FOFViewForm Object
(
    [form:protected] => FOFForm Object
        (
            [model:protected] => LegacyinterfaceModelCommentaries Object
                (
                    [default_behaviors:protected] => Array
                        (
                            [0] => filters
                            [1] => access
                        )

                    [__state_set:protected] => 1
                    [_db:protected] => JDatabaseDriverMysqli Object
                        (
                            [name] => mysqli
                            [nameQuote:protected] => `
                            [nullDate:protected] => 0000-00-00 00:00:00
                            [_database:JDatabaseDriver:private] => joomla
                            [connection:protected] => mysqli Object
                                (
                                    [affected_rows] => 1
                                    [client_info] => mysqlnd 5.0.11-dev - 20120503 - $Id: 15d5c781cfcad91193dceae1d2cdd127674ddb3e $
                                    [client_version] => 50011
                                    [connect_errno] => 0
                                    [connect_error] => 
                                    [errno] => 0
                                    [error] => 
                                    [error_list] => Array
                                        (
                                        )

                                    [field_count] => 1
                                    [host_info] => Localhost via UNIX socket
                                    [info] => 
                                    [insert_id] => 0
                                    [server_info] => 5.5.46
                                    [server_version] => 50546
                                    [stat] => Uptime: 1327833  Threads: 1  Questions: 187944  Slow queries: 0  Opens: 62  Flush tables: 1  Open tables: 55  Queries per second avg: 0.141
                                    [sqlstate] => 00000
                                    [protocol_version] => 10
                                    [thread_id] => 17463
                                    [warning_count] => 0
                                )

                            [count:protected] => 16
                            [cursor:protected] => 
                            [debug:protected] => 
                            [limit:protected] => 0
                            [log:protected] => Array
                                (
                                )

                            [timings:protected] => Array
                                (
                                )

                            [callStacks:protected] => Array
                                (
                                )

                            [offset:protected] => 0
                            [options:protected] => Array
                                (
                                    [driver] => mysqli
                                    [host] => localhost
                                    [user] => joomlauser
                                    [password] => default
                                    [database] => joomla
                                    [prefix] => ap_
                                    [select] => 1
                                    [port] => 3306
                                    [socket] => 
                                )

                            [sql:protected] => 
SELECT COUNT(*)
FROM (
SELECT `#__legacyinterface_commentaries`.*
FROM `#__legacyinterface_commentaries`
WHERE (`access` IN ('1','1'))) AS a
                            [tablePrefix:protected] => ap_
                            [utf:protected] => 1
                            [errorNum:protected] => 0
                            [errorMsg:protected] => 
                            [transactionDepth:protected] => 0
                            [disconnectHandlers:protected] => Array
                                (
                                )

                        )

                    [event_after_delete:protected] => onContentAfterDelete
                    [event_after_save:protected] => onContentAfterSave
                    [event_before_delete:protected] => onContentBeforeDelete
                    [event_before_save:protected] => onContentBeforeSave
                    [event_change_state:protected] => onContentChangeState
                    [event_clean_cache:protected] => 
                    [id_list:protected] => Array
                        (
                            [0] => 0
                        )

                    [id:protected] => 0
                    [input:protected] => FOFInput Object
                        (
                            [options:protected] => Array
                                (
                                )

                            [filter:protected] => JFilterInput Object
                                (
                                    [tagsArray] => Array
                                        (
                                        )

                                    [attrArray] => Array
                                        (
                                        )

                                    [tagsMethod] => 0
                                    [attrMethod] => 0
                                    [xssAuto] => 1
                                    [tagBlacklist] => Array
                                        (
                                            [0] => applet
                                            [1] => body
                                            [2] => bgsound
                                            [3] => base
                                            [4] => basefont
                                            [5] => embed
                                            [6] => frame
                                            [7] => frameset
                                            [8] => head
                                            [9] => html
                                            [10] => id
                                            [11] => iframe
                                            [12] => ilayer
                                            [13] => layer
                                            [14] => link
                                            [15] => meta
                                            [16] => name
                                            [17] => object
                                            [18] => script
                                            [19] => style
                                            [20] => title
                                            [21] => xml
                                        )

                                    [attrBlacklist] => Array
                                        (
                                            [0] => action
                                            [1] => background
                                            [2] => codebase
                                            [3] => dynsrc
                                            [4] => lowsrc
                                        )

                                )

                            [data:protected] => Array
                                (
                                    [start] => 380
                                    [limitstart] => 380
                                    [option] => com_legacyinterface
                                    [view] => commentaries
                                    [Itemid] => 616
                                    [layout] => 
                                    [task] => browse
                                    [directionTable] => asc
                                    [sortTable] => published_on
                                    [filter_order] => published_on
                                    [filter_order_Dir] => desc
                                    [savestate] => 1
                                    [base_path] => /var/www/html/apcms/components/com_legacyinterface
                                )

                            [inputs:protected] => Array
                                (
                                    [get] => JInput Object
                                        (
                                            [options:protected] => Array
                                                (
                                                )

                                            [filter:protected] => JFilterInput Object
                                                (
                                                    [tagsArray] => Array
                                                        (
                                                        )

                                                    [attrArray] => Array
                                                        (
                                                        )

                                                    [tagsMethod] => 0
                                                    [attrMethod] => 0
                                                    [xssAuto] => 1
                                                    [tagBlacklist] => Array
                                                        (
                                                            [0] => applet
                                                            [1] => body
                                                            [2] => bgsound
                                                            [3] => base
                                                            [4] => basefont
                                                            [5] => embed
                                                            [6] => frame
                                                            [7] => frameset
                                                            [8] => head
                                                            [9] => html
                                                            [10] => id
                                                            [11] => iframe
                                                            [12] => ilayer
                                                            [13] => layer
                                                            [14] => link
                                                            [15] => meta
                                                            [16] => name
                                                            [17] => object
                                                            [18] => script
                                                            [19] => style
                                                            [20] => title
                                                            [21] => xml
                                                        )

