Tag Archives: stocks

Market Lab Report – Premarket Pulse 7/28/15

Major averages fell but on lower volume after the Chinese markets tanked once again. All major averages are under their respective 50dmas, but should the market continue the sloppy sideways pattern it began in late 2014, it could find a floor sooner than later. That said, the  market lives to surprise so further damage could be in store. Thus, it is always more important to safeguard against losses, so if you are still long any stocks, keep stops tight as moving to cash is always prudent when the market is undergoing a correction, even if a minor one. Stocks in this environment tend to take the staircase up and the trapdoor down. Futures are up more than 0.5% at the time of this writing as the two-day Federal Reserve meeting kicks off today. A statement is due at 2 p.m. on Wednesday. Chairwoman Janet Yellen has previously indicated that a rate increase is on the cards before the end of the year, though expectations for a September hike have faded, partly due to market turmoil in China and a continuing slide in commodity prices including oil.  “The Fed will surely bring the Chinese selloff and commodity rout under their consideration and will tailor their response accordingly. We do not think that Yellen will fan the fire any further by bringing the exact timeline for a rate hike. In fact, there is a strong possibility that she may water down those expectations and use a very dovish approach,” said Naeem Aslam, chief market analyst at AvaTrade, in a note.  Indeed, Yellen is well known for her dovish stance on not undoing what the central bank has done with respect to quantitative easing since 2009.  

RSX: Expect More Weakness

Oil continues to trend lower. The Russian ruble is also weak. There has not been more panic in the Russian market yet, but this does not mean that there will be no panic at all when oil drops further. I published my initial bear thesis on the Russian market (NYSE: RSX ) on June 26. Things went as I expected and RSX declined 9% since then. I must admit that RSX held fairly well, as oil prices declined and the economy showed no signs of rebound. However, I think we will see the true downside potential of RSX later. It is obvious that while RSX declined this month, there was no panic. The decline of the Russian market is by no means comparable to the recent performance of the Chinese market , although the state of affairs for the Russian economy is far worse than for the Chinese economy. My explanation for this is the lack of players on the Russian market. Russian market went out of favor after the oil crash of 2008 – 2009 and never really recovered in terms of trading activity. Recent data ( Google translate link ) from the Moscow Stock Exchange confirms this thesis. For example, the volume of stock trading declined by as much as 22% in May 2015 compared to May 2014. In my view, a significant number of investors who wanted to get out of Russia already completed this task. It also turns out that the rebound from December 2014 lows was on low volume, which means that there are less players to panic when things go south. However, this also means that there will be less liquidity on the market in case of negative events. The main risk for the Russian market is the continuing decline in the price of oil. The decline in oil price hurts RSX in two ways. The first one is obvious, as RSX has 43.54% of its portfolio in Russian energy companies. The second blow is the damage that low oil prices do to economy, hurting almost every other company in the portfolio of RSX. There have recently been additional negative news for the retailer Magnit, which accounts for 7.62% of RSX holding. Sergey Galitsky, the founder of Magnit, told ( Google translate link ) the press that the company could work without him. For Magnit, Galitsky is the same that Steve Jobs was for Apple, and his departure could seriously hurt the business, especially in the Russian business reality, where a lot depends on individuals and not on processes. Back to oil. Here and there I read bullish articles on oil. The main bullish argument is that oil prices are too low to stimulate investment, which will ultimately lead to a rebound. If we think about a five or ten year period, then I agree with this statement. If we talk about next few years, this might not be the case. The examples of coal and iron ore markets showed us how long prices could decline despite the fact that producers are losing money. Also, producers with lower costs could try and increase production in order to make some additional money. In severe downturns, costs also go down fast. For my thesis to be valid, oil does not need to be in a severe downtrend for years. In my view, low oil prices until the end of this year will be enough to bring RSX back to the lows of December 2014. So far, everything went according to plan in the RSX trade. I think that there’s more weakness to come, as the decline of oil prices pressures Russian economy and the Russian ruble. Disclosure: I am/we are short RSX. (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.

