Largest High Grade Bond Outflow On Record

Monday, December 20th, 2010

While it was no surprise to readers that equity mutual funds saw the 32nd consecutive outflow from domestic stock funds (for a total of $95 billion YTD), what was far more surprising is that flows out of credit, and particularly high grade, surged. As Bank of America notes, “high grade mutual funds saw outflows of $2.5 billion, the largest dollar amount on record and just the fourth occurrence this year so far, according to data from EPFR.” The question then becomes where did, and will, all this cash go: if now following such a massive outflow from the traditional flow safe-haven, no money still goes to equities, then it will be fairly simple to conclude that no matter what happens, that equities are now thoroughly embargoed by the vast majority of retail investors: those that, incidentally, account for just under 40% of market capitalization (a number which curiously is almost comparable to the amount of stimulus notional, both fiscal and monetary, since the Lehman crash).

From BofA:

High grade mutual funds saw outflows of $2.5 billion, the largest dollar amount on record and just the fourth occurrence this year so far, according to data from EPFR. As we highlighted yesterday, negative net flows in high grade funds tend to follow large sell offs in rates, which has occurred since the beginning of this month. In other asset classes, high yield mutual funds saw $222 million in net flows, the second consecutive weekly inflow, but lower than last week’s figure of $533 million. Factors pointed to a mild but positive number, as daily flow  figures were inconsistent, with two positive and two negative readings. CDX indices performed well early in the week, but softened towards  the end, also providing an inconclusive signal. Net flows from institutional and retail investors were largely split, with institutional investors reporting inflows of $153 million or 0.2% of assets, and $120 million or 0.2% of assets from retail. Importantly, non-US domiciled funds saw their third consecutive weekly outflow, $28 million this week, compared to an inflow of $233 million from US domiciled funds. Finally, inflows to loans reached a record by dollar amount, according to AMG/Lipper data.

Tags: Asset Classes, Bank Of America, Domestic Stock Funds, flow figures, high yield mutual funds, Institutional Investors, Market Capitalization, Retail Investors, Safe Haven, Sell Offs
Posted in Credit Markets, Markets | Comments Off

China Imports Five Times More Gold

Saturday, December 4th, 2010

Just last week we highlighted how India and China are driving global gold demand (Read: India and China Continue to Drive Global Gold Demand) but it appears demand from China is even stronger than we thought.

Statistics released today by the Shanghai Gold Exchange show that China’s gold imports have jumped over 460 percent in just the first ten months of this year. Through October, China’s gold imports totaled 209 tons of gold, up from just 45 tons in 2009.

And they’re not done yet. Historically, the fourth quarter is when China imports the largest amount of gold so we could see much higher figures when all is said and done.

The import figures were released as a part of a presentation from Shanghai Gold Exchange Chairman Shen Xiangrong. Chinese inflation worries have picked up steam as the year has progressed and Shen said “uncertainties in domestic and global economies, and increasing anticipation of inflation [in China], have made gold as a hedging tool very popular” as investors look for a store of value, according to several news reports.

Shen added that 70-80 percent of the imported gold has been transformed into mini gold bars which the Financial Times describes as a “classic product for retail investors.”

While the figures are astounding, we’ve been discussing this developing trend for several years. Since 2000, the gross national income (GNI) per capita on a purchasing power parity basis has jumped nearly 200 percent in China.

Without a social safety net, efficient retirement savings vehicles and a limited number of investment options, these wealthier citizens are turning to the metal that they began using as a currency more than 4,000 years ago.

We believe the figures released today reflect long-term gold demand and are not short-term in nature.

Tags: China Imports, Currency, Exchange Show, Financial Times, Fourth Quarter, Global Economies, Gold Bars, Gold Demand, Gold Exchange, Gold Imports, Gross National Income, Import Figures, India, Inflation In China, Inflation Worries, Investment Options, News Reports, Per Capita, Purchasing Power Parity, Retail Investors, Retirement Savings, Rsquo, Shanghai China, Social Safety
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Horizons AlphaPro Launches Canada’s First Actively Managed Preferred Share ETF

Monday, November 22nd, 2010

Horizons AlphaPro Launches Canada’s First Actively Managed Preferred Share ETF

Toronto, November 23, 2010 – AlphaPro Management Inc. (“AlphaPro“), manager of the Horizons AlphaPro exchange traded funds (“ETFs“), has launched Canada’s first actively managed preferred share ETF, the Horizons AlphaPro Preferred Share ETF (the “Preferred Share ETF“).

