Tag Archives: seeking-alpha

Will GLD Resume Its Decline?

The market remains on fence on the timing of the Fed’s rate hike. SPDR Gold Trust benefits from economic uncertainty but not from low inflation. The Fed still expects inflation will reach its target in the coming years. A strong non-farm payroll report could further push down the price of GLD. Even though shares of SPDR Gold Trust (NYSEARCA: GLD ) are up for August , they are still down for the year. The debate over the Federal Reserve’s rate hike continues. The devaluation of the Chinese yuan along with low inflation and the strong U.S. dollar reduce the odds of a rate hike in September. But the Fed keeps us guessing. Nonetheless, a stronger than expected non-farm payroll report could bring back up the probability of a September hike and drag back down the price of GLD. Let’s see the recent developments in the market and their relation to GLD. The market still doesn’t know when the Fed will be ready to hit liftoff. And although the implied probabilities for a September rate hike are still very low – the odds are only 28% in September and 56% in December, the market could still raise these odds again if the upcoming non-farm payroll report exceeds the market’s expectations. Currently, the market expects a gain of around 220,000 jobs; if the actual number comes at over 250,000 this may be enough to rekindle the possibility of a rate hike later this month. Back in July, the NFP report showed a gain of 215,000, slightly below expectations, which still led to a rise in the price of GLD. When it comes to the September rate hike, even Federal Reserve Vice Chair Stanley Fischer , in a recent interview, still refrained from voicing his opinion about the September meeting and kept the possibility of a hike on the table. He was also optimistic in Jackson Hole and thinks inflation will pick up: “Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further.” If this is the case, it will be harder for the Fed to reach its goal of 2% as rates start to rise again. Also, inflation aren’t, for now, rising. Moreover, the ongoing descent in the core CPI may have also contributed to the weakness of gold in the past couple of years. The chart below presents the price of gold and annual percent changes in core PCE between 2011 and 2015. (click to enlarge) Source: FRED The combination of a stronger dollar, which is likely to further strengthen as the Fed begins normalization, along with the low price environment, driven, in part, by falling commodities prices, isn’t expected to help gold or the price of GLD to bounce back from its recent fall. It’s also worth noting, a point made on CNBC , that the current long-term yields are still low – the 10-year Treasury bond yields are around 2.2%. Back when the Fed started to raise rates, yields were much higher – the spread between the federal funds rate and the 10-year note was closer to 4%. Thus, the market conditions, at least from the bond market, aren’t best for a rate hike. I think it’s not likely that the Fed will raise rates – for the same reasons everyone states including China, low inflation and yields, global economic uncertainty, strong U.S. dollar and more – any time soon. But we should also remember the Fed is purposefully avoiding from giving clearer guidance and keeping us guessing: It’s trying to test the waters and see the market’s reactions. So far, the growth in the U.S., which was very strong in Q2, could still change course. The labor market is improving but still has room for improvement especially when it comes to wages. And most importantly, inflation is low and higher rates won’t bring it any faster to the Fed’s target. For GLD, low inflation and the strong U.S. dollar will drag its shares down. Conversely, economic uncertainty could play in favor for its price – as was the case back in mid-August. Thus, over the short term, we could still see modest gains in the price of GLD, but as long as the Fed heads towards normalization – if not in September then in December or the beginning of 2016 – the U.S. dollar is, for the most part, heading up, GLD is likely to resume its slow descent. For more please see: 3 Questions About Investing in Gold . 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.

