Archive for October, 2009
Large Bank ETFs Eye Earnings
Large financial institutions like JP Morgan Chase(JPM) and Goldman Sachs(GS) have bounced back harder than many of their regional banking peers, a trend reflected in their respective ETFs.
While large-cap oriented funds iShares Dow Jones US Financial Services(IYG) and SPDR KBW Capital Markets(KCE)have risen 23% and 49% year to date, regional peers like iShares Dow Jones US Regional Banks (IAT) and SPDR KBW Regional Banking KRE have fallen 10% and 24% respectively.
As a broad sector, financials have recovered substantially from March lows, but certain sub-sectors continue to lag others as investors recover from widespread market downturn.
Earnings announcements from big banks like JP Morgan, Bank of America(symbol), Wells Fargo(WFC), Goldman Sachs, and Citigroup(C) could help to further separate the big boys from the rest of the pack.
J.P Morgan’s Wednesday earnings announcement underscored the improvement for large financial institutions. Despite problems with delinquencies in its consumer and credit-card operations, it reported strong profits in its earnings call. Pricey deposits from Washington Mutual and the recovery of leveraged loans and mortgage securities helped to fuel the $3.6 billion in posted profit.
The banking sector, particularly small banks, still have a long road to recovery.
During the Q&A portion of the earnings call, a representative from JPM fielded a call from analyst Meredith Whitney about the firm’s exposure to commercial real estate. The representative noted: “Commercial real estate and the values have already dropped, and it’s going to be recognized over the next couple of years. We believe you are seeing several hundred additional smaller regional based banks go — you know, not make it.”
Nearly 100 U.S. banks have already failed in 2009, including the seizure of three banks last week that brought the total to 98. There has been a correlation between size-of-underlying- banks and performance when it comes to regional banking ETFs KRE and IAT. While both ETFs cover the regional banking sector, IAT’s portfolio is concentrated in larger super- regional banks as opposed to KRE’s smaller banking sampling.
KRE and IAT are a case of two similar sounding ETFs with different underlying portfolios. According to Morningstar, KRE has the bulk of underlying assets, more than 87%, allocated to small- and micro-cap firms. IAT has less than 23% allocated to small- and micro-firms, with the bulk of assets in large- and medium-cap firms.
Large, liquid and balanced ETFs like KRE are a good way to add small-cap exposure to your portfolio. As smaller banks come under pressure, however, KRE’s methodology has left the fund lagging IAT. In the year period ending Oct. 13, KRE fell 31.43% while IAT fell just 21.1%.
Regional banks, and the ETFs that track them, could continue to feel pressure in the short term. Reserves accrued for losses could continue to cause write-downs as commercial real estate slumps.
KRE’s components may continue to lag IAT’s as smaller banks fold. Before betting on IAT, however, investors should consider the fact that the fund’s top five components, which comprise more than 44% of assets, could make the fund a volatile bet if one takes a turn for the worst.
Emerging-Market ETFs a Battleground
Emerging-market investors are out in force, and they know how to spot a deal in the ETF industry.
Year to date, assets have flowed out of dominant iShares MSCI Emerging Markets(EEM), while funds have flowed in to lower-cost Vanguard Emerging Markets(VWO). The success of these funds has propelled the launch of new offerings as the popularity of emerging markets continues to grow.
ETF giant iShares has seized upon investor interest to offer emerging-market ETFs in both the U.S. and abroad. iShares recently announced the launch of the MSCI Emerging Markets Eastern Europe Index Fund(ESR) in the U.S. and its intention to launch the first ETF in Chile.
According to Bloomberg, the Chilean ETF will add to its international emerging-markets roster, which includes three funds currently trading in Brazil.
iShares’ new offerings will not go unchallenged. Low-cost ETF provider Vanguard has fired a shot across the bow. In 2008, iShares’ EEM had net cash outflows of $129 million while Vanguard’s VWO’s net cash flow was $2.8 billion. Year to date, VWO’s net cash flow is nearly $4.2 billion while EEM’s net cash flow is $1.8 billion.
