Garbage In, Garbage Out

There is a lot of chatter on CNBC about poor market breadth.  I can see why.  On Friday most market averages were at new highs so one would expect the Advance-Decline Line to also be at a high.  It wasn't.  The well published AD Line based on NYSE data failed to reach a high.  I'm not worried, however.  In my view this is a case of garbage in-garbage out.

To measure market participation, or market breadth, most analysts look at the number of stocks advancing on the NYSE versus the number of declining stocks.  Here's the problem:  Close
to half of the securities traded on the NYSE are closed-end bond funds that are tied to interest rates, ADRs and warrents.  With the move higher in interest rates, the bond funds are moving lower.  So upon first glance it looked like many stocks are declining.  While advancing and declining figures are technically correct, they are misleading because about half of the issues represent "irregular" securities. 

Instead of using the flawed NYSE data, it's best to run market breadth calculations on a large list of stocks that excludes bond funds.  For my analysis, I crunch the numbers on the 1500 stocks in the S&P 1500 index.  As the chart shows, the Advance Decline Line reached a new high on Friday.  Market breadth is strong.

As interest rates trend higher, we'll hear even more analysts warning about the market's poor market breadth.  It's not that these analyst's calculations are wrong, it's that the data they use in their calculation is flawed. 

David Vomund is a fee-only Registered Investment Advisor.  Information is found at www.ETFportfolios.net.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

The "Great Rotation"

Much has been written about how money will move into stocks as long-term rates rise and bond prices and funds sink.  And indeed since rates began to rise in May bonds have fallen and stocks have surged to record highs.  But the facts don't confirm the "great rotation" from bonds to stocks.

Money is pouring out of bonds.  In August investors withdrew $6.7 billion from bond ETFs.  That's nearly 3 percent of the assets in those funds.  Investors sold bond funds as well.  The world's biggest fund, Pimco Total Return, had $7.7 billion in net outflows in August and has lost 14 percent of its assets in the last four months.

But data show that most of the money coming out of bond funds has not gone into stocks.  In August, investors pulled more than $15 billion out of U.S. stock ETFs.  The largest ETF, SPDR Standard & Poor's 500, had the most withdrawals as the market fell.  Although stocks are having an exceptional year, last month investors feared an end to the stimulus program and military strikes in Syria.  That was a bad move.  Stocks rose 4 percent in the first half of September, and retail investors continue to underestimate this powerful bull market.

My belief for the past year or two, well before talk began of a rotation out of bonds, has been that investors searching for income will turn to stocks for lack of an alternative.  The acronym TINA says it all:  "There Is No Alternative."  That is every bit as rue today as it was last year and the year before.  Until short-term rates rise significantly, or for that matter rise at all, stocks will do well.  The bull market will continue with occasional, mild and very brief pullbacks.

Wharton Professor Jeremy Siegel said that if the economy grows, so will earnings and that would be good for stocks.  If the economy limps along or falters, rates would stay low for a longer time and that would also be good for stocks, which would be even more compelling buys compared to the alternatives.  A win-win situation, he says.  I agree.

David Vomund
www.ETFportfolios.net

Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

Fixed-Income Funds for Long Term Investors

     Many fixed-income funds have fallen sharply ever since the Fed Chairman Bernanke talked about "tapering."  The iShares 20+ U.S. Treasury ETF (TLT) has lost 17% since May.  Yet retirees still need income form their investments and many investors don't want to be too exposed to the stock market.  What should they do?  That's the subject of my recent interview with TheStreet.com.

click here for TheStreet.com article

     In my interview I was asked for my favorite ETFs for income and long-term investing.  I believe income investors must include dividend-paying equities, but I limited my choices to fixed-income ETFs.  Here are the two I chose:

     PowerShares Senior Loan Portfolio (BKLN).  This is one of the most popular ETFs in 2013, gathering $3.6 billion in assets.  BKLN yields 4.6 percent and provides some protection against rising rates because it invests in floating-rate bonds.  Because most of the bonds are not investment grade, the risk to this fund is a slowing economy.

     iShares US Dollar Emerging Market Bond ETF (EMB).  Rising interest rates led to selling in most fixed-income funds and for many this selling is deserved.  But not in all.  I believe the selling in emerging market bond funds is overdone.  EMB is the largest emerging market bond fund with $4.1 billion in assets and it primarily hold U.S. dollar denominated government debt, much of it investment grade.  It yields 5.3 percent.

--David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

For Every Problem ...

H.L. Mencken, "For every problem there is an answer -- simple, clear...and wrong." 

 

     Stocks have been falling for most of August.  Not by a lot and with very little trading, but the relentlessness of the selling makes the decline seem worse than it is (down 3.9 percent from high to low).  We're told the reason is clear: interest rates are rising.  Rising rates make for an easy headline.  The media never mention that a little profit-taking after a 20-percent rally this year was understandable and in fact healthy.  They are also missing the real point --- the economy.   

     The media expect a stronger economy, but recent economic reports tell a different story.  New home sales tanked last month as mortgage rates rose.  Retail sales are disappointing and durable goods orders saw its biggest drop in nearly a year.  The employment picture is the key to future growth.  New job creations are mostly in low-paying, part-time work in retailing, hotels and restaurants with few full-time positions.  I am certain the Fed looks beneath the headline numbers and sees just how weak the jobs picture is.  All this shows a weakening economy, not one about to accelerate.  Even so...

