ETF Hubbub

The ETF Hubbub

30 Aug

Inflation vs Deflation

Posted by Jim at 11:45 am

Mr. Bernanke spent his time last week in Wyoming discussing the Fed’s role in expanding the economy. One primary concern on the table currently is deflation rather than inflation. Remember in 2008 as the Fed and the US government poured trillions of dollars into stabilizing the economy the big fear was inflation from too much money supply. Thus far that has not been the problem. You have to have growth in order for inflation to become a problem. Last Friday Q2 GDP was revised lower from 2.4% growth to 1.6% growth. The trade gap was larger than expected and thus, less growth. The outlook from the Fed has shifted to fighting deflation.

CPI (Consumer Price Index) along with PPI (Producer Price Index) have shown little to no inflation all year. Why all the talk about inflation? Why is gold moving higher if inflation isn’t a concern? Why the sudden interest in deflation by the Fed? So many questions and so few answers relative to the future economic picture. The answer to all the question relative to this topic start and end with economic growth. There is a lack of clarity relative to growth in the economy which explains the volatility in the equity markets and it explains the flight to quality or bonds. Gold has become an alternative investment choice as well in avoidance to stocks. The global picture is similar with the exception of specific pockets of strength. There is a prevailing need assumed, stimulate growth at whatever cost. That thinking is what put us in the current situation economically. In the U.S. too much money supply following the 2000-2002 stock market collapse pushed money into technology stocks creating a bubble and collapse. This same money in 2003 started to moved toward real estate. The bubble started popping in 2006 and culminated in the banking collapse in 2007-2008. If we continue to push money at the problem we will create another bubble in another sector of the markets. Why? Money rotates to where the fastest growth is offered until there is no fundamental reason to own the sector. It is then followed by a collapse or money being withdrawn and looking for the next opportunity. 

Taking this into account, are bonds the next bubble being created? If you look at a chart of the 10 year Treasury yield you might say yes. If you look at a chart of the Treasury bond ETFs you might say yes. This is reason enough to take the necessary precautions relative to your bond holdings. IEF, iShares Barclays 7-10 Year Treasury Bond ETF has moved from $89.30 in March to $98.55 currently. The last time the ETF was at this level was the height of the financial crisis in December of 2008. The flight to quality then was rational and justified. Today, only time will tell, with hindsight, if the level is justified. At this point however, you have to evaluate the elevated levels in price to equate to an elevated level of risk in holding these assets. I am not saying to run out and sell your Treasury bonds, but establishing a stop, hedge or exit point would be a prudent approach.

Corporate bonds are in a similar boat, but they have leveled off over the last 3-4 months. They still offer some opportunities, but they will track the direction of the broader stock market indexes relative to trend. The fixed income market posses more risk currently in may ways than specific sectors of the markets. Money flow has picked up to dividend producing stocks and that brings DVY, iShares Select Dividend Index ETF into play. The focus of the ETF is to buy the top dividend paying stocks based on the Dow Jones Dividend Index. I would place this on a watch list and look for the opportunities as we move forward. The fund currently pays a 3.8% dividend.

Moving full circle the issues facing investors relative to inflation or deflation is leaning towards the deflation side. The Fed is on the case and they are determined to do whatever they can to keep the economy growing to curtail the risk of deflation. Our job is to manage our money relative to what we see on the horizon and for now that means risk in terms of deflation and risk relative to stocks moving lower. Taking a defensive posture is the best course of action relative to the data available.

23 Aug

Investors In Search of Yield

Posted by Jim at 11:51 am

Investor sentiment remains on the negative side and the economic data continues to feed the negative emotions. Scanning the sectors we find plenty of volatility along with a flight to quality. The bond ETFs have been the leaders as money rotated to safety. As a result of the shift to safety, as well as the Fed intervention, interest rates have moved lower. The short end of the yield curve stands below 0.5% on the two year Treasury bond and 2.6% on the ten year. The move lower in dividend yields has prompted investors to look for alternatives to bonds.

Last week we discussed REITs (Real Estate Investment Trusts) as an alternative investment and they remain an option. This week I want to look at dividend producing stocks. As investors shift their attention to the dividend/income side, they cannot forget to measure and adjust for risk. This has been my biggest warning for investors  over the last 12 months. Never buy an investment you don’t understand, first and foremost, and always understand the risk of any investment before you invest. Establish a defined strategy and follow the plan with a defined entry, stop and target.