Emerging-markets ETFs have been standout performers in 2009, with the Market Vectors’ Indonesia(IDX) ETF jumping more than 33% in the three months ending Oct. 12, while iShares MSCI Turkey Investable Market Index(TUR) rose more than 45%, and Market Vectors Russia(RSX) rose nearly 73%. Year to date, TUR and RSX are up 102% and 137%, respectively.
The release of new emerging-market ETFs began to heat up in the summer as a variety of new funds hit the market. The July 22 release of the Emerging Global Shares Dow Jones Emerging Markets Titans Composite Index Fund(EEG) by newcomer Emerging Global Shares was followed by the Aug. 14 release of the Market Vectors Vietnam(VNM) ETF. More recently, Emerging Global Shares released an Emerging Markets Financials Titans Index Fund(EFN) on Sept. 16.
While successful emerging-markets ETFs offer good portfolio diversification, it is sector-heavy bets that often drive returns. TUR, with more than 50% allocated to financials, has seen an incredible bounce-back since the depths of the financial crisis. RSX is an energy-hefty number with energy firms as four out of the five top holdings.
Sector weighting is just one important consideration when picking an emerging market ETF. Low priced funds like VWO are beneficial alternatives to entrenched competitors. Investors should keep an eye towards volume, however, as more liquid ETFs are easier to trade in the short-term.
The upcoming Brazilian Olympics, Banco Santander(BSBR) IPO, and renewed appetite for risk should help to keep investors’ eyes on emerging markets. Recent returns are one reason that investors will add these funds, but many of these ETFs are beneficial for diversification over the long haul.
“We launched our Indonesia fund in January and it was slow to gather assets at first,” notes Adam Phillips at Van Eck Global/Market Vectors, “but it now has caught the attention of market participants. ETFs are the tool of choice in the emerging markets space.”
Trading Tax Could Cut Everyone
Proposed legislation in the House of Representatives aimed at making Wall Street pay for the bailout of financial firms could have unforeseen consequences — even for mom-and-pop investors. That’s why lawmakers need to think long and hard before they decide to vote on it.
The proposed bill (H.R. 1068: Let Wall Street Pay for Wall Street’s Bailout Act of 2009) would put a damper on banks like JPMorgan Chase(JPM), Goldman Sachs(GS) and Morgan Stanley(MS), whose results have benefited from trading operations.
Its passage, which would add a 25-basis point tax on securities transactions, could cripple the high-frequency trading market that has sprung up in place of human market makers since the decimalization of trading. That would cause spreads to widen, and money would move to less-regulated forums. This would result in lower liquidity for average investors in markets with the new regulation and increased risks for those who venture outside.
When taxes or restrictions are placed on certain securities transactions, Wall Street finds new ways to trade. This is a trend that has played out recently in the exchange-traded fund industry, exposing investors to new types of credit risk and overseas contracts.
Need an example of how regulation can unintentionally result in more risk to the consumer? A war is being fought over futures-based commodity ETFs, and as the Commodities Futures Trading Commission places new “safety limits” on New York Mercantile Exchange-traded futures contracts, ETF managers are shifting toward alternatives.
Take United States Natural Gas(UNG), a popular futures-based fund that saw premiums soar during the more than two months when the creation of new shares was halted. As the Securities and Exchange Commission took its time in allowing additional shares, and as new position limits from the CFTC seemed imminent, UNG managers began selling their to-be-regulated futures and buying swaps, adding to the ETF’s risk.
Managers of the UNG reiterated today that they could allocate fund assets to interests other than futures contracts in order to stay within position limits and abide by accountability levels. In August, a representative of UNG confirmed to me that the fund was selling futures contracts and buying other investments such as swaps.