ALFA: A Market-Beating ETF About To Go Market-Neutral

Summary ALFA allows the retail investor to “invest with the best”. ALFA has shown market-beating performances since inception, with superior upside and downside capture ratios, but also higher volatility. Barring a final-day rally, ALFA is about to go into market-neutral mode. The AlphaClone Alternative Alpha ETF (NYSEARCA: ALFA ) is an ETF that tracks the AlphaClone Hedge Fund Long/Short Index. This index contains U.S.-listed equity securities to which hedge funds and institutional investors have disclosed significant exposure. An interesting feature of the index is that it uses AlphaClone’s proprietary “Clone Score” methodology to aggregate the ideas of hedge funds for which historically it has made the most sense to follow based on their disclosures. Additionally, index constituents are equal weighted but have an overlap bias (i.e., securities held by twice the number of managers have twice the weight). In a recent article entitled ” The AlphaClone Alternative Alpha ETF May Be The Safest Equity Ticker ,” Seeking Alpha author Fred Piard elegantly summarizes the methodology of ALFA as thus: ALFA selects fund managers based on their past performances after publication of their holdings…In other words, past performances must be good, and also replicable. Investing in ALFA therefore allows the retail investor to “invest with the best” (while avoiding 2 and 20 fee structure associated with investing in hedge funds). Only holdings from top managers are chosen for inclusion in the index – holdings from mediocre managers are not considered. ALFA was incepted in May 2012, and charges an expense ratio of 0.95%. Another hedge fund-duplicating ETF is the Global X Guru Index ETF (NYSEARCA: GURU ). Performance The following chart shows the total return performance of ALFA and the U.S. market (NYSEARCA: SPY ) since inception of ALFA. ALFA Total Return Price data by YCharts We can see from the chart above that ALFA has pretty much led SPY wire-to-wire since inception. However, the higher return of ALFA has been accompanied by higher volatility. The following chart shows the 3-year annualized standard deviation (volatility), return, Sharpe and Sortino ratios for ALFA and SPY (source: Morningstar ). We can see from the above chart that ALFA has been about 30% more volatile than SPY over the past three years. This has led to ALFA’s Sharpe ratio of 1.78 being lower than SPY’s at 1.93. Interestingly, however, the Sortino ratio, which unlike Sharpe ratio only takes into account downside (and not upside) volatility, slightly favors ALFA at 4.36 vs. SPY at 4.26. This is consistent with ALFA’s impressive upside and downside capture ratios over the past 1 and 3-year periods, as shown in the chart below (source: Morningstar ). The chart above shows that over the past 3 years, ALFA has managed to return an extra 7% over the S&P 500 in positive months for the market, while decreasing 18% less than the S&P 500 in negative months for the market. Its 1-year upside and downside capture ratios are even more impressive, at 130% and 52% respectively. Obviously, SPY captures 100% of both the upside and downside of the S&P 500. Additionally, ALFA has had a 0.84 correlation with SPY since inception (source: InvestSpy ). Holdings The higher volatility of ALFA compared to SPY may be partially attributed to the fact that ALFA’s portfolio is quite concentrated, with the top 10 holdings accounting for 31.85% of assets, compared to only 173.03% for SPY. Moreover, ALFA currently holds only 73 stocks, compared to the 500 in the S&P 500. The following table shows the top 10 stocks held in ALFA and SPY. ALFA SPY Stock Ticker % Assets Stock Ticker % Assets Apple Inc. (NASDAQ: AAPL ) 7.25 Apple Inc. AAPL 3.75 Valeant Pharmaceuticals (NYSE: VRX ) 7.19 Microsoft Corporation (NASDAQ: MSFT ) 2.03 Celgene Corporation (NASDAQ: CELG ) 2.55 Exxon Mobil Corporation Common (NYSE: XOM ) 1.78 Horizon Pharma plc (NASDAQ: HZNP ) 2.53 Johnson & Johnson Common Stock (NYSE: JNJ ) 1.49 Allergan PLC (NYSE: AGN ) 2.41 Wells Fargo & Company Common St (NYSE: WFC ) 1.46 The Priceline Group Inc. (NASDAQ: PCLN ) 2.36 General Electric Company Common (NYSE: GE ) 1.41 Transdigm Group Incorporated Tr (NYSE: TDG ) 2.22 Berkshire Hathaway Inc. Class B (NYSE: BRK.B ) 1.4 Oracle Corporation Common Stock (NYSE: ORCL ) 2.05 JPMorgan Chase & Co. Common St (NYSE: JPM ) 1.37 Biogen Idec Inc. (NASDAQ: BIIB ) 1.79 Pfizer, Inc. Common Stock (NYSE: PFE ) 1.19 Skechers U.S.A., Inc. Common St (NYSE: SKX ) 1.5 AT&T Inc. (NYSE: T ) 1.15 Besides AAPL, which constitutes 7.25% and 3.75% of ALFA and SPY, respectively, the two funds do not have any top-10 holdings in common. Hedging mechanism ALFA has an interesting hedging mechanism, which when enforced shorts the S&P 500 in an amount equal to the value of the fund’s long holdings. In other words, ALFA becomes market neutral when the hedge is activated. The trigger for the activation is simple – almost too simple, at first glance – it’s when the S&P 500 falls below its 200-day simple moving average [SMA] at month’s end. Why month’s end, which seems like an arbitrary day to choose? Why not the 15th of each month, or the 19th? Surprisingly, choosing the end of each month as the trigger was more effective than the seemingly more logical “5 consecutive days below 200 SMA” rule on data from 1950 to 2014, presumably because the portfolio was hedged less in a long-term secular rising market. Which brings us to the main purpose of this post, which is to inform investors that, unless the S&P 500 gains in excess of 4.35% (from 1988.87 to 2075.41) on the last trading day of August, i.e. in one trading day’s time, ALFA’s hedging mechanism is about to be activated for the first time . Interestingly, this is not the first time that the S&P 500 has dipped below its 200 SMA since ALFA’s inception. As can be seen from the chart below, this has happened at least twice since May 2012. But now let’s take a closer look at each of those two instances. The first event took place in November 2012, around the time of the “fiscal cliff” negotiations. We can see from the above chart that the S&P 500 dipped below the 200 SMA in mid-November, but then recovered above the 200 SMA by month’s end. Hence, ALFA’s hedge was not activated. A similar phenomenon was observed in October 2014: Takeaway What does this mean for investors? If you already own ALFA, you have two basic choices (assuming that the S&P 500 does not rally 4.35% over the weekend). HOLD . You prefer to take a “passive” approach to market timing (an oxymoron, perhaps), and are comfortable with ALFA’s hedging strategy. You understand that ALFA will probably return close to flat in the month of September, plus or minus ALFA’s alpha, and then for every month after that until the S&P 500 breaks above its 200 SMA at month’s end. SELL . You have a strong conviction that the market will resume its uptrend in September and in the months beyond. You do not want to have part of your holdings invested in a market-neutral position, so you sell ALFA and replace it with SPY or another long-only instrument. You will only rotate back into ALFA when the S&P 500 breaks above its 200 SMA at month’s end. For investors who do not yet own ALFA and are considering whether or not to buy this fund, they should be aware that the ETF, if purchased in September, will be a market-neutral fund for at least that month, and then for every month after that until the S&P 500 breaks above its 200 SMA at month’s end. Disclosure: I am/we are long ALFA. (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.