 ETFs (Exchange Traded Funds) offer a variety of opportunities when it comes to dividend producing stocks. The obvious place to start is the bond ETFs, but currently we are looking for stocks producing dividends. DVY, iShares Dow Jones Select Dividend Index ETF is the most recognized in this category. The fund’s objective is to invest 90% of assets in the index stocks to best replicate the index. Currently 99% of the fund is individual stocks. The three largest sectors in the fund are industrial materials, utilities and consumer goods. They account for more than 65% of the fund allocation. The fund is invested in stocks and thus has volatility reflected by the Beta of 0.93. This means the fund has a 93% correlation with the S&P 500 index benchmark for risk. This shows some of the risk related to holding these type of funds.

The current dividend yield is 3.8%, compared to 0.5% for the 2 year Treasury or even the 2.57% for the 10 year Treasury. You are being rewarded for the increased risk. The average P/E of the fund is 15.8 with 101 holdings. Taking time to understand the fundamentals are important if you are looking to hold the fund longer term. This fund is designed to hold longer term to benefit from both dividends and growth.

Other options in this category are worth filtering for the more boutique offerings:

DOO, WisdomTree International Dividend ex-Financials ETF is designed to find high yielding stocks outside the financial sector. The top three sectors are Telecom, Utilities and Energy which account for 45% of the fund. The dividend is 5.6%, P/E is 12.8 and international focus is great for portfolio diversification with no correlation to the U.S. markets.

IDV, iShares Dow Jones International Select Dividend Index ETF is designed to track the index of a select group of stocks which have provided high dividend yields on a consistent basis over time. The top sectors are Financials, Industirals and Consumer Services accounting for 48% of the fund. More risk with the financial exposure, but the dividend was 7.4% over the past year.  The current yield is 4.4%, P/E is 16.5 and the beta is 1.17. The fund offers potentially higher yields, but it comes with higher risk relative to the funds design.

The push towards dividend yield is on the rise and these ETFs offer the investor some alternatives worthy of consideration. Take the time to review and understand before putting your money to work. Exchange Traded Funds offer the opportunity to participate in a diversified portfolio of stocks benchmarked to a specific index allowing you full transparency of the holdings.

16 Aug

Finding the Right REIT

Posted by Jim at 2:34 pm

REITs have seen solid returns this year while the balance of the market has struggled. However, the question hanging over the sector currently is fair value or overpriced? REITs offers a vast array of opportunities and definable investments by market, asset class, etc. Sifting through the various offerings, one I find interesting, is office space. The demise of commercial real estate was predicted to be worse that what hit the residential markets, but it has not yet materialized. While not completely healthy the sector is still a viable investment opportunity. Scanning through the various REITs some different opportunities caught my eye when filtered by city.

One office REIT focused on New York City is St. Green (SLG). They been aggressive in buying high quality buildings in the city. They are currently the largest office building owner. A recent report from Cushman & Wakefield stated the slide in the New York market is reversing. While not flourishing, the decline has reversed and activity has picked up. The square footage leased in the first six months of the year has increased 100% over 2009. The signs of the slow economic recovery are taking place in the city. This REIT unlike many is a growth play not a dividend (0.7%) play. As leased space is occupied the value of the asset will rise with demand. The management is in the process of debt reduction, thus the small dividend payment. If the process works the value of the REIT will expand and the dividend will return. The time horizon for such a play would be 12-18 months.

Another area in the office REITs of interest are those specializing in government leases. One fairly new player in this space is Government Properties Income Trust (GOV). The fund was launched in June 2009 and focuses on leasing space to government entities. With the current growth in government and the creation on new agencies there is a likely increase in demand for space to house the new government employees. The dividend payment is 6.5% and the recent price drop of $3 or 11% was on the secondary offering of an additional 1.2 million shares.

Another REIT in this same universe of government leasing of office space is Corporate Office Properties Trust (OFC). Nearly 60% of the space is in the Washington D.C. area. The dividend currently is 4.2% and the price has pulled back from the recent high of $43 to $37. Watch for the opportunity to add shares at or near support of $35.