More recently, position limits have caused a restructuring of Deutsche Bank’s(DB) PowerShares DB Agriculture(DBA) and PowerShares DB Commodity(DBC) ETFs. New “safety position limits” placed on the underlying contracts have caused the latter fund to reallocate U.S.-regulated oil holdings to British-traded Brent Crude contracts.
Smarter regulation, not overregulation, is the order of the day for financial markets. Our alphabet soup of regulators needs to coordinate their efforts to produce regulation that will not unintentionally expose investors to greater risk or push business abroad.
In the wake of the financial crisis, it may seem tempting for Congress to exact revenge on Wall Street firms that have profitable trading departments such as Goldman Sachs and Citigroup(C). But lawmakers and regulators should first take a moment to consider who will ultimately pay. An old Chinese proverb warns, “The person who seeks revenge should dig two graves.”
The Beauty of Currency ETFs
WisdomTree Dreyfus Chinese Yuan Fund(CYB) uses forward contracts to replicate holding foreign currency in many of their foreign currency ETFs.
Although forward contracts can be confusing at first, these funds are straighter forward than they appear and come much closer to matching their target than commodity ETFs. The Japanese yen and euro ETFs are the exceptions in that they hold short-term yen- and euro-debt.
I recently discussed the difference between commodity and currency ETFs after the Wall Street Journal published a confusing article on CYB.
Due to government restrictions and capital controls, and in some cases liquidity, WisdomTree uses currency contracts known as non-deliverable forwards, along with U.S. dollar denominated short-term government and commercial paper.
Besides CYB, there are several others, including the Brazilian Real ETF(BZF) and Indian Rupee ETF(ICN).
A forward contract is an agreement to exchange currencies for a given rate at a specific future date. It states at what price currency X will be exchanged for currency Y.
Interest rates are a major factor in determining this price and the best way to show this is with an example. Say the interest rate in Brazil is 10% and the interest rate in the U.S. is 1%. Also, two reals can be exchanged for $1 today, and the exchange rate in a one-year forward contract is the same. You have 1000 dollars.
If this were the scenario, you could exchange $1,000 dollars for 2000 reals today, and buy a forward contract to exchange reals back to dollars at 2-to-1 in one year’s time.
You could then put your 2000 reals in a Brazilian bank, earn 200 reals interest, and one-year later, exchange them back for $1,100.
Since you locked in the exchange rate in the future, you were able to make a risk-free trade. Essentially, you put American dollars into a Brazilian bank for one year by completely eliminating currency risk. This is a textbook example of arbitrage.
Traders (now high speed computers) will execute these trades over and over until the risk-free profit disappears. The purchase of reals today will push up the spot price, such that $1 buys less than 2 real. The buying of dollars in the future will raise the future price of dollars. Investors will have to pay more for real today and get less in return when they switch back one year from now. In this way, the profit opportunity is closed.
Furthermore, interest rates could change to make the profit disappear. If everyone is switching from dollars to reals today, the U.S. interest rate may increase and the interest rate in Brazil may fall.
The benefit of these contracts is that they allow a foreign investor to approximate the return of a money market fund in a foreign currency, thanks to the implied yield that is calculated into the contract. In some cases, where arbitrage is easier to conduct, this gets very close to the actual rate of interest in a country.
Through August, almost every currency ETF in WisdomTree’s lineup that was in existence before 2009 has outperformed the currency itself, thanks to the implied yields in the forward contracts.
Of course, that’s not always the case. The Emerging Currency(CEW), a basket of several emerging market currencies, hasn’t had as much gain over the spot price due to negative implied yields on the Israeli shekel, Chilean peso, and Taiwan dollar. Traders expect those currencies to appreciate and have bid up the forward price. Currently, the CYB also has a slightly negative implied yield of 0.4%.
Finally, the forward contracts settle by an exchange of the difference in the value of these contracts. WisdomTree rolls these contracts monthly and uses five or six counterparties to minimize counterparty risk. WisdomTree charges 0.45% annually for the single emerging market currency ETFs and 0.55% for CEW.
