Tag Archives: seeking-alpha

Why The U.S. Stock Market Never Completely Recovered

Clearly, the global economic slowdown remains a headwind for U.S. stocks. The same canaries in the investment mines that stopped serenading last summer are straining their vocal chords once again. In sum, the S&P 500 has never fully recovered because global economic headwinds, equity overvaluation and anemic market breadth remain. Some things go unnoticed. For example, the S&P 500 rallied 13% off its closing lows (1867) set in late August. Lost in the shuffle? The popular benchmark has yet to revisit its closing highs (2130) registered back in May. In essence, the corrective activity that began in the springtime as a function of a faltering global economy, overvalued equities and weakening market internals has yet to run its course. What’s more, these factors that led to the August-September sell-off in risk assets are unlikely to dissipate quickly. Let’s start with the macro-economic backdrop. Data show that quantitative easing (QE) in Europe is not stimulating borrowing activity the way that it stimulated borrowing activity in the United States. If European consumers and European businesses are fearful to take out loans – or if creditors are unwilling to extend credit – the euro-zone economy is unlikely to show improvement. Similarly, European stocks would not experience much of a boost from share buybacks. Not surprisingly, then, the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) failed to rise above its 200-day moving average; it never came close to recapturing its 52-week high. At this moment, the euro-zone proxy is still 12% below its high-water mark. Europe is hardly the only canker sore on the world stage. Japan recently revised its economic growth projections lower. China is slowing dramatically. And nations that depend upon natural resources exports (e.g., Australia, Canada, Brazil, Chile, etc.) are witnessing yet another downturn in commodity prices. In fact, the PowerShares DB Commodity Index Tracking ETF (NYSEARCA: DBC ) has plummeted back to levels not seen since the late August free-fall for U.S. stocks. The bullish case for U.S. stocks continues to rely on the notion that the rest of the world does not matter. Ironically, the Federal Reserve did not raise borrowing costs in September and cast doubt on any rate hike this year when it stated that “…global economic and financial developments may restrain economic activity.” The central bank subsequently backtracked at its October meeting by removing its commentary on global issues altogether. So do the economic hardships abroad matter or not? They matter with respect to corporate earnings and revenue. Consider the reality that corporate profits as well as sales were negative for the recent quarter (Q3) and that multinationals with greater overseas exposure witnessed steeper year-over-year declines. Clearly, the global economic slowdown remains a headwind for U.S. stocks. What’s more, declining earnings and declining revenue continue to pressure U.S. stock valuations . We are now looking at a price-to-sales ratio of 1.84 – one of the highest P/S ratios on record. The third component that sent stocks tumbling back in August was the softening of market internals . In particular, the discrepancy between the S&P 500’s Advance-Decline (A/D) Line and that of the New York Stock Exchange (NYSE) pointed to fewer and fewer large companies holding up the benchmark. Here in November, the disparity appears to have resurfaced. Some researchers have been particularly outspoken on the lack of market breadth. Heading into the current week of trading, Strategas Research Partners noted that ” the 10 largest stocks in the S&P 500 have contributed more than 100% of the year’s roughly 2% gain .” They added that ” the 10 biggest stocks in the index accounted for just 19% of the gains last year and 15.2% of the index’s return in 2013 .” We should let the above data sink in for a moment. In 2013 as well as 2014, the S&P 500’s appreciation was attributable to most of its components. In 2015? Only the 10 biggest large-caps account for the positive spin. It gets worse. The same canaries in the investment mines that stopped serenading last summer – high yield junk bonds, emerging market stocks, small company stocks, commodities – are straining their vocal chords once again. The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) appears destined to retest its 52-week lows in the same way that commodities via DBC have. In sum, the S&P 500 has never fully recovered because global economic headwinds, equity overvaluation and anemic market breadth remain. Transporters, industrials, energy, materials, retail, leisure, household products, utilities, real estate, media, healthcare – a wide variety of sectors and sub-sectors have been buckling. It follows that it should not be all that surprising to see the S&P 500 buckle as well. 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.