The Preferred Share ETF will begin trading today on the Toronto Stock Exchange under the symbol HPR. The sub-advisor to the Preferred Share ETF is Natcan Investment Management Inc. (“Natcan“), which currently manages more than $1 billion dollars in preferred share assets.

“We’re very happy to be working with Natcan once again. Their fixed income team has done a great job in managing the recently launched Horizons AlphaPro Corporate Bond ETF, Canada’s largest actively managed ETF. We expect more of the same with the Preferred Share ETF based on our belief that an active strategy can overcome many of the limitations found in trying to replicate a preferred share index,” said Ken McCord, President of AlphaPro.

The investment objective of the Preferred Share ETF is to provide dividend income while preserving capital by investing primarily in preferred shares of Canadian companies. The Preferred Share ETF may also invest in preferred shares of companies located in the United States, fixed income securities of Canadian and U.S. issuers, including other income generating securities, as well as Canadian equity securities and exchange traded funds that issue index participation units. The Preferred Share ETF will, to the best of its ability, seek to hedge its non- Canadian dollar currency exposure to the Canadian dollar at all times.

Natcan anticipates yields on investment grade preferred shares will stay strong over the next two years and that the asset class will likely continue to see a growth in interest from income seeking retail investors, many of whom are looking to increase their income in retirement. This process could be accelerated by the phase-out of many income trusts in 2011 and beyond.

“Preferred shares really hit a sweet spot for many Canadian investors,” Mr. McCord said. “They offer attractive, tax-efficient yields and are generally less volatile than common shares. For investors with a need for income and an appropriate risk tolerance, preferred shares can be a very effective investment solution.”

Commissions, management fees and expenses all may be associated with an investment in the Preferred Share ETF. The Preferred Share ETF is not guaranteed, its value changes frequently and past performance may not be repeated. Please read the prospectus before investing.

About Natcan Investment Management (www.natcan.com)

Founded in 1990, Natcan Investment Management Inc. is a subsidiary of the National Bank of Canada. Since the firm’s founding, Natcan has privileged shared ownership between the parent company and its key professionals. Recognized as a leading portfolio management firm in Canada, Natcan provides investment solutions to institutional clients, and acts as sub-advisor for mutual funds and private wealth portfolios. With approximately $25 billion in assets under management as of September 30, 2010, the firm has about 45 investment professionals across its Montreal and Toronto offices.

About AlphaPro Management Inc. (www.HAPETFs.com)

AlphaPro is an innovative financial services company specializing in actively managed exchange traded funds with assets under management of approximately $435 million as of October 29, 2010. AlphaPro is a subsidiary of BetaPro Management Inc. (“BetaPro“). BetaPro is Canada’s largest provider of leveraged, inverse leveraged and inverse ETFs. BetaPro manages approximately $2.6 billion in assets as of October 29, 2010. BetaPro is a subsidiary of Jovian Capital Corporation (JOV:TSX).

For more information:
Ken McCord, President, AlphaPro Management Inc., (416) 933-5746 or 1-866-641-5739

Tags: Alphapro, asset class, Canadian Equity, Canadian Market, Corporate Bond, Currency Exposure, Dividend Income, Dollar Currency, Equity Securities, ETF, ETFs, Exchange Traded Funds, Income Securities, Investment Management, Investment Objective, Issue Index, Mccord, Natcan Investment Management Inc, Preferred Share, Preferred Shares, Retail Investors, Share Index, Toronto Stock Exchange
Posted in Canadian Market, ETFs, Markets | Comments Off

Getco Churns Nearly Entire GM Float As Stock Closes At Lows Of Day, And $1 Below Break Price

Thursday, November 18th, 2010

The only clear winner from today’s GM IPO? All those who got IPO shares and flipped them to the sheep. And of course GETCO, which churned 452 million of GM’s 478 million share float: in other words 95% of the entire float was traded by computers! As for everyone else, you lost: with the stock closing at the lows of the day, all retail investors who bought in post the break, and on the way down ended up with losing positions.We eagerly await the teleprompter’s appearance at 4:15 pm eastern to spin this in the right way and convince people that a loss is really a gain.