The other major currency ETF issuer is Rydex CurrencyShares, which deposits the underlying currency with J.P. Morgan. Rydex’s offerings are limited to the major currencies available to foreigners, so the only comparable funds are the WisdomTree Dreyfus Japanese Yen(JYF) and CurrencyShares Japanese Yen(FXY); WisdomTree Dreyfus Euro(EU); and CurrencyShares Euro(FXE). The returns for these ETFs have been similar; WisdomTree charges 0.35% versus 0.40% for CurrencyShares; CurrencyShares has hundreds of millions in assets in FXE and FXY versus about $10 million in EU and JYF.
Investing in currencies carries risk, and emerging market currencies carry more risk than average. Central banks are flooding the globe with currency to fight the financial crisis, and the chances of a major accident are not small. However, for investors who want to invest in emerging market currencies, the WisdomTree products work as advertised. You can check their holdings on the WisdomTree Website.
Where High CEO Pay Is Deserved
The upcoming earnings of Bank of America(BAC), Goldman Sachs(GS) and Citigroup(C) will undoubtedly throw the spotlight of public scrutiny on executive pay.
Investors who scoop up shares of these companies should do so for the right reasons, keeping in mind the difference between “high” and “undeserved” pay.
On Saturday I discussed the purchase of Citigroup’s money-maker Philbro LLC by Occidental(OXY). This transaction is significant because the move skirts the issue of the $100 million pay package of Andy Hall, the head of the Philbro group.
I expect the recoveries of BofA, Citigroup and Goldman to continue to be valuable to investors. This Big Three has the opportunity to emerge from the financial crisis as profitable companies and franchises. The financial chaos eliminated much of the competition, and areas like Goldman’s trading operations have flourished. Over the next five years, this big three could offer a lot in the way of returns for investors.
The issue of Hall’s compensation and Ken Lewis’ massive retirement package could be hot button topics as we move further along into earnings this week. While I do think that the hundreds of millions being dished out to the AIG(AIG) and BofA executives deserve the scrutiny of compensation czar Ken Feinberg, I think that investors should consider the distinction between “high pay” versus “undeserved pay.” Feinberg should be given a fair chance to represent the taxpayers again and determine what is sane when it comes to BofA and AIG.
I have noted before that Hall’s exceptional pay package was a direct result of exceptional results. Hall’s case is an example of “high pay” derived from huge profits. Hall’s Phibro group averaged $371 million in pretax earnings in the five years leading up to 2008. When partners at the big financial firms oversee growth in profits, “high pay” can be justifiable. Someone like Ken Lewis on the other hand, may fall into the category of “undeserved pay.”
Whatever debate transpires over executive pay this week, investors should keep their eye on the prize. Scrutiny of pay packages is important, but so are results and earnings potential. CEOs should be rewarded based on their benefit to shareholders, which in upcoming months, could be “high”.
This isn’t Feinberg’s first time assessing sensitive payouts. He did a good job allocating funds to 9/11 victims families. Terms like “deserve” and “need” have been redefined by the financial collapse, and balancing capitalism with public opinion will be no small task. The trick will be keeping the top talent at embattled institutions so that they continue to recover.
Investors looking to make a play on earnings from the Big Three through an ETF should consider iShares Dow Jones U.S. Financial Services(IYG) or the Vanguard Financials ETF(VFH) . While IYG trumps VFH on trading volume, both ETFs have high allocations towards the three banks. If the earnings results this week are positive, these ETFs could have a lot of room to move on the upside.
How Currency ETFs Differ
The Wall Street Journal misunderstood the nature of some currency ETFs in a story last week that compared the WisdomTree Dreyfus Chinese Yuan Fund(CYB) with U.S. Natural Gas(UNG).
The article concluded that a buyer of CYB may not realize the gain in the Chinese yuan because speculators have already bid up the price of yuan forward contracts.