Myopia & Market Function

Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.”. Myopic loss aversion can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. We know that there will be future bear markets and probably another crisis or two in most of our lifetimes. By Roger Nusbaum AdvisorShares ETF Strategist The Wall Street Journal posted an article written by Shlomo Benartzi who is a professor at UCLA specializing in behavioral finance. The article primarily focuses on the behavioral problems, like myopic loss aversion, that can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.” Benartzi cites that the stock market has a down day 47% of the time, a down month happens 41% of the time, a down year 30% of the time and a down decade 15% of the time. We’ve talked about this before going back before the crisis albeit with some different wording. Before and during the last major decline, as well as many times since then, I’ve said that when the market does take a serious hit that it will then recover to make a new high with the variable being how long it takes. While this seems obvious now it is one of many things frequently forgotten in the heat of a large decline. Additionally we know that there will be future bear markets and probably another crisis or two in most of our lifetimes. And those future bear markets/crises will take stocks down a lot which will then be followed by a new high after some period of time. This is not a predictive comment this is simply how markets work with Japan being a possible stubborn exception that proves the rule. It took the S&P 500 five and half years to make a new nominal high after the “worst crisis since the great depression.” If you are one to use some sort of defensive strategy, it is hopefully one that you laid out when the market and your emotions were calm and your strategy probably doesn’t involve selling after a large decline. My preference is to start reducing exposure slowly as the market starts to show signs of rolling over. Very importantly though is that if you somehow miss the opportunity to reduce exposure, time will bail you out….probably. I say probably based on when a bear market starts in relation to when retirement is started. If a year after retiring, a 60% weighting to equities that cuts in half combined with a life event at the same time that requires a relatively large withdrawal (this is not uncommon) it will pose some serious obstacles. I think the best way to mitigate this is, as mentioned, a clearly laid out defensive strategy but not everyone will want to take on that level of engagement. In that case it may make sense for someone very close to retirement and having reached their number (or at least gotten close) to reduce their equity exposure. Not eliminate, but reduce. Back to the idea of myopic loss aversion and how to at least partially mitigate it. Knowing how markets work and then being able to remember how they work will hopefully provide an opportunity to prevent emotion from creeping in to process and giving in exactly as Benartzi describes.

New Mutual Fund Aims To Democratize Access To Venture Capital

By DailyAlts Staff Following the Crash of ’29 and subsequent onset of the Great Depression, securities regulators moved to restrict the general public’s access to “esoteric” investments. The problem: These laws have arguably helped the rich get richer while barring less-affluent investors from investing in assets that could have made them more affluent. Not only that, but many of the investments prohibited or discouraged by Depression-era securities laws also have low correlation to the broad stock and bond markets. During the Crash of ’08 and subsequent Great Recession, the importance of low correlation was made very clear – hence the popularity of liquid alternatives. Liquid Venture Capital But while liquid alternatives have democratized retail-investor access to a variety of hedge fund strategies, some asset classes remain out of reach: Infrastructure, private equity, and especially venture capital – that is, until now. While infrastructure and “PE” investments for non-accredited investors are still hard to come by (but, are becoming more available – see articles on funds from Altegris , Pomona Capital and AMG ), Leland Funds and Thomson Reuters have launched an innovative new mutual fund providing retail access to “VC” investments: The Leland Thomson Reuters Venture Capital Index Fund (MUTF: LDVAX ). “Historically, sophisticated institutional investors have been the only market participants able to gain meaningful access to venture capital investments, which are expensive, illiquid and require high minimum investments,” said Leland Funds CIO and fund Portfolio Manager Neil Peplinski, in a recent announcement. “The Leland Thomson Reuters Venture Capital Index Fund addresses these issues and provides investors with less expensive, more liquid exposure to the potentially strong returns typically associated with the traditionally hard-to-access venture capital asset class.” Thomson Reuters VC Index The fund tracks the Thomson Reuters Venture Capital Index , which was launched in October 2012. The index is designed to track the performance of individual U.S. venture capital-backed private companies by using “economic factors and market indicators to calculate optimal asset weights across a number of sectors.” The portfolio, which consists of exclusively liquid, publicly traded assets, is modified over time to reflect changes in the U.S. VC universe. “We are excited to draw on the strength of Thomson Reuters’ comprehensive research on diversified venture-backed companies to bring this distinct fund offering to the market,” said Paul Ingersoll, CEO of Good Harbor Financial, the advisor to the fund and owner of the Leland Funds. “Through this partnership, we are helping democratize access to this important asset class and we look forward to a long-term collaboration.” Fund Details The investment advisor to the fund is Good Harbor Financial. Shares of the Leland Thomson Reuters Venture Capital Index Fund are available in three share classes: A (LDVAX), C (MUTF: LDVCX ), and I (MUTF: LDVIX ). The minimum investments for A and C shares, which both have a management fee of 1.25% and respective net-expense ratios of 1.70% and 2.45%, is $2,500. The minimum initial investment for the I shares, which have a 1.25% management fee and a 1.45% net-expense ratio, is $5 million. For more information, visit the fund’s website .