Tags: Appearance, Break, Computers, Getco, Gm, Ipo Shares, Lost, Lows, People, Retail Investors, S 478, Sheep, Stock, Teleprompter
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Don’t Believe The Rally?

Tuesday, October 26th, 2010

by Leo Kolivakis, via Pension Pulse

I wanted to follow-up on my previous post where Leo de Bever articulated his fears on what will happen when the music stops. Joe Saluzzi, co-founder of Themis Trading, was interviewed on Yahoo Tech Ticker on Monday (see video below):

Major averages are hovering near their highest levels since September 2008, but retail investors continue to flee the market.

Domestic equity funds have suffered outflows for 24 consecutive weeks through Friday, and over $81 billion has come out of domestic equity mutual funds year to date, according to Morningstar.

At the risk of stating the obvious, several factors explain why investors simply don’t trust the rally.

Twice bitten, thrice shy: Having been burned by the bursting of the tech stock bubble in 2000, the housing bubble and the financial crisis of 2008, investors are understandably wary of getting sucked in again. A “lost decade” for index investors hasn’t helped either.

It’s the Economy Stupid: With the “real” unemployment rate near 17%, millions of Americans simply have no money to put into the market; many are cashing out their 401(k) plans and otherwise raiding their nest eggs in an effort to stay afloat.

Given the economic backdrop, it’s no surprise many investors see the rally as being detached from reality and due only to the Fed’s easy money policies…and the promise of more!

“We’re not seeing any sort of growth other than stimulus,” says Joseph Saluzzi, co-founder of Themis Trading. “That is a very disturbing thing — the constant stimulus that keeps on coming that really does nothing other than barely keep you above [breakeven] on the GDP print.”

In addition, Saluzzi says investors are rightfully worried about a market dominated by “high-speed guys just chasing each other up and down the price ladder.”

Unsafe at High Speeds

As has been widely reported, high-frequency trading routinely accounts for more than 50% of daily U.S. equity trading volume and regularly approaches 70%.

Saluzzi isn’t opposed to high-frequency trading per se, calling it a “byproduct of the market structure,” as detailed in the accompanying video. But he believes that structure is broken, thanks to rules promoting computer-driven trading, most notably Reg NMS.

As a result of regulatory changes and new technology, events like the May 6 ‘flash crash’ “will happen again,” he says. “There’s not a doubt in my mind.”

Many retail investors feel the same way, another reason for the mistrust of the rally and why about $65 billion of the equity fund outflows this year have occurred in the five months since the “flash crash”.

So are high frequency trading (HFT) platforms accounting for 70% of the daily trading volume? I’m not sure if it’s that high but I have no doubt that today’s stock market is primarily driven by multi-million dollar computers developed by large hedge funds and big banks’ prop desks.

But what’s the best way to beat high frequency trading? Take a long-run view on a stock, a sector, or an asset class. You’re never going to beat the computers day trading but you can make money in these markets by understanding the weakness of these HFT platforms. For example, if you hold shares of a solid company and the price plunges on high volume for no real valid reason, chances are some HFT is going on in that company. My advice is to add to your positions on those dips and just hold on. If you get cute, placing tight stop losses, you’re going get burned. Just like anything else, computers have advantages and disadvantages.

[Note: Keep an eye on Citigroup (C), a favorite target of HFTs, and Research in Motion (RIMM). Both stocks are primed to break out from these levels. I prefer RIMM.]

What worries me more is what Saluzzi says on how volatility is impacting the IPO market. But the facts don’t back up his claims. In fact, according to Renaissance Capital, $23 billion was raised in the global IPO market last week, making it the biggest week this year and signaling a revival in investor interest for this class of equities:

The Hong Kong offering of AIA, a carveout of AIG’s Asia Pacific life-insurance business, raised $17.8 billion, making it the fifth-largest IPO on record. Also Taiwan’s TPK Holdings has a $200 million IPO; the firm is the supplier of the touch-screen technology behind Apple’s iPad.

In early November, Coal India IPO is set to raise more than $3 billion in what may be the country’s largest-ever initial public offering.

