Tag Archives: nasdaq

International Business Machine Corp. Earnings Preview: Here's What Really Matters

Despite its nearly 5% stock price increase in October, IBM shareholders are still about 6% in the red year to date. Last quarter’s 32% drop in hardware related revenue, along with a 10% decline in

Buy These Funds To Beat A Choppy Q4

Unlike the previous two years, 2015 has turned out to be very frustrating for investors. It has been a bear story so far with the downtrend intensifying every passing quarter. August was particularly disturbing, when the market rout dragged the Dow & S&P 500 to their correction territories. In the third quarter, the Dow, S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively. As for mutual funds, just 17% of mutual funds managed to finish in the green. This is a slump from 41% in the second quarter, which was again a sharp fall from 87% of the funds ending in positive territory in the first quarter. Unfortunately, we are not too bullish about the overall trend in the fourth quarter as well. Rather, lingering concerns from the third quarter may continue to disrupt the markets. Moreover, we are all too aware of the increased volatility that has worsened the investment climate in recent months. Market movements may yet again be volatile as investors continue to grapple with global growth worries, oil’s decline notwithstanding the momentary upsides, and a looming Fed lift-off. Three primary questions will keep the volatility alive – firstly, when will Fed hike rates; will China continue to negatively impact markets; and is the Bull Run over. As we move into the fourth quarter, Market Neutral mutual funds, Long Short mutual funds or Bear market funds should be the best picks at the moment. Market Neutral funds maintain a low correlation to market trends, helping to beat the volatility. Before we pick these funds, let’s look at the economic conditions: China, Global Growth Fears Linger The International Monetary Fund (NYSE: IMF ) has yet again trimmed the global economic growth projection. IMF’s latest World Economic Outlook (WEO) projects global economic growth of 3.1%, down from prior expectations of 3.3%. Slowdown in the emerging markets is largely to be blamed for the world economy expanding at its weakest pace since the financial crisis. Emerging markets are now expected to grow at 4% in 2015, down from the previous projection of 4.2%. Modest growth in the U.S. and a small recovery in the Eurozone won’t be strong enough to stem the declining trend in the emerging markets. Maurice Obstfeld, the IMF’s new chief economist, stated: “Six years after the world economy emerged from its broadest and deepest postwar recession, a return to robust and synchronized global expansion remains elusive.” The downward projection comes after China-led growth concerns have already wreaked havoc. A number of economic data out of China had confirmed that the world’s second largest economy was shaky. In China, lower-than-expected investment and factory output, dismal manufacturing data, significant trade gap and decline in foreign exchange reserves were among the dismal reports. Asian Development Bank’s (ADB) weak economic outlook for China also dented investor sentiment. China’s key benchmark moved down to the 3K level, from the 5K level enjoyed by the Shanghai Composite Index in early June. China Region fund category was the third best gainer in the first half of 2015, but the market rout has now made it the third biggest loser in the third quarter. Government measures to prop up markets did not have much success in China. However, it must be noted that the Chinese government has been implementing financial reforms, fiscal reforms and structural reforms for sustaining long-term growth. The implementation may have slowed growth in the short term. Going forward, it seems that support measures announced by the government hold the key to market movement. Investors need to look for such indications before placing their bets. Fed Rate Hike in December? The hullabaloo about the September rate hike was put to rest after the policy makers decided against a lift-off. However, while 9 out of 10 policy makers voted in favor of keeping the rate at the near zero level; 13 out of 17 committee members indicated that a rate hike may be possible this year. The chance of a rate hike in December was further fueled by Federal Reserve President Dennis Lockhart’s hawkish comments. Lockhart said: “As things settle down, I will be ready for the first policy move on the path to a more normal interest-rate environment. I am confident the much-used phrase ‘later this year’ is still operative.” Meanwhile, weak jobs report for the month of September raised speculation that the Federal Reserve may become more circumspect about raising rates this year. The Fed has been keeping an eye on further improvements in the labor market for hiking interest rates. Ultra-low interest rates have aided economic recovery and helped the markets enjoy a bull run. How to Beat Uncertainty in Q4 Market neutral funds aim to invest in bullish stocks and an equivalent number of bearish stocks. The objective is to generate above-average returns at relatively lower levels of risk. In fact, this category of funds adopts a precision approach to long-short investing, by ignoring the market’s direction. This is particularly relevant in today’s highly volatile market scenario when the objective is to protect the invested capital. This approach aims to identify pairs of assets whose price movements are related. Subsequently, the fund goes long on the outperforming asset and shorts the underperformer. Market neutrality is achieved by allocating the same proportion of assets to both positions. These funds may not offer robust gains, but they may be safe picks in a volatile market. Below we present three Market Neutral mutual funds that carry a favorable Zacks Mutual Fund Ranks. The following funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance. The minimum initial investment is within $5000. These funds carry low beta and are in the green over year-to-date and 1-year periods. The 3- and 5-year annualized returns are also favorable. Calamos Market Neutral Income A (MUTF: CVSIX ) invests in equity securities of domestic companies irrespective of their market capitalization. CVSIX also employs short selling to reduce market risk and generate more income. Its average maturity varies within the range of 2 to 10 years. CVSIX may also invest a major portion of its assets in junk bonds. Calamos Market Neutral Income A carries a Zacks Mutual Fund Rank #1. While the year-to-date and 1-year returns are 0.4% and 2.6%, respectively, the respective 3- and 5-year annualized returns are 2.6% and 3.6%. CVSIX’s 1- and 3-year beta scores are -0.31 and 0.05, respectively. Annual expense ratio of 0.94% is lower than the category average of 1.84%. TFS Market Neutral Fund (MUTF: TFSMX ) seeks capital growth while having minimum correlation to the domestic equity market, or the S&P 500 Index, as defined by the advisor. TFSMX mostly invests in common stocks traded on the US exchanges, irrespective of their market capitalization, sector or style. However, average capitalization of TFSMX tends to be in the small-cap range. A maximum of 25% of its assets may be invested (as long and short positions) in other registered investment companies (“RICs”). TFS Market Neutral carries a Zacks Mutual Fund Rank #2. While the year-to-date and 1-year returns are 1.4% and 4.3%, respectively, the respective 3- and 5-year annualized returns are 3% and 3.4%. TFSMX’s 1- and 3-year beta scores are 0.02 and 0.14, respectively. Annual expense ratio of 2.02% is however higher than the category average of 1.62%. Gateway Fund A (MUTF: GATEX ) seeks to achieve maximum return from the equity markets at less risk. The fund focuses on acquiring common stocks to add to its well-diversified portfolio. The fund invests a significant share of its assets in index call options in order to reduce volatility and maintain steady cash flow. Gateway A carries a Zacks Mutual Fund Rank #1. While the year-to-date and 1-year returns are 1.4% and 4.5%, respectively, the respective 3- and 5-year annualized returns are 4% and 4.6%. GATEX’s 1- and 3-year beta scores are 0.4 and 0.36, respectively. Annual expense ratio of 0.94% is lower than the category average of 1.84%. Link to the original post on Zacks.com

