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Is The Fed’s Policy Meeting Important For GLD?

Summary This week the highly anticipated FOMC meeting will take place. The market still places a low chance of a rate hike. But the meeting isn’t just about will they raise rates this time? Will the FOMC move the price of GLD? This week the highly anticipated FOMC meeting will take place, in which the Fed will decide whether to raise rates or not. Currently, the implied probabilities for a September rate hike are slim – the market gives this possibility a 23% chance. For investors of the SPDR Gold Trust ETF (NYSEARCA: GLD ) will this rate decision move the price of GLD? How important is a rate hike at this stage for precious metals? It should matter, shouldn’t it? A rate hike should have some implications of the price of GLD: after all higher rates should translate to an increase in long term treasury yields, which should adversely impact gold prices. I talked about the relation between GLD and long term yields at great lengthen in previous posts . (click to enlarge) Source: U.S Department of Treasury and Bloomberg But as you can see, the medium term treasury yields, and the same goes for long term yields, after yields started to pick up at the beginning of the year, they have resumed their slow descent. Currently, yields aren’t far off their levels from the beginning of the year. The correlation between GLD and 5-year yields isn’t too strong at -0.24. This relation used to be much stronger in the past. It seems, for now, the relation may have weakened. Usually, the rise in the risk factor and economic uncertainty tends to pressure down long term yields and pull up GLD price. But this wasn’t the case for GLD this year. And if the FOMC raises rates, it could slightly raise interest rates, which should also lead to a modest decline in GLD. The U.S. dollar should also strengthen, a move that could also bring down GLD prices. Finally, as the Fed changes its policy, which in effect it has already heavily prepared us for, the “fear factor” of some bullion investors over a possible rate hike is likely to subside – a shift that could also reduce the demand for bullion investments including GLD. This FOMC meeting, however, isn’t likely to make long term waves. Yes, it could lead to some short term volatility, because some people still think a rate hike is still on the table. And if the Fed does push the button, it could raise market volatility in the following days. In such outcome, the price of GLD is likely to suffer even if it’s only for a few days. But for the more likely scenario – no rate hike, only a promise for hikes in the near term – the price of GLD could actually slightly rise, even if for a short term. More than just the statement This meeting also includes an update to economic data, a press conference – if we don’t get a rate hike, Chair Yellen will promise us a rate hike is right around the corner and is “data dependent” – and the dot plot. (click to enlarge) Source: FOMC As you can see, the Fed’s medium cash rate has declined over the past year, while the rates for 2016-2017 increased in the past meeting. If we don’t see a rate hike this time, the dot plot will likely show a decline in the medium rate for this year, a perhaps a rise for 2016. This shifts in the dot plots could also impact the markets as it will provide the outlook of FOMC members’ vis-à-vis the direction of the cash fund. I think, as I pointed out in the past , the current market conditions are less in favor for a rate hike at this point in time. If the Fed doesn’t raises rates, we could see a short term bounce in the price of GLD. But as long as the Fed is on course to raise rates in the coming months, GLD is still likely to suffer. For more please see: ” Gold and Inflation – Is there is relation? ” 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.