It is important when looking at these type of investment to understand the risk/reward before putting your money to work. Too often the focus is squarely on the dividend versus the valuation of the underlying asset and the business model driving the performance. The valuations in the sector are rich on a relative basis, but there are values to be found for patient investors. The underlying assets in real estate are long term investments. They are generally designed for investor who have longer term time horizons. The dividend payments and capital appreciation combined are the goal, not just the dividend.

3 Aug

Telecom Ready to Break Higher?

Posted by Jim at 9:01 pm

The telecom sector has moved back to the top of its current trading range and is poised to break higher. Why the sudden interest in this sector by investors? Telecom fits into the utility sector as well as the technology sector based on the various stocks. Utilities tend to perform better under a falling dollar scenario. The last four weeks the dollar has been declining and the sector has been a benefactor.

As you can see on the chart below, IYZ is at the top of the trading range and prepared to break higher. The question is will there be enough of a catalyst to push through $20.75 and sustain the move. Time will tell and a couple of stocks withing the sector to watch are below as well. If the sector pulls back short term, look for support near the $19.65 mark to hold and then push back to the highs. This would be a good entry point if support holds on the test. Watch and see how this plays out near term. 

AT&T like the broader sector is attempting to break higher as well. As you can see on the chart below resistance is at the $26.70 mark and would give room for a move to the $28.65 level. If the pullback discussed above does take place look for support at $25.60 hold. This would be a confirmation to the broader index as well.

Research in Motion has struggled with Apple and others attacking their hold on the business markets with new PDA phones. The latest edition of new phones from RIMM have received solid reviews and could impact the stocks looking forward. The stock is facing resistance at the $57.35 mark and support on a pullback would be near $52.

Telecom is in a position to provide some leadership to the broad market on a break higher. Watch and play according to your risk tolerance and strategy. This sector is highlighted on the ETF Spotlight Video.

25 Jun

The Money Trap

Posted by Jim at 9:49 am

The chart below of the S&P 500 index depicts the consolidation pattern of what many refer to as a double bottom (green lines). The break higher occurs when the price eclipses the apex between the two respective bottoms. This is an indication of positive sentiment from investors for a change or switch in direction. If the break higher on Tuesday is positive for the broad markets and investors, then where are all the positive emotions and outlook that accompanies a trend change?

There is one thing missing from the move – volume. The volume bars at the bottom of the chart show below average volume since the second bottom reversal last week. In other words the advance is questionable because of the lower volume. One could conclude, the move higher on the second leg came from a lack of sellers more than positive momentum from buyers. I am not saying we cannot have a broad based rally in stocks without ample buyers. We accomplished a rally in the second half of 2009 on low volume. What I am saying is to remain cautious and not bet the farm on this bounce off the recent lows. I would take the lack of volume as an indication investors appetite for risk has receded along with the markets off the April high.

Economic data is pointing to less spending by the consumer. The drop in spending validated by the economic data is creating a calmer market sentiment or smaller expectations for growth on the horizon. In return investors have less desire for risk in their investment portfolio. The flight to safety (risk avoidance) over the last six to eight weeks is showing up in the price of gold, Treasury bonds and a stronger dollar. Take note and adjust the risk of your portfolio accordingly.

The volatility index spiked well above the 40 level as the anxiety rose relative to the concerns in Europe. The volume during the selling process over the last eight weeks was well above average indicating investors have been active in paring down the risk allocation in their respective portfolios. Volatility has subdued with the recent buying, but it is still in the high 20’s and represents elevated concerns or fear from the investor.

The move higher has failed to produce any substantial leadership. Tuesday’s breakout move came on the back of a few sectors pushing higher. Semiconductors were up more than 5%, but the sector also led the downside during the sell off. We need strong leadership for the trend reversal to be a sustainable move.

Reviewing the chart above you could have put money to work on the break above the 1105 level on Tuesday. Because of the potential risk, a stop at 1085 would be appropriate along with a target of 1150 initially. The risk would be 20 points in exchange for 45 points or slightly more than a 2 to 1 risk/reward ratio. Not the best in the world, but realistic in this environment. If the volume doesn’t matter and the momentum picks up to push the index to the 1182 level, the reward gets better. However, we are going against the statistical odds.

From my view the volume is telling us something about this move higher. Proceed with caution, use stops to protect your downside risk and avoid a potential money trap. The question to ask is, without volume will the move higher be sustainable?