In the U.S., handbag-maker Vera Bradley (VRA), Chinese education provider TAL Education (XRS) and Italian restaurant chain Bravo Brio (BBRG) raised a combined $440 million, while in South America, oil and gas provider HRT Participações sold $1.4 billion in new stock on Thursday.

Norway’s Statoil Fuel & Retail raised $800 million after pricing at the top of the range Thursday. Andthe world’s largest online betting exchange, London-based Betfair, made its public debut by raising $540 million.

The average 2010 IPO has returned 6.3% from its first day close to date, outpacing the 4.8% year-to-date return of the MSCI World Index (IWRD), says Renaissance.

“Heavy, deal flow, positive returns and a swelling IPO pipeline suggest an active close to an already active year, and an IPO market that has finally returned to more normalized issuance levels,” the company said in an online blog.

As for the economy, don’t just focus on the US. CPB Netherlands Bureau for Economic Policy Analysis released its world trade report on Monday, showing world trade up 1.5% month-on-month in August and world industrial production up 0.2%:

Compared to its long run average, production momentum remains high in July, particularly in the United States, the Euro Area, and emerging Asia.

There is a lot of slack in the US economy, but things are slowly shifting. As for the rally, there is plenty of liquidity to propel shares much higher. While I understand asset managers who are skeptical, I fear they will be left in the dust when the markets start going parabolic. And whether or not you believe in the rally, it’s irrelevant. What is relevant is how long can you afford to underperform the markets before you lose your job?

Copyright (c) Leo Kolivakis, Pension Pulse

Tags: 401 K Plans, Breakeven, Co Founder, Consecutive Weeks, Domestic Equity Funds, Easy Money, Economic Backdrop, Equity Trading, ETF, High Frequency, High Speeds, Housing Bubble, Index Investors, India, Morningstar, Nest Eggs, oil, Retail Investors, Saluzzi, Several Factors, Stimulus, Stock Bubble, Unemployment Rate
Posted in Energy & Natural Resources, ETFs, India, Markets, Oil and Gas | Comments Off

Emerging Markets Diary (August 30, 2010)

Friday, August 27th, 2010

Emerging Markets Diary (August 30, 2010)

Strengths

• Thailand’s GDP expanded by a higher-than-expected 9.1 percent in the second quarter from a year earlier, as surging exports helped offset the impact of political turmoil.
• Second-quarter GDP rose 7.9 percent year over year in The Philippines, exceeding consensus estimates. Growth was driven by higher fixed-asset investment, especially in construction, and government spending.
• GDP and consumption levels in dollar terms place Russia on par with Brazil and India, according to Troika Dialog research. Data from the Brookings Institution imply that Russia actually has the largest middle-class consumption among the BRIC nations, which supports the consumer sector investment theme.
• The Brazilian corporate and retail investors still continue to borrow—the data from July show 18 percent growth of outstanding loans year over year.
• -The unemployment rate in Brazil in July declined to 6.9 percent from 7 percent in June. With the latest inflation data at 4.4 percent, below the official target of 4.5 percent, the market expectations are that the current interest rates of 10.75 percent are unlikely to change by year-end
• Investors continue to be attracted by the prospects of Brazil. Shell and Cosan set up a joint venture to produce sugar and ethanol and to consolidate the fuel distribution in the country. The combined entity will have an 18 percent market share in the fuel distribution, behind Petrobras (34 percent) and Ultrapar (21 percent)
• Retail sales in the greater Santiago area in July increased by 25 percent year over year. The Central Bank of Chile updated a previously forecast GDP growth of 4 percent to 5 percent, saying it is more likely to reach 6.5 percent

Weaknesses

• Hong Kong’s July exports increased by a slower-than-expected 23.3 percent year over year, while imports grew a less-than-estimated 24.9 percent year over year, reflecting a slowdown in China.
• According to WINDS database, out of 90 Chinese property developers listed in Shanghai and Shenzhen that have reported first-half results, close to two-thirds show negative operating cash flows. A similar ratio was last seen in the middle of 2008.
• Russia’s ministry of economy estimated that the drought will shave off at least 0.4 percent to 0.5 percent from GDP growth this year. According to Reuters, potential total effect on the economy could be 0.7 percent to 0.8 percent being slashed from GDP growth.
• An appreciating Chilean peso (up 3.3 percent against the U.S. dollar last month) is causing strain for many Chilean exporters. The Central Bank rejected an intervention call at this stage, saying the currency strength is a reflection of the strength of the Chilean economy

