funds that will likely see smooth trading in the days ahead. ETFs to Consider PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) A healing job market and the resultant improving economy will pull in more capital into the country and lead to an appreciation of the U.S. dollar. UUP is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of the U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro while 25.5% collectively in the Japanese yen and British pound. The fund has so far managed an asset base of $1.1 billion while sees an average daily volume of around 1.9 million shares. It charges 80 bps in total fees and expenses, and added 0.2% on the day following the jobs report. The fund has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. SPDR S&P Homebuilders ETF (NYSEARCA: XHB ) Solid labor market fundamentals along with affordable mortgage rates will continue to fuel growth in the recovering homebuilding sector, creating a buying opportunity in homebuilders and housing-related stocks. In addition, the slower and gradual rates hike will not impede the growth prospect of the sector, at least in the short term. The most popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. In total, the fund holds about 37 securities in its basket with none accounting for more than 4.71% share. The product focuses on mid-cap securities with 65% share, followed by 25% in small caps. The fund has amassed about $1.5 billion in its asset base and trades in heavy volume of more than 3.5 million shares. Expense ratio comes in at 0.35%. XHB lost 1.7% on the day and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook. SPDR S&P Retail ETF (NYSEARCA: XRT ) Retail will also benefit from accelerating job growth and a moderate rise in wages that will increase the consumer spending power. XRT tracks the S&P Retail Select Industry Index, holding 101 securities in its basket. It is widely spread across each component as none of these holds more than 1.33% of total assets. Small-cap stocks dominate more than three-fifths of the portfolio while the rest have been split between the other two market cap levels. XRT is the most popular and actively traded ETF in the retail space with AUM of about $616.6 million and average daily volume of around 4.2 million shares. It charges 35 bps in annual fees and shed 3% on the day. The product has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook. Stocks to Consider Though several sectors will benefit from healthy hiring, the direct beneficiary is the staffing industry. The industry bodes well at least in the near term given the superb Zacks Industry Rank (in the top 10%) at the time of writing. Investors seeking to ride out the optimism could look at a few top-ranked stocks having a Zacks Rank #1 (Strong Buy) or #2 (Buy) with a Growth Style Score of B or better using our Zacks Stock Screener. Cross Country Healthcare, Inc. (NASDAQ: CCRN ) Based in Boca Raton, Florida, Cross Country is a leading healthcare staffing services’ company which primarily focuses on providing nurse and allied, and physician staffing services and workforce solutions. The stock is expected to deliver earnings growth of 26.9% for fiscal 2016 versus the industry average growth of 25.5%. The stock lost 0.9% in Friday’s trading session and currently has a Zacks Rank #1 with a Growth Style Score of ‘A’. Heidrick & Struggles International, Inc. (NASDAQ: HSII ) Based in Chicago, Illinois Heidrick & Struggles International is one of the leading global executive search firms. With years of experience in fulfilling clients’ leadership needs, it offers and conducts executive search services in every major business center in the world. The stock is expected to post earnings at a growth rate of 19.2% annually in fiscal 2016, which is higher than the industry average of 17.4%. HSII gained 0.3% on the day and has a Zacks Rank #1 with a Growth Style Score of ‘A’. Tarena International, Inc. (NASDAQ: TEDU ) Based in Beijing, the People’s Republic of China, Tarena International is a leading provider of professional education services in China with core strength in information technology professional education services including classroom training. Tarena has an incredible earnings growth projection of 69.8% for fiscal 2016 compared to the industry average of 17.4%. The stock was up 0.4% in the Friday session and has a Zacks Rank #2 with a Growth Style Score of ‘B’. Original Post

How Much Should You Hedge Currencies Today?