When UNG rolled its contracts this summer, it paid a steep premium between the contract it was holding and the near-month contract it wanted to buy. Each time UNG sold, it depressed the price of the contract it was selling and increased the price of the contract it bought. Other factors contributed to a situation whereby the spot price of natural gas was much lower than the contract prices for futures further out in time.
In the case of CYB, the premium it pays is not due to the fact that it rolls its contracts monthly, but rather that traders believe the Chinese currency will appreciate. CYB is not losing money every time it rolls the way UNG did. There is a premium in the currency market for yuan.
A commodities trader could purchase a 2010 futures contract and mitigate contango (while taking on other risks), but a currency traders cannot escape the premium for yuan.
In any event, it is incorrect to think of currency forwards in the same way as commodity futures. There isn’t contango (when the near-month contract costs more than the current contract), nor backwardization (when the near-month contracts are cheaper). Most often, the difference in the contract prices is a result of the implied rate, or the interest-rate differential between the two currencies.
There is also the factor of speculative demand. If traders expect a currency will appreciate, they will bid up the price of the forward contracts. In some cases, they may be willing to pay a hefty premium for the chance of further gains, but with the Chinese yuan, the premium right now is small. Importantly, the fund is up 1.8% this year, compared to less than 1% for the underlying currency. The fund captured the gain in the yuan, and more.
In the Journal article, the author compares this premium as similar to the contango in UNG, but there are big differences with UNG and other commodity futures ETFs. In the case of commodities, higher prices in the future are based on the cost of storing the commodity and the opportunity cost of foregone interest on cash, along with speculative demand.
UNG also had problems specific to itself and the natural gas market. First, it became the market. It owned so much of the outstanding contracts that it had to move into swaps. Its size in the market meant that traders could exploit its strategy and front-run the fund, and this exacerbated contango. CYB is a relatively popular currency fund, but its $150 million in assets is a very small portion of a huge market.
Second, storage issues caused the near-month gas prices to plummet, compared to much more stable prices further out in time. In the case of currencies, they aren’t physical and suffer no similar problem.
In conclusion, the premium in CYB is entirely driven by market expectations, while UNG was the victim of market failures. An individual can avoid the problems of UNG by doing their homework and purchasing futures contracts for their own account using a different strategy. In the case of Chinese yuan forward contracts, an individual investor would be in the same position as the Wisdom Tree ETF.
The biggest difference between the prices of forward contracts further out in time is based on interest rates. Since interest compounds, longer-dated contract have a larger interest component than near-term contracts. Tuesday, I’ll explain how interest rates affect forward prices and get into greater detail on currency ETFs.
Don Dion’s Weekly ETF Blog Wrap
VIX-Based ETN Correlations Are Skewed
Posted 10/5/2009 5:20 p.m. EDT
The iPath S&P 500 VIX Short-Term Futures Index ETN (VXX) and iPath S&P 500 VIX Mid-Term Futures Index ETN (VXN) didn’t capture as much of last week’s pop in the CBOE Volatility Index (a.k.a., VIX) as some traders may have liked.
Between Tuesday and Friday, the VIX gained nearly 20%, but VXX only gained about 8%, while VXZ managed just 4%. On the flip-side, today’s loss cost the VIX nearly 7%, but VXX shed 4% and VXZ fell less than 2%.
One difficulty with the rolling futures contract is that the future never arrives. Options and futures have two components to their value: the underlying value of the security or index; and the time value.
For example, if you have the option to buy a stock one year from now, there is a greater probability that the stock will rise or fall a given amount over the course of a year, as opposed to one week.
If you purchase a futures contract and hold it until just before expiration, the time value will decay to nothing, and you will be left with the underlying value. Since these contracts roll daily, however, the time value is constantly replenished. A change in time value can affect the NAV of these ETNs, but it will never be replaced by the underlying value.
The VXZ holds futures contracts on the VIX in the fourth-, fifth-, sixth- and seventh-month contract, dropping the fourth- and rolling into the new seventh-month contract each day.