Stocks Are Like Hamburgers: Be Bullish When Prices Go Down

Companies that buy back shares favor declines. So do bargain-hunters like Warren Buffett. Sellers should prefer price increases. The recent stock market decline was certainly disheartening for many investors, such as those needing to sell positions in order to fund retirement living expenses. Others, especially those building up a portfolio, or companies buying back shares, and with an eye out for the long term, reacted more gleefully. Why is it bad for some, and good for others, when the market goes south occasionally? Part of the answer can be gleaned from a 1997 letter written by Berkshire Hathaway ( BRK.A , BRK.B ) Chairman Warren Buffett: But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have increased for the ‘hamburgers’ they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices. Buffett roots for stocks to fall when he, or the company, is buying. The Oracle of Omaha owns a $12B chunk of International Business Machines (NYSE: IBM ), a company with a long history of buying back its own stock, which among other things makes the remaining shares more valuable. And occasionally he will add to his own holdings when he feels the time is right. Recently Berkshire increased its position in Phillips 66 (NYSE: PSX ). IBM is blue The Armonk, N.Y.-based IBM reduced its share count by 10% over the last two years, and by a fifth over the past half decade. However, by its own admission Big Blue is in a funk and has been unable to grow revenue and net income over the past few years. The company has been able to boost EPS only through the use of buybacks and other financial moves. The stock has dropped by 20% over the last two years. Management, led by CEO Virginia Rometty, is trying to right the ship and reinvent itself like it did after getting out of the PC business years ago. Today it is making bets in the fast growing cloud computing industry and with Big Data technology. IBM created a separate division for its Watson supercomputer and the Jeopardy! game show champion has found applications in the healthcare industry. In another potential lucrative move the company recently hooked-up with Apple, Inc. (NASDAQ: AAPL ) in a deal in which IBM will sell Apple products to its corporate clients. An investment in IBM could pay off for patient shareholders, like Buffett, willing to hold on for a long period of time. Indirectly, Berkshire investors can also expect a nice return. No oil shock here Not all of the players in the oil patch are in trouble. One niche, the refinery industry, has not been affected as much as the upstream and midstream segments of the business. And as the U.S. economy continues to improve demand for gasoline, diesel, and other refined fuels will probably increase and provide an opportunity for growth going forward. Phillips 66 is positioned well to benefit from the trends. Berkshire took advantage of a slight drop in Phillips 66 stock over the past year and increased its position to about $5B, including two purchases totaling about 3M shares over the past 10 days. After the recent, albeit small, pullback and with a price to book of 2.0, shares are reasonably priced at about 12x forward earnings estimates. A yield of 2.6% and payout ratio less than 30% might be attractive to investors needing a bit of extra income. Other financials, such as a debt to equity ratio of 39%, indicate that things are going well at Phillips. All things considered this might be a good entry point for any investor, not just Buffett. Conclusion Stocks are like hamburgers. Whether it is a company like International Business Machines wanting to reduce share count or an investor like Warren Buffett on the prowl for solid companies like Phillips 66 buying makes more sense at lower prices. 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.

Portfolio Risk Contributions: Practical Examples

Portfolio risk contribution of an investment tends to differ from its portfolio weight. In some cases intuition may be misleading – a good example is the traditional 60/40 portfolio. It is paramount to assess the impact from each position in a portfolio. It is no secret that portfolio risk contribution of an individual security almost always differs substantially from its portfolio weight. However, investors frequently overlook this simple truth and tend to focus on notional dollar amounts invested. I have compiled a few examples that clearly illustrate why risk contributions matter. Let’s start with the traditional 60/40 portfolio, where SPDR S&P 500 ETF (NYSEARCA: SPY ) is used as a proxy for equities and iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) for bonds. Analyzing this portfolio on InvestSpy Calculator with 1 year historical data, we get the following results: The table above tells us that even though TLT had a slightly higher annualized volatility than SPY (which is an interesting fact in itself), its risk contribution to the total portfolio volatility was only 21.4% – way below TLT’s portfolio weight of 40%. And the difference would only get wider if we used shorter duration bonds for the fixed income component. So even though an investor may intuitively feel well diversified between stocks and bonds, almost 80% of portfolio risk comes from the equities component. Big discrepancies between portfolio weights and actual risk contributions can arise in equities-only portfolio as well. I came across the next example while writing a recent article about the ‘Fab Five’ stocks. Assuming a simple hypothetical portfolio where 50% is invested in SPY ETF and 50% in Google (NASDAQ: GOOG )(NASDAQ: GOOGL ), risk contributions from each position are far from even: This gap between risk contributions is primarily factored by the fact that GOOG is by far a more volatile security than SPY. The third example I would like to present is a portfolio that includes emerging market stocks. Investors are frequently reminded of a home country bias in their allocations and encouraged to include international stocks in their portfolio. So if a US investor allocates 20% to Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) with the remainder sitting in SPY, the risk profile of such a portfolio looks as follows: The risk contribution of the VWO position appears to be fairly close to its portfolio weight. Interestingly, the annualized volatility of the portfolio is only a tad higher than that of SPY’s in isolation despite the fact that VWO is significantly more volatile security. This is a direct result of the diversification effect. Therefore, the addition of emerging market stocks to diversify a portfolio of US stocks looks like a sensible decision. I hope the examples above give the readers a bit of a flavor how risk contributions work and why they are important. It is crucial to look beyond notional amounts invested in each position to assess if your portfolio is balanced the way it was intended. You will be surprised in some cases. 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.