Index ETF Investors Are Vulnerable To A Return To Rational Pricing

Recent financial research suggests that inclusion of a corporate share in an index ETF adds to its market value. As index ETF investor participation grows, overpricing apparently becomes more pronounced. As ETF participation has become a greater share of the investment universe, these effects have apparently become more important. As a result index ETFs may now be both less diversified and overvalued. A return of shares included by ETFs to their fundamental, rationally determined, values would adversely impact an index ETF investment. The effect of the new valuations on index ETF decision-making would be perverse, leading to further investor losses. According to much recent financial research, the market’s focus on index ETFs [such as the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), the iShares Core S&P 500 ETF (NYSEARCA: IVV ) and the Vanguard Total Stock Market ETF (NYSEARCA: VTI )] has led to overpricing of many of the common shares included in the important indexes, accompanied by underpricing of companies excluded by the indexes, among other pricing anomalies. This mispricing presents a hazard to investors. The only existing investor defense against a return of these overpriced stocks to their rational value is to buy underpriced stocks outside the index ETF with properties similar to the overpriced stocks inside the ETF. How can the simple publication of an index number intended to represent the value of the stock market as a whole change the value of common stocks? The indexes that are the subject of this article are the source of the dominant common stock investment strategy of the moment, the index ETF. For example the Standard and Poors 500 Stock Index (S&P, a value-weighted average of the 500 largest common shares listed on the NYSE or NASDAQ) is the oldest and still the most important example of a traded numerical characterization of the value of the equity market as a whole. Index exchange traded funds (ETFs) are exchange-listed instruments that replicate broad market measures such as the S&P. Index ETFs are big – about 30% of the volume of all investment funds under management. But there may be strange effects of the existence of index ETFs on the prices of stocks that are part of an index. Those effects, or at least the current scholarly take on them, is chronicled in an interesting October 10th article in the New York Times . The Times article points to substantial evidence produced by market researchers that common stocks included in the popular listed indexes are often, by all the usual measures, overvalued relative to similar stocks outside the indexes. In the current financial academic literature, this is a prominent example of market irrationality. It is not rational, the argument goes, for the simple inclusion of a stock in an index portfolio to change investor behavior and thus affect market prices of securities so profoundly. But the evidence points to several effects. It has been clear, almost since the S&P 500 index began to be published, that being newly included in an important index increases a stock’s market value; while a fall into exclusion leads to a decline in market value. But there is evidence of other more profound effects as well. It appears that as a greater share of the market is included in index portfolios, the effects of index inclusion on stock prices have become more pronounced. And the effects may not simply be higher prices of stocks within the indexes, but higher correlations among the prices of stocks within the indexes as well. This higher correlation is particularly interesting, since it has investor risk management implications. If higher past correlation continues, the major indexes no longer perform their function in portfolio theory – risk reduction through diversification. Why? If correlation between investments inside the indexes rises, correlation among instruments outside the indexes rises, and correlation between index-included and index-excluded investments falls, a diversified portfolio must include stocks outside the index. In other words, the behavior of stocks in index ETFs creates a paradox. The effect of index ETF growth is that the index no longer represents a diversified portfolio. Index ETFs are, in this sense, self-defeating. To form a truly diversified portfolio, investors must now add other stocks outside the ETF. The index ETFs are vulnerable to any trading strategy that exploits this mispricing. One trading strategy that a hedge fund might apply to restore rational pricing to the stock market has characteristics that can be found in my SA Instablog: ” A Trading Strategy Based on Index ETF Overpricing. An ETF Defense. ” Investors can protect themselves (imperfectly) now from a return to rational pricing of the shares included by the index ETFs, and simultaneously achieve the portfolio diversification index ETFs once provided, by buying diversified shares outside the ETFs.