Opportunities

• The 60-mile traffic jam in Northern China since August 14 is attributable to coal transportation to meet higher demand for power generation because of unusually hot weather. The provinces of Inner Mongolia, Shanxi and Shaanxi account for half of China’s coal production. Truck transportation to coastal regions has added tremendous pressure on highway infrastructure. These bottlenecks highlight the longer-term need for more infrastructure construction in the hinterlands and shorter-term opportunity for higher coal prices.

• Russian car deliveries increased 9 percent in the first seven months of the year and jumped 48 percent in July, compared to first-half year sales growth of 0.6 percent in the rest of Europe.
• The Venezuelan government will cancel $200 million in outstanding debt of Colombian exporters. Although the two countries represent very divergent political systems, their trade relations remain strong
• HSBC is reported to be bidding for a controlling stake in Nedbank, the fourth-largest bank in South Africa. It remains to be seen whether the South African authorities will authorize such a transaction after holding ICBC (of China) to a 20-percent stake in Standard Bank
• Time Warner bought a stake in Chilevision, the local free-to-air TV network, for around $150 million. It remains to be seen how Time Warner, which already operates in Chile through CNN, will reposition its strategy in the country

Threats

• Deteriorating U.S. economic data, including housing sales and unemployment, might weigh on investor sentiment toward Asian countries that have largely relied on exports for the current recovery.
• The constitutional referendum on September 12 could limit potential upside in Turkish equities until the outcome is known. Historically, market performance was hindered by the prospect of a coalition government.
• Mexico continues to battle to restore stability while conducting its war on drugs.

Tags: Asset Investment, Bank Of Chile, Brazil, BRIC, BRICs, Brookings Institution, Central Bank Of Chile, China, Consensus Estimates, Consumer Sector, Consumption Levels, Cosan, Current Interest Rates, Dialog Research, Dollar Terms, Emerging Markets, Fuel Distribution, GDP Growth, India, Inflation Data, Market Expectations, oil, Political Turmoil, Quarter Gdp, Retail Investors, Russia, Target, Unemployment Rate
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India to Open Equity Markets to Foreign Retail Investors

Tuesday, August 24th, 2010

This article is a guest contribution by American Century Investments.

Over the past few years, India has moved forward with market-oriented economic reforms such as reductions in tariffs and other trade barriers, the modernization of its financial sector, major adjustments in government monetary and fiscal policies, and more safeguards for intellectual property rights. In a move to reform its economy and boost double-digit growth, India—Asia’s third largest economy—is now planning to open equity markets to foreign retail investors.

The Financial Times reported last week (“India Eyes Foreign Retail Share Investors,” August 9, 2010) that a panel set up by the government to explore ways of bolstering foreign capital inflows had recommended making it easier for foreigners—particularly wealthy foreign nationals of Indian origin—to buy shares on the Indian exchanges.

In the article, Ashvin Parekh, a partner at Ernst & Young in Mumbai, who has also been working with the finance ministry on the project, said that “the finance ministry has accepted the recommendations in principle as it wants to capitalize on India’s incredible growth by attracting more foreign investors.” The move to open up the country’s equity market to retail investors abroad had been passed on to India’s market regulator and central bank, which would have to create a framework to protect investors’ interests.

About 18 years ago, foreign institutional investors were first allowed to invest in India. Now, foreign-owned brokers are common and trade directly on the country’s exchanges, while individual investors are prohibited from such practices. The plan to open up equity markets to foreign markets comes as India’s exchanges are upgrading technology in a bid to lure high-speed, computer-driven trading that accounts for a large proportion of activity on U.S. and European stock exchanges.

India’s government is also reportedly seeking to raise about $5 billion by selling minority stakes in state-owned groups, including Oil India and Coal India, and as investors eye India for higher financial returns. Over the past six months, India’s equity market has drawn much foreign institutional investor cash. In addition, the economy has grown 8.5% on the back of strong domestic demand and abundant liquidity, thus outperforming large emerging market rivals.

