Tag Archives: stocks

Optimists Survive By Eating Bears

Yesterday (9/10/15) David Tepper came on CNBC for an hour. The whole discussion is worth watching, but one thing he said is missed time and time again by many investors. I’m not real comfortable being short stocks because there’s a bias for stocks to go up over time” – Tepper Tepper has been putting up 25-30% returns for over 20-Years with billions under management. He is one of the best traders in history, great at sizing up risk-reward, security selection, and timing… and yet he says, “I’m not real comfortable being short stocks because there’s a bias for stocks to go up over time.” One of the sub-segments of the investment/econ space that I enjoy are the “end of the world as we know it” genre. They are mainly published at market bottoms while the super bullish books are published at market tops (remember Dow 40,000?) but we also see a lot of them mid-cycle as well. For whatever reason, doom and gloom sells very well. The short argument always sounds like the intelligent argument. To make it worse, there is always a lot of data that shows real reasons to be worried. Look at any of the books in the picture below and they are filled with data and charts showing impending doom. If you look at the publishing dates, however, they either missed the crash or just got the entire thesis wrong. (BTW, I recently moved and have not unfinished packing or I could have shown a stack four feet high of end-of-the-world books. For whatever reason, I cannot resist the urge when I am in a used bookstore). (click to enlarge) The end of the world What the perma-bears get wrong is that over time, civilization has indeed improved its lot in life. Yes, there are downturns but more often than not stocks go UP and not down. If someone as smart as Tepper is wary of shorting, then what does that say about what you should be doing? Looking at US assets over time using data from the Credit Suisse Global Investment Returns Yearbook , we can see that stocks go up… a lot… over time. Even after taking into account inflation, you would have 1,396 times your money from 1900-2014. Bonds and bills are less explosive, but even there, they go up over time. Cumulative Real Returns USA Over the past 115 years, you would have been fighting a 6.5% annual upwards drift by shorting stocks. That means that you are fighting a 0.54% hurdle each month. And, of course, that doesn’t even include any borrowing costs, commissions, or taxes. Annualized Real Returns USA Now all of this is not to say that we don’t short because we do. We have had success going long and short across asset classes to include stocks. What I am saying is that you need to have a really good reason to fight long-term trends in markets. If you can’t figure out why you have an edge on any given trade, then you are probably better off not doing it. Oh, and in case you are wondering “stocks are overvalued” or “Because the Fed” are not sufficient answers. If you want more info on the long-term bias of stocks to go higher, or just want to get a lot smarter, pick up a copy of the book “Triumph of the Optimists” by Dimson, Marsh, and Staunton.

4 Ways To Hedge Volatility With ETFs

Volatility levels have picked up lately though chances of a turnaround are little, at least in the near term. This is especially true as a faltering Chinese economy rattled the global markets in recent weeks and intensified fears of global repercussions. Plunging oil price, which is yet again threatening global growth and deflationary pressure, and slowdown in key emerging markets have added to the woes. All these factors might dim the chances of the Fed’s September lift-off and delay the rates hike to later this year or early next year. On the other hand, a series of upbeat data on the domestic front is supporting the prospect of a rates hike. The second estimate of Q2 GDP data came in much higher than the initial estimate, the housing market is improving, consumer confidence is rising, and the unemployment rate dropped to a seven-and-half year low. All these signaled that the U.S. economy is doing quite well on several aspects. In such a backdrop where international fundamentals are weak but domestic economy is on a firmer footing, investors may want to stay allocated to the U.S. markets and might take advantage of the beaten down prices. However, rising volatility might put their returns at risk. In order to exploit the current trend, investors should apply some hedge techniques to the equity portfolio. While there are number of ways to do this, we have highlighted four volatility-hedged ETFs that could prove beneficial amid market turbulence. Investors should note that these funds have the potential to stand out and might outperform the simple vanilla funds in case of rising volatility. How to Play PowerShares S&P 500 Downside Hedged Portfolio (NYSEARCA: PHDG ) This actively managed fund seeks to deliver positive returns in rising or falling markets that are uncorrelated to broad equity or fixed-income market returns. It tries to follow the S&P 500 Dynamic VEQTOR Index, which provides broad equity market exposure with an implied volatility hedge by dynamically allocating between different asset classes: equity, volatility and cash. The S&P 500 Total Return represents the equity component while the S&P 500 VIX Short-Term Futures Index represents the volatility component of the index. The non-equity (volatility + cash) portion makes up for one-fourth of the portfolio, while the rest goes to equity. In terms of equity holdings, the fund is widely diversified across sectors and securities. None of the firms holds more than 2.72% share while technology, health care, financials, consumer discretionary and industrials occupy the top five spots with a nice mix in the portfolio. The fund has accumulated $462.5 million in its asset base and trades in a moderate volume of around 179,000 shares per day. It charges 40 bps in fees per year from investors and was down 1.8% in the trailing one-month period. Barclays ETN+ S&P VEQTOR ETN (NYSEARCA: VQT ) This is an ETN option tracking the S&P 500 Dynamic VEQTOR Index. VQT uses volatility futures contracts directly to hedge volatility. It increases allocation to the equity component as measured by the S&P 500 Total return index, in times of low volatility. On the other hand, it increases volatility exposure as measured by the S&P 500 VIX Futures Total Return index and allocates entirely into cash if the index slumps 2% or more in the preceding 5 days. In this manner, the note manages to keep a check on volatility. The product has amassed $434.7 million in AUM while sees light volume of nearly 28,000 shares per day on average. It is a bit pricey, charging 95 bps in annual fees. The ETN lost 1.7% over the past one month. Janus Velocity Volatility Hedged Large Cap ETF (NYSEARCA: SPXH ) This ETF tracks the VelocityShares Volatility Hedged Large Cap Index and looks to hedge “volatility risk” in the S&P 500, offering investors exposure to not only the S&P 500 but also both long and inverse exposure in short-term VIX futures. The product provides target equity exposure of 85% to the S&P 500 using large cap ETFs, while the remaining 15% goes to the volatility strategy through one or more swaps. The fund trades in a light volume of roughly 7,000 shares a day and charges 71 bps in annual fees. The ETF shed nearly 3.2% in the past one-month period. ETRACS S&P 500 VEQTOR Switch ETN (NYSEARCA: VQTS ) This product entered the market 10 months ago and has been able to garner $22.8 million in its asset base. It follows the S&P 500 VEQTOR Switch Index, which seeks to simulate a dynamic portfolio that allocates between equity and volatility based on realized volatility in the broad equity market. The allocation to the equity component is dynamically adjusted to gain exposure to the S&P 500 with a target volatility of 10%. The remainder of the index is allocated to the S&P 500 VIX Futures Long/Short Switch Index that allocates between cash and long or short positions in an index of VIX futures with a constant one-month maturity. This means that when realized volatility is 10% or less, the index allocates 100% to the S&P 500 Index. When realized volatility exceeds 10%, the index allocates a portion to the S&P 500 Index and the remainder to the futures index. This approach results in higher expense ratio of 0.95%. Volume is also paltry at about 4,000 shares. VQTS was down nearly 8% over the past one month. Bottom Line Investors could definitely hedge volatility in their portfolio with the help of the above-mentioned products, which provide dynamic exposure according to the level of market volatility. These are least affected by any market turmoil and could prove great choices when it comes to protection against market downturn. Original Post