By Jeremy Schwartz Currency-hedged exchange-traded funds (ETFs) have been THE story in ETFs over the last three years as one of the leading categories for ETF flows. This has caused some critics to say the movement into currency-hedged ETFs is overdone. First and foremost, we think this assessment underestimates the investment thesis for strategic currency-hedged allocations . More on that below. Second, even based purely on flows, these would-be contrarians are missing the bigger picture. The flows toward currency-hedged ETFs have occurred in two of the smaller pieces of the asset allocation pie-Europe and Japan. When we look at Morningstar categorization for non-U.S. equities, Europe had approximately $88 billion in assets under management (AUM) as of November 2015, Japan had approximately $48 billion of AUM and the foreign large-cap category was approximately $1.3 trillion. 1 While we think Europe and Japan can become bigger categories over time as investors view them more favorably, broad international allocations are more common. In the dedicated European and Japanese category of investments, the adoption of currency hedging has been staggering. Currency-hedged ETFs, which were nonexistent six years ago, now represent as much as one-third of total European-focused AUM in the U.S. and 40% of total Japanese AUM-when including both mutual funds and ETFs. 2 Yet in the broad international category, the trend toward hedging, in our view, hasn’t even started, with only 2% to 3% of the total $1.3 trillion in the category being strategically hedged. WisdomTree believes currency offers uncompensated risk and that most of the $1.3 trillion in assets is taking on more risk than necessary to deliver the returns of international equities. Myths about Hedging Many active managers propagate a generalization and myth that it is expensive to hedge currencies. We see interest rate differentials as the most important cost to hedge. For certain markets, such as Brazil, it could be expensive to hedge because short-term interest rates in Brazil are approximately 14% 3 , and this creates a high hurdle for how much currency has to decline to break even from the hedge. Being Paid More to Hedge But in general, over the last 30 years, an investor was paid on average about 40 basis points (bps) per year to hedge developed world currency exposures 4 . In Japan over the last 30 years, an investor was paid on average almost 2.5% per year to hedge currency exposures simply from the interest rate differentials in the forward contracts. 5 With the U.S. Federal Reserve now raising its Federal Funds Rate, and other central banks continuing to pursue stimulative policy, an investor is now being paid more to hedge foreign currencies in the short run, making hedging even more attractive from an interest rate perspective in 2016 and 2017 than it was in 2015, 2014 or 2013, when currency hedging first took off. This is a reason hedging is becoming more attractive . Is It Too Late to Hedge the Euro and Yen? We argue that currency hedging should serve as the baseline and that investors should add currency risk whenever they view it as less attractive to hedge (or more desirable to have the currency exposure). Investors can switch from hedged to unhedged exposures or blend such strategies together-but now there is a new solution through our dynamically hedged family. This index family solves the challenge of trying to time when currency hedging should be in place. WisdomTree Investments partnered with Record Currency Management to build an index family that incorporates Record’s hedging signals into a dynamically hedged index. 6 Record has been evaluating currency risk and return trade-offs for more than 30 years, and research showed the most important hedging signals for developed world currencies are threefold: The Interest Rate: If the implied interest rate in the United States is higher than that in the targeted currency, it is more attractive to hedge. This signal helps manage the cost to hedge when it is more expensive to do so (like in Australia today). Momentum: Simply put, a downward trend in the targeted currency would signal to put on the hedge, whereas an upward or appreciating trend would signal to take it off. Value: When the targeted currency is overvalued compared to “fair value,” as determined by purchasing power parity (PPP), it is attractive to hedge, and when deeply undervalued, it is less attractive to hedge. Importantly, this is a long-run signal, and a wide band is used in applying this signal. Monitoring the Hedge Ratios by Currency & by Signal Click to enlarge For definitions of terms in the chart, visit our glossary . The currency-hedge signals are determined on an individual currency basis, but in aggregate, for the developed world currency exposures in the WisdomTree Dynamic Currency Hedged International Equity Index , the models suggest hedging 71.05%, and for the WisdomTree Dynamic Currency Hedged International SmallCap Equity Index , they suggest hedging 64.57%. These models are by nature dynamic, and when it is more/less favorable to hedge, some of these hedge ratios will come up/down. While many investors think they missed the opportunity to switch to currency-hedged strategies, we reiterate that we believe the most important drivers of long-term currency movements suggest hedging a majority of your currency exposures today. Sources Morningstar Direct. Europe refers to the universe of U.S.- listed mutual funds and ETFs within the Europe Stock peer group. Japan refers to the universe of U.S.- listed mutual funds and ETFs within the Japan Stock peer group. Broad international refers to the universe of U.S.- listed mutual funds and ETFs within the Foreign Large Value, Foreign Large Blend and Foreign Large Growth peer groups. Data is as of 11/30/2015. Morningstar Direct. Same universes and as of date as the prior footnote. Bloomberg, with data as of 12/31/15. Developed world currency exposures refer to those defined by the MSCI EAFE Index universe from 12/31/1988 to 9/30/2015. Source for paragraph: Record Currency Management, with data from 12/31/1988 to 9/30/2015. No WisdomTree Fund is sponsored, endorsed, sold or promoted by Record Currency Management (“Record”). Record has licensed certain rights to WisdomTree Investments, Inc., as the index provider to the applicable WisdomTree Funds, and Record is providing no investment advice to any WisdomTree Fund or its advisors. Record makes no representation or warranty, expressed or implied, to the owners of any WisdomTree Fund regarding any associated risks or the advisability of investing in any WisdomTree Fund. Important Risks Related to this Article Hedging can help returns when a foreign currency depreciates against the U.S. dollar, but it can hurt when the foreign currency appreciates against the U.S. dollar. Investments focused in Japan or Europe increase the impact of events and developments associated with the regions, which can adversely affect performance. Jeremy Schwartz, Director of Research As WisdomTree’s Director of Research, Jeremy Schwartz offers timely ideas and timeless wisdom on a bi-monthly basis. Prior to joining WisdomTree, Jeremy was Professor Jeremy Siegel’s head research assistant and helped with the research and writing of Stocks for the Long Run and The Future for Investors. He is also the co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” and the Wall Street Journal article “The Great American Bond Bubble.”