The VXZ will never be as volatile as the VXX, since the VXX holds first- and second-month contracts, also using a daily roll strategy.
Since the VIX is not an actual index, it can’t be bought. Investors can achieve greater returns with greater risk via options or futures, however, because they can hold them until expiration.
The takeaway is that these ETNs may not be the best bet for individual investors. Those who understand how the VIX works and want to make a bet on market volatility can achieve better returns in the futures and options markets. Furthermore, any number of leveraged inverse ETFs are likely to outperform the VIX ETNs, since spikes in VIX are typically accompanied by selloffs in stocks.
There may be some investors who can make use of the VIX futures ETNs as part of complex portfolio strategies, but investors who are looking to make a one-way bet on a market selloff should try other products.
I previously named the VXX and VXZ pair as one of the 10 most dangerous ETFs.
Comparing Emerging Eastern Europe ETFs
Posted 10/5/2009 12:20 p.m. EDT
On Friday, iShares launched the newest member of its international ETF fund family. The iShares MSCI Emerging Markets Eastern Europe Index Fund (ESR) is designed to track the MSCI Emerging Markets Eastern Europe Index. Companies represented on this index hail from four nations: Russia, Poland, Hungary and the Czech Republic.
Investors looking for access to emerging Eastern Europe through this fund should be aware that the ESR is heavily weighed in energy companies. Gazprom and Lukoil are the fund’s top two holdings and make up over 35.5% of the fund’s total assets. Other top holdings include Sberbank, Cez and Norilsk Nickel.
The ESR is not the first ETF to expose investors to Eastern European markets. SPDR S&P Emerging Europe ETF (GUR) has been trading since March 2007 and tracks a basket of companies from the same four nations plus Turkey and a menial showing from the U.S. Once again, a huge percentage of the GUR is allocated to the same top energy
Although the two funds have similar holdings and sector allocations, The GUR’s low expense ratio will likely stifle some of the added competition from the ESR’s entrance. While the ESR charges investors over 0.70%, the GUR only carries a 0.59% fee. Furthermore, with 63% of the GUR’s assets in Russia vs. 75% of the ESR’s assets, the GUR offers more diversification.
Year-to-date for the period ending Oct. 5, The GUR has performed well. The fund is up nearly 61%.
In the end, however, these funds are more like a Russia ETF, such as Market Vectors Russia (RSX), which has a 0.62% fee that makes it competitive with these funds, with some added diversification into Eastern Europe. Investors who want pure plays on Poland and other Eastern European countries will have to wait.
Brazil ETFs Recap
Posted 10/7/2009
On July 13, I named Market Vectors Brazil Small Cap ETF(BRF) as the best of the Brazil ETFs. I followed up twice this week, as news of the Olympics and the big Santander IPO have drawn the world’s attention to Brazil.
BRF is the best way to play these events because its holdings are positioned to benefit. Longer term, BRF is the ETF for a rising Brazil, whereas iShares Brazil’s(EWZ) commodity and energy heavy holdings will do well in a commodity boom, even if the broader Brazilian economy underperforms.
EWZ is the ETF of Brazil’s past. It’s a story we’ve seen all over the globe: resource-rich nations that fail to transition to a diversified economy. If Brazil fails again, as it did in the 1980s following the ’70s resource boom, then EWZ should outperform. But if it succeeds, BRF will be the fund to own. It is the fund of the future for the country of the future.
Since I picked BRF in July, the fund is up 49.5%. Over the same period, EWZ gained 38.7%, and Wisdom Tree Dreyfus Brazilian Real(BZF) added 14.2%.On July 13, I named Market Vectors Brazil Small Cap ETF(BRF) as the best of the Brazil ETFs. I followed up twice this week, as news of the Olympics and the big Santander IPO have drawn the world’s attention to Brazil.
BRF is the best way to play these events because its holdings are positioned to benefit. Longer term, BRF is the ETF for a rising Brazil, whereas iShares Brazil’s(EWZ) commodity and energy heavy holdings will do well in a commodity boom, even if the broader Brazilian economy underperforms.