     The Fed still sees a second-half pickup to 3 percent GDP growth and 3.5 percent next year, but in their July meeting half the members began to question the official forecast.  If growth is much less (below 2 percent, as it is now), bonds would rally and rates would fall as investors realize that their optimism for the economy isn't justified.  How stock investors will take that remains to be seen.  So far, those who see the prospect of slow GDP (and therefore profit) growth are selling.  I believe that for lack of a good alternative in fixed income or cash equivalents they'll turn again to better-yielding stocks.  My favorites include Spectra Energy (SE) and Chesapeake Energy (CHK). 

     There have been several sell-offs in this great bull market, most recently in May and June and before that last fall, but all were brief and followed by new highs.  Sell-offs in bull markets are usually fast and this one has been typical.  In the past, the media were always ready with a reason (never just profit-taking).  The reason this time, they say, is that interest rates are rising.  End of story.  Wrong.  The market is telling us that economic growth won't pick up as much as the Fed expects.  That's the real story. 

 — David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security. 

 

 

Profit Taking and Recovery

     Stocks continue to do well as investors continue to put some of their idle cash to work in stocks.  That is not a new story, nor for that matter is it one that is winding down.  Look for buying to increase and prices to move still higher for the same reason they've done well for a few years, i.e. there is no alternative.     

     Investors shrugged off May's profit-taking triggered by Bernanke's comments about Fed bond buying to which people overreacted.  The Fed must have been surprised by the quick sell-off in both stocks and bonds, because in appearances since May Bernanke and others made it clear that short-term rates won't be rising for years.  Recently he said that the 7.6 percent unemployment rate "overstates" the health of the economy and argues for more accommodation not less and low rates for a long time.  And he's right.  Look beneath the headline numbers for hiring (mostly part-time) and the picture is bleak.  The broadest measure of the labor picture shows that 14.3 percent are either out of work or in a part-time job when they really want to work full time. 

     Bonds have not fared well as stocks rallied.  Treasurys have been especially hard hit and with good reason since they had been the most overvalued.   

     What catalyst could drive stocks higher?  A slight rise in the market's price-earnings ratio would do it, that on top of a small boost in earnings estimates for next year that will be reflected in prices before year-end.  There is another factor.  Hedge funds and institutions have been underinvested in stocks for years.  There is $2.6 trillion in money-market funds, two-thirds held by institutions.  The cash-heavy professionals are returning, though slowly.  Individuals control one-third of the money-market trillions.  Some are re-discovering stocks as well.  Buying by pros and amateurs will support the market when profit-taking occurs and propel it higher at a rate faster than earnings growth would dictate.  Presto!  Multiple expansion.

     Bottom line: As long as alternative investments remain unattractive (think years), stocks will do well.  They'll do best if GDP growth here and overseas picks up even if that makes interest rates rise, because profits would be rising, too.  That, plus some multiple expansion, is what many investors are banking on.  They'll be right.

David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security. 

Blame Bernanke?

The selling of stocks and bonds in recent weeks was reaction to Ben Bernanke's saying what we all knew -- the Fed can't buy bonds and mortgages at this rate ($85 billion/month) forever, and sooner or later it will buy fewer until it buys none.  

All the selling because of Bernanke?  Not so fast.  While Bernanke's comments are a convenient explanation for the market's sell-off, the truth lies elsewhere.  Prior to the recent selling the S&P 500 was up 17 percent year-to-date and long overdue for some profit-taking (6 percent).  Profit-taking can be triggered by many things...or by nothing at all.  It just happens.  Invariably, the media and market observers point a catalyst.  In this case, it was Ben Bernanke and his timetable to end QE if this and that happens.  

The Fed will slow down its purchases when the economy is in better shape, inflation rises and the employment picture improves.  Bernanke said so...again.  But the Fed is ready to buy even more bonds if the economy loses steam or inflation stays far below its 2 percent target.  He said that, too.  Bernanke went on to add that if economic forecasts prove correct (a huge "if"), bond purchases might end by mid-year 2014 and a boost in the short-term rate might occur a year later, assuming the economy stays on a growth track.  That timetable was new.  Don't count on it.  Policy will depend on future economic data; a lot can happen along the way.  

While many investors are jumping to the money market, they won't be content there for long.  The need for income will trump all else and investors will continue to focus on better-yielding stocks, which won't give much ground.  Should investors sell a stock that yields 3.5 or 4.5 percent to hold cash that pays nothing?  If its dividend would be cut, yes.  If long-term interest rates will soar and the stock's yield would no longer be attractive, probably.  But long-term interest rates won't soar without a sharp rise in inflation.  Commodity prices are in a free fall and there is no pressure on labor costs.  Forget inflation.  

I expect bond yields will rise to normalized levels.  That isn't far from here.  Once there bonds won't offer serious competition for quality stocks with good yields.  That will become clear soon enough.


— David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security. 
 

Top ETFs for Your Retirement

Here is a brief interview with Main Street, a division of The Street.com:

http://www.mainstreet.com/article/retirement/top-etfs-your-retirement-savings

David Vomund

Rising Interest Rates

What will happen to bond funds when interest rates rise?  Here is how to profit from higher rates:

http://www.tahoebonanza.com/article/20130123/NEWS/130129983

David Vomund

Investing For Income

Growing tired of low yields?  Need more income from your investments?  Read on:

http://www.tahoebonanza.com/article/20121226/NEWS/121229960

David Vomund