In the first seven months of 2010, foreign institutional investors have poured approximately $11 billion into Indian equities (see chart below), compared with about $7.5 billion during the same period last year. Analysts expect inflows for this year to top the $17 billion record hit in 2007.

Source: The Financial Times

More Growth Potential for Investors

While opening up its equity market to foreign retail investors will likely benefit India and increase capital inflows in that country, there is also more growth potential for investors who are prepared to accept the risks and invest for the long term.

Over the past decade, the economies of emerging market countries like India have been more dynamic and faster growing than the developed world. Maintaining growth and stability is certainly a top priority for emerging market countries like India. Compared to when emerging markets funds were first listed some 20 years ago, the asset class is also better regulated and offers more transparency due to improvements in the legal and financial systems. Many economies such as India have also built up their foreign exchange reserves, which allows them withstand market turbulence from developed economies. Moreover, sound macro fundamentals and stimulus measures helped the country weather the recent global financial crisis.

Over the next five years, we also believe that India and emerging market economies will be driven not only by export demand from the rest of the world, but by growth in domestic consumption, including health care, technology, infrastructure, and finance, among others. Accordingly, we think that this will create huge opportunities for investors and companies doing business in these sectors.

Investment return and principal value will fluctuate, and it is possible to lose money by investing.

International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.

The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.

You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. The fund’s prospectus or summary prospectus, contains this and other information about the fund, and should be read carefully before investing. Investments are subject to market risk.

Copyright (c) American Century Investments

Tags: American Century Investments, Ashvin, Capital Inflows, Double Digit Growth, European Stock Exchanges, Finance Ministry, Financial Times, Fiscal Policies, Foreign Institutional Investors, Foreign Investors, Foreign Nationals, India, India Asia, Indian Origin, Individual Investors, Intellectual Property Rights, Market Regulator, oil, Retail Investors, Share Investors, Speed Computer, Stock Exchanges India
Posted in Energy & Natural Resources, India, Infrastructure, Markets, Oil and Gas | 1 Comment »

The Art of Outperformance (Jensen)

Sunday, July 4th, 2010

This article is a guest contribution of Neils Jensen, Absolute Return Partners.

“When data contradicts theory in a discipline like physics, there is excitement amongst scientists […]. When data contradicts theory in finance, there is dismissal.”

Robert Arnott

Active management in the equity field is a notoriously difficult art. In fact so difficult that more and more investors give up and go passive instead. If you can’t beat them, join them. In the US alone, retail investors have withdrawn about $350 billion from active equity managers in the past two years and instead pumped $500 billion into passive investment vehicles (mostly ETFs). Retail investors are not alone. Sovereign wealth funds, endowments and pension funds are all allocating ever larger amounts to passive instruments. By one estimate, some $4 trillion worth of actively managed assets will switch to passive management over the next 5 years^(1).

Behind this flight to armchair investing lies a growing realisation that the majority of active managers will never consistently beat the index. Newly published research from Standard & Poors(2) suggests that for the five year period ending 31 December, 2009, only 39% of active large cap managers outperformed the S&P500. In mid- and small-cap, the problem was even more pronounced with only 23% and 33% outperforming the respective benchmarks.

It all began with Harry Markowitz, Eugene Fama and the efficient market hypothesis, developed back in the 1950s. A decade later, when William Sharpe published his work on the capital asset pricing model (CAPM) on the basis of Markowitz’s and Fama’s earlier work, it gradually became accepted that it is near impossible for most mortals to outperform the market (Warren Buffett is obviously not a mere mortal). Hence the foundation for passive investing, index funds and ETFs was laid.

The irony of all of this of course is that ultimately the growth of passive investments will create anomalies and inefficiencies. Stock prices will be driven more by inclusion/exclusion in the indices than by the intrinsic value. For stock pickers, such an environment is likely to create enormous opportunities. But we are not there yet. For the time being, in the equity arena, index products are likely to continue to outperform the majority of active managers.

So why do most active equity managers underperform? Many a research paper has been written on this subject, and I am not particularly keen to add to an already long list. I think it is far more interesting to look for solutions, so I shall answer the question only superficially. The most obvious reason is cost. Between management fees, performance fees (sometimes), trading costs, custody and admin fees, active managers often start the year being behind by 2% or more. Not easy.