EWZ is the ETF of Brazil’s past. It’s a story we’ve seen all over the globe: resource-rich nations that fail to transition to a diversified economy. If Brazil fails again, as it did in the 1980s following the ’70s resource boom, then EWZ should outperform. But if it succeeds, BRF will be the fund to own. It is the fund of the future for the country of the future.
Since I picked BRF in July, the fund is up 49.5%. Over the same period, EWZ gained 38.7%, and Wisdom Tree Dreyfus Brazilian Real(BZF) added 14.2%.
Citigroup Talent Follows Money
Citigroup’s(C) sale of Phibro to Occidental(OXY) is an important sign of the times and a stark reminder of how much things have changed in the past year.
Wall Street will always find a way, and Andrew Hall’s transfer takes the heat off Citigroup, which exchanged government funding for the door to its dressing room. Kenneth Feinberg has been gazing inward intently, and Vikram Pandit is eager to get one more issue off the table.
Last month, in a public discussion in New York City, Pandit admitted that Hall’s agreed-upon salary was too high for a bank employee. Hall’s Phibro group averaged $371 million in pretax earnings during the five years ending in 2008. The superior performance of this oil-and-gas trading group had garnered $100 million in annual compensation for Hall.
By moving Hall to OXY, and releasing Phibro from banking-sector scrutiny and coming commodities regulation, Citi has been able to keep the issue quiet. The transfer of Phibro was said to occur at “net asset value,” or reportedly $250 million.
The coming commodities regulation has affected more than one area of the financial marketplace. “Safety position limits” have caused ETFs like PowerShares DB Commodity(DBC) to restructure on the run, or in the case of United States Natural Gas(UNG), sell to-be-curtailed futures contracts for swaps. As regulatory and public pressure bear down on Wall Street, it is shifting perceptibly to meet its ultimate goal: payday.
Coverage of executive compensation, and subsequent public anger, has ranged from insightful to absurd over the past year. From the rage over AIG(AIG) bonuses to tabloid coverage of Northern Trust(NTRS) events, a shell-shocked public has put wealthy CEOs on trial. Seeing the NTRS annual golf event alongside Britney Spears on a celebrity gossip Web site seemed like the saturation point.
The “other side” has emerged tactfully at times in the lathered coverage of executive bonuses. Who could forget Jake DeSantis’ editorial in The New York Times as busloads of tourists picketed the lawns of AIG’s executives?
More often, the talent simply, quietly, moves on. Andrew Hall’s new job at OXY will give him the breathing room to generate hundreds of millions in profits and get paid instead of pilloried. In the universe of capitalism, people get paid for exceptional results. Talent will emerge and re-emerge as the tide of public scrutiny washes over Wall Street.
Don Dion’s Weekly ETF Winners and Losers
It was a wild week for the news and for the markets. The S&P 500 index gained on every single trading day and finished the week with a 4.5% advance.
Behind the scenes, there was much hand-wringing about the demise of the dollar, which picked up pace after gold neared the $1,060 level. Gold fell back to $1,049 on Friday after the greenback recovered.
Alcoa kicked off earnings season with a positive report. Charles Schwab(SCHW), Intel(INTC), Google(GOOG) and Goldman Sachs(GS) are some of the noteworthy companies reporting next week. It has been a few weeks since tech or financials were the biggest gainers or losers in a week.
Winners
Market Vectors Gold Miners(GDX) +12.9%
Gold was the story of the week, and GDX rode the excitement to a new 52-week high. It was a week of high drama after British newspaper The Independent reported that Arab oil states, China, Russia, France and Japan held secret talks to end the pricing of oil in U.S. dollars, while later in the week, the Southeast Asian nations stepped in to support the dollar. All the while gold bugs were giving out price targets ranging from $1,500 an ounce to $5,000.