Wild Week In The Market And How Investing Is Like Buying Groceries

Last week, along with some sharp turns in the market, came some interesting comments on Federal Reserve policy and markets from Ray Dalio, the investment guru and world’s largest hedge fund manager. Dalio, the founder of Bridgewater Associates feels that the Federal Reserve, while they may raise interest rates soon, will be forced to enact another round of Quantitative Easing (QE). QE is the purchase of assets by the Federal Reserve to stimulate the economy. It increases the size of the Fed’s balance sheet and provides support to equity prices. Much like in 1936, the Fed finds themselves painted into a corner and addicted to quantitative easing. In 1936 the Fed raised rates for the first time since the 1929 stock market crash and that tighter monetary policy caused a recession which sent equity prices tumbling. Will the Fed do that again? They are certainly trying to avoid that but must get interest rates above zero. Dalio expects a major easing from the Fed. Could we see rising interest rates courtesy of the Federal Reserve AND QE? We are contingency planners and must provide for all outcomes. On Monday of last week the S&P 500 was over 4 standard deviations away from its 50 Day Moving Average (DMA). That is a level that would denote an extreme move in a short amount of time. The last time that this occurred was in August of 2011 when the United States sovereign debt was downgraded. The following week the S&P 500 rallied over 7%. We felt that Monday was an appropriate time to put cash to work for our more aggressive clients. By the end of the week we had seen a 6.3% rally in the S&P 500 from its lows and we felt that taking some profits in a tax efficient manner was appropriate. History has shown that sharp selloffs like this tend to have reflex rallies that are prone to failure. Having seen sharp declines investors are likely to scale back risk exposure and that produces overhead resistance to stock prices. We would not be shocked and are quite prepared for the downside in prices to resume this week. Now is a very good time to reassess one’s appetite for risk and whether that is commensurate with one’s risk exposure. If you didn’t sleep well last week you need to have less risk in your portfolio. If the market selloff didn’t interfere with your zzzz’s or you felt like buying on the dip then your risk is either okay or could be increased. Take some time and think about how you reacted last week. It is going to be another fun filled week. These are the times that we thrive on and live for. Dislocations in markets provide opportunity. You can see things as problems or opportunities. If you are prepared then it is an opportunity. We are prepared with an underweight in equities and quite happy with market moves lower and dislocations. We are shopping for groceries and want to see lower prices. As Warren Buffett has often said, “Why would anyone want higher stock prices”? Know that we have room in our basket and are looking for groceries in the discount aisle. Share this article with a colleague