Rounding Up The Top International Equity REIT ETFs

Summary TAO has delivered the strongest total returns, but when it outperformed the pack in the past it usually fell right back within a year. My favorite international equity REIT ETF is VNQI primarily due to the substantially lower expense ratio. While VNQI is offering the best expense ratio here, there are options for international equity without the REIT structure that offer much lower expense ratios. International equity REITs offer investors a compelling opportunity for portfolio diversification, but high expense ratios limit the long term potential returns. To help investors identify which funds might work for them, I’m performing a quick comparison on several of the most liquid options. The ETFs I’m comparing in this piece are: Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ) iShares International Developed Real Estate ETF (NASDAQ: IFGL ) SPDR Dow Jones Global Real Estate ETF (NYSEARCA: RWO ) SPDR Dow Jones International Real Estate ETF (NYSEARCA: RWX ) Guggenheim China Real Estate ETF (NYSEARCA: TAO ) Comparing Returns Out of the 5 ETFs, VNQI is by far the youngest. That is a little disappointing because I would love to have a longer period for measuring returns. Since I had to limit my assessment of historical performance to the period in which VNQI was a viable investment, my sample size was reduced to only about three and a half years. The chart below shows the total returns earned for each ETF using dividend adjusted closes since the start of 2012. TAO was the clear winner for the period, but it also shows less correlation with the other ETFs. The weaker correlation should be expected since TAO is investing in China and the other four are showing a great deal of international diversification. In my opinion, TAO is the most dangerous due to the very high volatility of monthly returns (about twice the volatility of the SPDR S&P 500 Trust ETF ( SPY)), but the price charts also indicate that TAO seems to be risky when it deviates from the rest of the pack. The next chart uses those dividend adjusted closes and standardizes for share prices by charting returns over time as a percentage of their starting values. (click to enlarge) The real reason to use a chart like this is to be able to do a quick eyeball check for correlation. When I run correlation statistics, sometimes the values appear to be more correlated than they do when I just eyeball the chart. At a glance we can see that TAO and RWO seem more prone to deviating from the rest of the pack. However, we have also seen that the deviations from the pack are reversed within a year or less. At the moment, TAO is still above the other options and expecting international REIT valuations to stay strongly correlated would suggest it may be moving a little too high unless it is actually breaking out of a very long term connection to the other international REIT markets. Comparing Expense Ratios Remember that over the long term a buy and hold investor will see a meaningful part of their total return determined by the expense ratio. In a period of 3 or 6 months the expense ratio won’t make a large difference in the total returns but a difference of .5% in the expense ratio becomes very meaningful if it is allowed to compound for 30 or 40 years. Even without compounding, a difference of .5% in the expense ratio would devour 20% of the portfolio value over 40 years. The next chart compares the expense ratio for each ETF. Since TAO was the only ETF with a different gross and net expense ratio, I’ve included both in the chart. As you might guess from my feelings about expense ratios, my holding for the exposure is the Vanguard Global ex-U.S. Real Estate ETF. As I’ve been digging into the returns for international equity REITs, I’m finding that I’m less than impressed with the risk to return ratio. Within my portfolio the highest expense ratio comes from VNQI and I’m contemplating if I may want to sell off from the sector all together and just use the Schwab International Equity ETF (NYSEARCA: SCHF ) for my international exposure. I love the REIT structure for investing, but I’d rather see lower levels of volatility and lower expense ratios. The expense ratio on SCHF is only .08%, which thoroughly beats even VNQI. Do I want international equity REIT exposure enough to keep holding VNQI over SCHF? I’m not sure. I want my equity holdings to be long term allocations and if I was going to buy one international equity investment and then not touch it for 40 years, I think I would lean towards SCHF. At the moment, I’m out of my position in SCHF because I liquidated the position to fund a limit-buy order on a microcap. If you’re looking for that international REIT exposure as part of the portfolio, my favorite is VNQI. I’m just starting to question whether it offers enough risk adjusted returns to be worth the allocation I’ve given to it. A Note on RWO RWO holds international REIT investments, but it is really a global REIT ETF. It was holding around 55% of the portfolio in domestic equity REIT investments. The internal diversification is great for an investor that is seeking to get their diversification with as few tickers as possible, but I see no reason to pay .50% on RWO when an investor could pay .24% on VNQI and .12% on the Vanguard REIT Index Fund (NYSEARCA: VNQ ). Conclusion There are a few options for international REIT investing through ETFs. In my opinion, VNQI offers the most compelling option but I’m starting to question whether the sector is worthy of allocation when the expense ratios and level of volatility throughout the industry are so high. If I was holding TAO, I would contemplate selling it whenever it moved meaningfully above the other international equity REIT investments. Since I’m bearish on China and prefer to make long term investments, the strategy doesn’t work very well for me. If I sell out later in the year, I would probably swap to an international ETF with a lower expense ratio. I might also put part of the cash into a short term bond fund to reduce my total exposure to international equity since I am concerned about the correlation between international equity investments. Even if I’m not holding shares in China, if my concerns come to pass I would expect most international ETFs to take a hit even if there was no direct exposure to China. Disclosure: I am/we are long VNQ, VNQI. (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. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.