Are Treasuries The Best Safe Haven ETFs Now?

Though the U.S. economy has been putting up a stronger show since the second quarter of 2015, global growth worries led mainly by China issues could derail the U.S. market momentum in the coming days. Whatever the case, devaluation of the Chinese currency yuan by 2% and a six-and-a-half-year low manufacturing data for August left the global market in ruins last month. Apart from China, a slowdown in the Japanese economy, the return of growth concerns in the Euro zone, technical recession in Canada mainly on a protracted oil price rout, slouching commodities and painful trading in the emerging markets recently put an end to the rally in risky assets. If this was not enough, U.S. job numbers in August grew at the most sluggish pace in five months and fell short of analysts’ expectations. Though the data was not at all unimpressive as the unemployment rate ticked down to 5.1% from 5.2%, the lowest since April 2008, the estimate miss stirred up confusion among investors. This coupled with growing concerns in the global horizon sent investors on a defensive mode and brightened the risk-off trade sentiments. Investors dumped stocks and junk bonds in favor of safe haven assets to protect their portfolio from capital erosion. However, investors should note that there are a few assets in the market which are known for their safe haven bids. These include U.S. Treasuries, the greenback, gold and Japanese yen. These products normally gain when volatility in the market flares up and vice versa. However, all safe haven assets and the related ETFs did not provide equal solace to investors this time around. While some lived up to expectations and some failed short. Greenback – Loser U.S. dollar seems to be loser on this front. PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) which offers exposure to the U.S. dollar against a basket of six world currencies like the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc lost about 1.9% (as of September 4, 2015) in the last one month as the bet for the September timeline of the Fed lift-off had softened a bit since subdued inflation pushed the speculative timeline to a little later. After the latest U.S. job report which emphasized the estimate miss, UUP lost about 0.12% on September 4 and left safety seeking investors stranded. Gold – Gainer; But How Long? Though the looming Fed lift-off and the persistent slowdown in China (one of the major consumers of gold) go directly against the demand for the yellow metal, this precious metal offered unanticipated support to investors in the recent global market tumult. Gold bullion ETF SPDR Gold Shares (NYSEARCA: GLD ) added over 3.4% in the last one month. However, this support is likely to be short-lived as the underlying fundamentals are weak. Sooner or later, the U.S. economy is due for a rate hike which will tarnish the gold bullion. U.S. Treasury – Are the Best among the Pack? For the U.S. Treasury bonds, especially the long-dated ones, 2014 turned out to be a banner year. Though the looming Fed lift-off is a negative for U.S. treasury ETFs, 10-year U.S. Treasuries outdid their Group of Seven counterparts in the last month’s equities collapse, as per Bloomberg . Bloomberg also reported that the latest performance was a sweet surprise for Treasuries if we go by the prior three Fed rate-hiking rounds since 1993, when 10-year U.S. debt underperformed other developed countries. Yields on the U.S. benchmark 10-year notes, which touched the 2.50% mark – the highest point of this year – on June 10, slipped to 2.13% on September 4, 2015. The plunge in yields at the eleventh hour of the most speculated Fed meeting for a lift-off in mid-September favored its safe-haven standing. A still-low inflation level and an estimate miss in U.S. job data also spurred many investors to bet against an immense rate hike and pour their money into U.S. Treasuries, the safest harbor for smart yields and decent capital gains. Over the last one month (as of September 4, 2015), Barclays iPath US Treasury 5-Year Bull ETN (NASDAQ: DFVL ) added over 3.2%, the best performance in the government-backed bond ETFs space. The product looks to gain in response to a decrease in 5-year Treasury note yields and fall if there is a rise in 5-year Treasury note yields. Other well-performing treasury ETFs are Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV ), Pimco 7-15 Year U.S. Treasury Index Fund (NYSEARCA: TENZ ), Intermediate-Term U.S. Treasury ET F (NYSEARCA: SCHR ) and iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ). Original Post