On Stock Crashes, Hindsight, And Anger

“You will not be punished for your anger, you will be punished by your anger.” – Buddha US stocks just had their worst start to a year in history last week going all the way back to 1928. The bears have come roaring back. As investors and traders frantically deal with clients and their own personal emotions, let’s put things into factual perspective. Those that have seen my presentations, met with me or read our writings for years are aware that we quantitatively test indicators and create strategies we believe have merit. Backtesting, like any form of analysis, does not guarantee exceptional performance in the future, but it can at least provide information on anomalies or market patterns which have persisted over time. So here’s a very simple and powerful backtested strategy. The 200 day moving average is popular as an indicator used to buy or sell stocks. Let’s make a simple rule. If a stock fund is trading above its 40 week (200 day) moving average, buy that stock fund. If below, then instead, buy Treasuries as your “risk-off” trade. For the below backtest, I used the Vanguard 500 Index (MUTF: VFINX ) as the stock proxy, and the Vanguard Long-Term Treasury Fund (MUTF: VUSTX ). Want to get more creative? Use the same rule, but leverage up the stock fund VFINX by an extra 30% to juice returns. Yellow uses that leverage, blue is the rotational risk-on/off strategy using Treasuries, orange is VFINX, and gray is VUSTX. VFINX mimics the S&P 500 SPDRs ETF (NYSEARCA: SPY ), while VUSTX mimics the iShares Treasury 20+ Year ETF (NYSEARCA: TLT ). Click to enlarge Looks pretty good right? Most of the time you’re trending higher, though it is worth noting that there are several flat volatile years where those who invest over a 1, 2, 3, or 4-year period are frustrated by a lack of returns and volatility/whipsaws. However, over longer periods of time and full cycles, both the unleveraged rotational strategy between stocks and Treasuries, and the leveraged one not only outperform on an absolute basis in terms of pure performance, but also do so on a risk-adjusted basis. The blue version’s cumulative return is 1,545% going back to 1986, versus the stock fund itself at 1,274%. That’s 1.2x better. The leveraged version which magnifies by 30%? Cumulative return is 2,756%, resulting in 2.16x stronger performance against VFINX as a buy and hold investment. Note that the extra 30% leverage over time significantly magnifies results. Compounding leverage can be a wonderful thing when it works over time if you have a strategy for it. It is worth noting that the 40 week MA’s strength is more about avoiding big declines rather than participating in big upside, though that upside exposure is most conducive towards using leverage. Also worth noting that if you added other momentum areas, notably emerging markets, the return path gets even more extreme. Great! Let’s buy into that. Now instead of the chart above, you’re living performance day to day. Feel good about the rotational strategy? Well, let’s now dig a little deeper. Let’s look at the worst weeks in the strategy. Any of these percentage declines feel familiar? Date Stocks/Bonds Leveraged Stocks/Bonds 4/10/2000 -10.52% -13.67% 10/12/1987 -9.21% -11.97% 9/8/1986 -7.84% -10.19% 12/8/1986 -7.66% -9.96% 8/1/2011 -7.15% -9.30% 10/9/1989 -6.91% -8.98% 10/11/1999 -6.63% -8.62% 5/3/2010 -6.35% -8.26% 8/17/2015 -5.71% -7.43% 1/24/2000 -5.62% -7.30% 10/5/1987 -5.07% -6.59% 8/24/1998 -4.97% -6.46% 7/23/2007 -4.89% -6.35% 1/5/1998 -4.83% -6.28% Herein lies the point of this backtest and any strategy employed. It is completely and utterly impossible to avoid weeks like what happened at the start of 2016 from impacting your portfolio and creating an emotional response. In the rotational strategy outlined here, there are numerous large declines throughout history. In each and every single one of these weeks, the response by investors and traders is the same. “What the hell is going on?” “I can’t invest in this!” “You should have sold out!” “Sell! SELL!!!!!” “Change the strategy!” Nothing can get everything right. Even if you used stop orders or decided to trade out of one of these big declines mid-week, historically it doesn’t do anything to mitigate those losses, even though one believes deeply that it would. The anger that comes from weeks like last week is no different than the emotional response that comes from other worst weeks in history in any strategy. Hindsight creates anger, but that doesn’t mean that anger is right. In the 2014 Dow Award paper on Beta Rotation, (click here to download) for example, we show that 80% of the time Utilities outperform the broader stock market before an extreme VIX spike. That means it also missed it 20% of the time, just like any indicator used to mitigate risk over much longer periods. That in no way shape or form invalidates the indicator. My point here is that sometimes these things happen. Long duration Treasuries did not confirm ahead of time that last week would happen based on indicators we have tested. Following the decline last week, things do look ugly. The decline could get worse, or the market could V, or W, or L, or do anything it wants to do. Hindsight is the only way we will know after such a major break. One cannot control for the madness of sudden markets. All any of us can do is prevent that madness from impacting rational decision making. The year is not written yet. There will come a major up move in reflation trades which would undo in the blink of an eye any damage done to portfolios so far in 2016. In the meantime, don’t let hindsight make you angry, because every strategy will have weeks in the dataset as violent as the one just experienced. That does not mean one should abandon the approach. It is easy to forget one simple rule when it comes to investing passively or using active management. The best time to buy in is after a significant drawdown. After drawdowns is the time to rationally examine data, rather than make rash decisions failing to understand that sometimes, you just can’t avoid bad luck. This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.