15 Jun

Stop Fighting the Trend

Posted by Jim at 7:09 pm

Why are the charts always right? First, they represent the market’s opinion relative to value of a given stock, sector or index. Regardless of our opinion the chart will always reflect the consensus for value. If you buy a stock and the chart is falling in price you are going against the trend or consensus valuation. Thus, the term, “don’t fight the tape” comest to mind. If you short a stock and the trend is moving higher, you are a salmon swimming upstream. It is important to understand, acknowledge and respect the fact the market is always right. There is no such thing as the market moving up or down for the wrong reasons. The market is always right – our job as investors is to get in sync with the market. Being right for the wrong reason beats being wrong for the right reason.

Second, markets create trends over time. The old statement, “the trend is your friend”. Respect the trend. This is where we can get in sync with the market. Define the trend, define the reasons or rationale for the trend. Even if you disagree with the trend or consensus, the trend will be your friend or your enemy. It is our job to deploy the tools and techniques with the sole purpose of defining the trend, up or down. Learn to get in step with the market and following the trend versus fighting it for all the wrong reasons.

Why do I bring up the obvious relative trends? For the simple reason we forget or we start to think we know more than the market. A friendly reminder, being on the wrong side of the trend leads to principle damage. In the current market environment the short term trend is down. A simple look at the chart of the S&P 500 index validates that fact. I have read plenty of articles and reports stating all the reasons the market should bounce and move higher. The reasons sound logical and believable, however the chart says something completely different. Until which point in time the opinion expressed on the chart show a reversal and buyers starting to take interest, the trend is your friend.

There are stocks currently fighting the market trend by creating their own individual trend. If we look at Netflicks (NFLX) we will find the uptrend still intact and moving higher. The same is true of Chipolte Mexican Grill (CMG) and SanDisk (SNDK). The point being, if you want to buy stocks or sectors of stocks with and ETF, follow their trend. This is one reason we spend so much time scanning the market to find trends up or down.

There are other sectors setting up for a trend reversal. Take a look at the semiconductor ETF, IGW, if it follows through, the chart would break above resistance at $48 and reverse the downtrend from the April high. The Industrial ETF, XLI, needs to push above the $30 level and break higher to reverse the downtrend as well.

Others are setting up for a continuation of the current downtrend in play. XHB, the homebuilders ETF, broke below support at $16.30. The last two weeks has been spent retesting the upside, but the chart shows the ETF at resistance near $16.30. What was support is not resistance and the likelihood the downtrend will continue are high. Watch for a confirmation or continuation of the trend lower.

The trend is your friend, respect the trend and remember, it is our job to deploy the tools and techniques with the sole purpose of defining the trend, up or down. Put in place a strategy for capturing the trend.

Make it a great day!

10 Jun

Trends and Trading Strategies

Posted by Jim at 6:25 pm

I wrote “Trends Develop and We Follow” recently for the sole purpose of getting back to the basics of building a disciplined strategy for managing money. Too often as investors we get sidetracked with all the software, back-testing and holy grail investment philosophies and we forget the simple basics of money management. There is nothing wrong with learning new strategies for finding stocks. But, when we get off track and lose focus on the ‘why’ of investing, the ‘how’ tends to take over and we lose our way.

Here are some simple guidelines for managing your strategies and money:

  1. Create your ‘why’ before you focus on the ‘how’.
  2. Develop a system to follow. This will keep you on track and focused on your goals.
  3. Risk management is money management. Don’t be exposed to unbalanced risk.
  4. Establish a plan for your overall portfolio and work your plan.
  5. Have and established plan for each position in your portfolio. Entry, Exit and Target.
  6. Cut your losses. Risk management 101.
  7. Let your profits run. Money management 101.
  8. Be willing to play both side of the market – short and long.
  9. The market has no feeling, nor does it care about yours. Manage your emotions.
  10. Know your trading personality. Don’t go against it or you invite negative emotions.
  11. Break-even is not an investment strategy – SELL IT!
  12. Never add to a losing position! If you are wrong, admit it and move on.
  13. Have a planned exit strategy for every position. Adjust to let your profits run.
  14. You manage money, not markets. Don’t forget #9.
  15. Greed is the downfall to profit and money management. “Greed Kills”

Each of these principles have a profound impact on your results. The challenge as an investor is the ability remain humble, follow your rules and be disciplined every day. Learn who you are as an investor, define your strategy around your discovery, be patient and keep it simple, so simple you can do it every day of your investing life.