However, cost alone does not explain the difference between active and passive managers; if it did, active managers would consistently underperform and that is not the case. ‘Herding’ is another reason. We are all prone to it. Herding manifests itself in a number of different ways. For example, investors tend to fall in love with the same investment ideas, which can drive valuations up in the short to medium term but cause over-crowding longer term and ultimately lead to a collapse in valuations (think dotcom). In the survey conducted by CREATE Research, asset managers from all over the world were asked which markets would be expected to grow the fastest and which would offer the best opportunities for alpha going forward.

Chart 1: CREATE Research Survey on Market Opportunities

The response, which is shown in chart 1 above, speaks for itself. Not surprisingly, most of us have fallen in love with Asia. It is hard to disagree that Asia looks likely to deliver higher growth than both Europe and North America in the years to come; however, to conclude on that basis that Asia will also offer the best opportunities for alpha may be a step too far. This is an example where unrestricted affection for a particular market may have clouded the minds of investors – a classic example of herding.

Tags: Absolute Return, Active Management, Asset Pricing, Capital Asset Pricing Model, Capital Asset Pricing Model Capm, Efficient Market Hypothesis, Equity Managers, ETF, ETFs, Eugene Fama, Fundamental Indexing, Harry Markowitz, Investment Vehicles, Neils, Outperformance, Passive Instruments, Passive Investment, Passive Investments, Passive Management, Retail Investors, Robert Arnott, Warren Buffett, William Sharpe
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The Fear Premium of Gold

Friday, May 14th, 2010

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Gold prices were hitting record highs as gold’s appeal as a safe haven asset exploded. June gold was down 1.1% to settle at $1,229.20 an ounce on Thursday after hitting a record high of $1,250 in previous session.

The metal’s surge was driven primarily by concern that an almost $1 trillion loan package in Europe will slow the region’s growth and debase its currency. Adjusted for inflation, gold is near its highest since April 1981, based on data at Bloomberg.

Record Investment Boosted by ETFs

Global investors, led by the US, last year bought a record 228.5 tons of gold in the form of bullion coins, up from 77.4 tons in 2000, according to GFMS, the London-based precious metals consultancy.

Exchange-traded funds (ETFs) also have made it convenient for retail investors to get in on gold. Holdings in physically backed gold exchange traded funds are at record highs after some ETFs last week experienced their biggest inflows in over a year.

The largest gold ETF–the SPDR Gold Trust (GLD)–recorded its highest daily inflow since early 2009 last week with total holdings hitting a record 1,185.78 tons.

Pattern Change – Gold & Stocks

Gold tends to rise when investors are uneasy about risky investments, so gold often gains as stocks fall. However, stocks continued to recover from last week’s big drop, while gold also broke new highs.  (Chart 1)

Meanwhile, the euro broke through the 14-month low reached against the dollar last week touching $1.2516. Some analysts say a test of the euro’s 2008 low of $1.2330 looks likely in coming sessions. These are clear signals that investors’ anxiety is with the euro.

Pattern Change – Gold, Dollar & Euro

Furthermore, gold prices usually go down when the dollar strengthens. But that inverse relationship gold previously has with the dollar has now been switched to the euro since late last year due to the sovereign debt crisis in Greece and Europe (Chart 1).

The lack of faith in the sustainability of the euro has been driving investors to flee the euro and go into gold, stocks and the U.S. dollar. Nevertheless, this is not indicative of any fundamental strength in the U.S. currency. Rather, it’s “relatively stronger” against the embattled euro.

Similar to Crude – Gold Has a High “P/E Ratio”

Now, many analysts expect gold prices to fall back near $800 an ounce over the next ten or twelve months, according to Jon Nadler at Kitco Bullion Dealers. Nadler thinks the economic fundamentals for gold are “completely upside down.” Demand from jewelry has been weak, and that much of gold’s recent strength has been speculative in nature.

However, similar to crude oil, gold also has become an asset class in itself and trades beyond market fundamentals. Gold has long been a safe haven when world markets are gripped by fear. Those fear factors—outlined below–if prolonged, will most likely drive investors to gold and send gold’s P/E ratio soaring far beyond the demand/supply fundamentals.