Claymore/Delta Global Shipping(SEA) +11.8%
A small upturn in the Baltic Dry Index accompanied the ascent of SEA. It was a good week for the global reflation trade, with energy, gold and foreign currencies climbing. SEA isn’t as strong as some other winners this week, however, as it’s up less than 30% in the past three months and less than 10% in the past month.
Market Vectors Russia(RSX) +13.1%
A gain in the ruble, higher energy prices and a strong performance from energy ETFs underpinned the move in RSX. This fund is up more than 60% in the past three months and continues to have strong momentum. RSX is still about 50% below its 2008 high.
Losers
PowerShares DB U.S. Dollar Bullish Fund(UUP) -0.8%
The report that several major countries secretly discussed pricing crude oil in a currency other than the dollar sent the greenback, which was already weakening, into further decline. Friday’s rebound wasn’t enough to reverse the losses for the week.
iShares iBoxx $ Invest Grade Corp Bond(LQD) -0.5%
Bonds made investors nervous this week after they declined sharply on Friday. The technical picture for LQD weakened at the end of September, breaking a consistently higher and improving picture since March.
LQD peaked above $107 per share last month and on Friday closed below $104, its lowest level since late August.
iShares Barclays 20+ Year Treasury(TLT) -3.1%
Thirty-year Treasury yields moved below 4% this week, only to soar more than 20 basis points on Thursday and Friday. While the technical picture for long-dated Treasury ETFs such as TLT looks much better than LQD, TLT’s chart also appears to be reaching a turning point.
Corporate bonds and Treasuries headed in opposite directions last fall, but this week they moved in the same direction.
Don’s Outlook 10/9/09
Stocks rebounded this week, shaking off the languidness of late September. The S&P 500 reached within one point of its 2009 high, which was set nearly three weeks ago. A breach of the high, less than a one percent gain from these levels, would be a bullish signal for traders using technical analysis. September had a similar start as well. The S&P 500 began with a two-day drop and then advanced for eight of the next nine trading days. This month, the index fell for the first two days and has now advanced for four straight days.
Gold and commodities continue to be in the news. Gold has performed well over the crisis, but it lagged during the 2009 rebound. This week the price of gold bullion finally surpassed the previous all-time high and settled at $1,055 before retreating on Friday. Gold reached these levels on the back of a declining US dollar, which fell to a 14-month low as investors and politicians discussed the dollar’s future as a reserve currency.
A dollar story making the rounds this week was whether the Arabs, French, Chinese, Russians, and Japanese have discussed trading oil in something other than dollars, but too many people hyperventilate over the pricing of assets such as oil. The report was later denied by the Saudis, according to CNBC. Nevertheless, many goods are priced in dollars because it remains the reserve currency, but this does not mean traders actually need to hold dollars. The world could just as easily price everything in yen or gold, or anything that trades globally.
The reason everything is priced in dollars is because the US economy was by far the largest for the past 60 years. Major economies from Europe to Asia linked their economies to the US, so it made sense to price everything in the currency of the largest customer. Going forward, however, the US will become a smaller player in a much larger global economy. The real question is not what the asset or good is priced in but what people want to hold after the trade. A sound dollar and U.S. government debt will be assets worth holding if they are responsibly managed.
The third-quarter earnings season kicked off to a strong start this week with a better-than-expected earnings report from Alcoa (AA). The company’s surprising third-quarter 4 cent per share profit beat the 9 cent per share loss that was predicted by analysts. Although year over year the company’s revenue was still down by 33%, AA beat last quarter’s earnings by 9%.
Although I am expecting a good corporate reporting season because the economy is stronger, it will be more difficult than the previous quarter for companies to beat expectations and surprise to the upside of analysts’ projections. After deep cost cutting improved results last quarter, all eyes will be on revenue growth this quarter. Unfortunately the year-over-year comparisons will be difficult, so I will be focused on the outlook for 2010, where only moderate GDP growth could support additional stock gains.