Fear Factor #1 – Inflation

Analysts say there’s a lot of fear on the part of the Europeans that moves to mitigate debt crisis will only lead to more problems. FT.com reported that traders and coin dealers said buying was exceptionally strong from German and Swiss investors.

The spike appears to reflect concerns in Germany about the potential inflationary impact of the European Central Bank’s decision to buy up euro zone government bonds in the wake of the Greek debt crisis. Outside the euro zone, dealers said that demand was also strong in North America.

Fear Factor #2 – Fiat Currencies Debase

The potential for other countries to be overwhelmed by debt also has investors rethinking paper currencies in general. Gold is vastly appealing as it has become the only reserve currency not backed by debt.

It is this fear that has fueled the price of gold rising against every major currency, not just the thrashed euro. (Chart 2)

The European Monetary Union (EMU) collectively is facing €965 billion of debt redemption this year.  Among them, three of the most heavily indebted PIIGS countries, Spain has to redeem €81 billion of debt this year, Italy at €267 billion, and Portugal with €19 billion. (Chart 3)

The Greek contagion may seem to be partially contained at the moment, but investors are still concerned widespread fiscal tightening could derail the already weak European economic recovery. Continued fears over the stability of the euro zone should further depress the euro and buoy gold prices.

The sheer scale of fiscal deficits facing numerous countries, including the United States, will likely prompt further diversification from fiat currencies and could ultimately propel gold to fresh highs.

Dissimilar to Crude – Not a Real Commodity

As noted earlier, gold is similar to crude oil with a built-in premium due to psychological factors. However, unlike crude oil, which is an essential energy source that the world cannot function without, gold has no real fundamental demand except for the use in jewelry.

Indeed, much of gold’s recent run-up has been driven by speculators, which means the correction(s) could be just as ferocious as the climb-up once investors’ fear subsides.

Short to Medium Term – Hinges on The Euro

Gold has risen 40% since the beginning of 2009, which suggests the market could be due for a correction. A dip in gold prices within the next 10 to 20 months is certainly possible as European and U.S. markets stabilize.

For now, the general trend over short term basis is still to the upside. But at this juncture, gold looks over-priced from a risk/reward standpoint. Retail/individual investors looking to invest in gold are best to stay on the sideline until a significant pullback, possibly at round $1,130. (Chart 4)

In the mean time, the 1,000-point drop in the Dow on May 6, although still under investigation, is a grim reminder that markets will likely be volatile going forward. Volatility breeds chaos and fear, and gold certainly has a proven record of thriving on both.

Economic Forecasts & Opinions

Tags: Backed Gold, Bullion Coins, Debt Crisis, ETF, ETFs, Exchange Traded Funds, Global Investors, Gold, Gold Bullion, Gold Dollar, Gold Etf, Gold Exchange Traded Funds, Gold Gold, Gold Holdings, Gold Prices, Inverse Relationship, Loan Package, New Highs, precious metals, Record Highs, Retail Investors, Risky Investments, Sovereign Debt, Spdr
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A Magic Bullet for Inflation and Deflation?

Wednesday, February 3rd, 2010

During the better part of the last 18 months, since the financial crisis erupted, the debate over whether we are in store for inflation or deflation has dominated the investment decision making thoughts of all market participants, from retail investors to hedge fund managers.

The burning question – “Are we heading for inflation or deflation?” – is the toughest one to hurdle. Since there is no way of knowing, you have to make a decision based on what you know about each, then, make a decision about how to invest, based on your decision. Its precarious at best. Many investors, however, unable to settle on an outlook, will choose the option that requires the least amount of thought – cash, GICs, and short term bonds – and wait for things to be clarified.

That’s why something hedge fund manager David Einhorn, of Greenlight Capital wrote last year has got my attention again.

Read the whole article here.

Pierre Daillie (AdvisorAnalyst.com), GlobeAdvisor.com, February 1, 2010.
http://www.globeadvisor.com/advisoranalyst/aa20100201.html

Tags: Burning Question, David Einhorn, Financial Crisis, Fund Managers, Gics, Globeadvisor, Greenlight Capital, Hedge Fund Manager, Inflation And Deflation, Investment Decision, Magic Bullet, Market Participants, Retail Investors, Term Bonds
Posted in Markets, Outlook | Comments Off