                                                    [attrBlacklist] => Array
                                                        (
                                                            [0] => action
                                                            [1] => background
                                                            [2] => codebase
                                                            [3] => dynsrc
                                                            [4] => lowsrc
                                                        )

                                                )

                                            [data:protected] => Array
                                                (
                                                    [start] => 380
                                                )

                                            [inputs:protected] => Array
                                                (
                                                    [get] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
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                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [start] => 380
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [post] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [cookie] => JInputCookie Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                    [get] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                    [start] => 380
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [post] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [cookie] => JInputCookie Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [files] => JInputFiles Object
                                                                        (
                                                                            [decodedData:protected] => Array
                                                                                (
                                                                                )

                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                    [get] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => applet
                                                                                                            [1] => body
                                                                                                            [2] => bgsound
                                                                                                            [3] => base
                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
                                                                                                            [11] => iframe
                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
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                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
                                                                                                        )

                                                                                                    [attrBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => action
                                                                                                            [1] => background
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                                                                                                            [3] => dynsrc
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                                                                                                        )

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [start] => 380
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [post] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => applet
                                                                                                            [1] => body
                                                                                                            [2] => bgsound
                                                                                                            [3] => base
                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
                                                                                                            [11] => iframe
                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
                                                                                                            [15] => meta
                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
                                                                                                        )

                                                                                                    [attrBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => action
                                                                                                            [1] => background
                                                                                                            [2] => codebase
                                                                                                            [3] => dynsrc
                                                                                                            [4] => lowsrc
                                                                                                        )

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [cookie] => JInputCookie Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => applet
                                                                                                            [1] => body
                                                                                                            [2] => bgsound
                                                                                                            [3] => base
                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
                                                                                                            [11] => iframe
                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
                                                                                                            [15] => meta
                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
                                                                                                        )

                                                                                                    [attrBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => action
                                                                                                            [1] => background
                                                                                                            [2] => codebase
                                                                                                            [3] => dynsrc
                                                                                                            [4] => lowsrc
                                                                                                        )

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [files] => JInputFiles Object
                                                                                        (
                                                                                            [decodedData:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
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                                                                                            [data:protected] => Array
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                                                                                            [inputs:protected] => Array
                                                                                                (
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                                                                                    [env] => JInput Object
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                                                                                            [options:protected] => Array
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                                                                                            [filter:protected] => JFilterInput Object
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                                                                                            [data:protected] => Array
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                                                                                            [inputs:protected] => Array
                                                                                                (
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                                                                                    [request] => JInput Object
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                                                                                            [filter:protected] => JFilterInput Object
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                                                                                                        )

                                                                                                    [attrArray] => Array
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                                                                                            [data:protected] => Array
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                                                                                                    [start] => 380
                                                                                                    [limitstart] => 380
                                                                                                    [option] => com_legacyinterface
                                                                                                    [view] => commentaries
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                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [server] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
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                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
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                                                                                                    [attrBlacklist] => Array
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                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [HTTP_AUTHORIZATION] => 
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                                                                                                    [HTTP_ACCEPT_ENCODING] => x-gzip, gzip, deflate
                                                                                                    [HTTP_USER_AGENT] => CCBot/2.0 (http://commoncrawl.org/faq/)
                                                                                                    [HTTP_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8
                                                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                                                    [SERVER_SIGNATURE] => 
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                                                                                                    [SERVER_NAME] => apdev.hubtech.tv
                                                                                                    [SERVER_ADDR] => 10.28.13.29
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                                                                                                    [REMOTE_ADDR] => 54.83.81.52
                                                                                                    [DOCUMENT_ROOT] => /var/www/html/apcms
                                                                                                    [REQUEST_SCHEME] => http
                                                                                                    [CONTEXT_PREFIX] => 
                                                                                                    [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms
                                                                                                    [SERVER_ADMIN] => ben@hubtech.tv
                                                                                                    [SCRIPT_FILENAME] => /var/www/html/apcms/index.php
                                                                                                    [REMOTE_PORT] => 49936
                                                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                                                    [SERVER_PROTOCOL] => HTTP/1.0
                                                                                                    [REQUEST_METHOD] => GET
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                                                                                                    [REQUEST_URI] => /?start=380
                                                                                                    [SCRIPT_NAME] => /index.php
                                                                                                    [PHP_SELF] => /index.php
                                                                                                    [REQUEST_TIME_FLOAT] => 1516387842.353
                                                                                                    [REQUEST_TIME] => 1516387842
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                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [session] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
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                                                                                                    [tagsMethod] => 0
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                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
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                                                                                                            [12] => ilayer
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                                                                                                    [attrBlacklist] => Array
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                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [__default] => Array
                                                                                                        (
                                                                                                            [session.counter] => 1
                                                                                                            [session.timer.start] => 1516387842
                                                                                                            [session.timer.last] => 1516387842
                                                                                                            [session.timer.now] => 1516387842
                                                                                                            [session.client.browser] => CCBot/2.0 (http://commoncrawl.org/faq/)
                                                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                                                (
                                                                                                                    [data:protected] => stdClass Object
                                                                                                                        (
                                                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                                                (
                                                                                                                                    [commentaries] => stdClass Object
                                                                                                                                        (
                                                                                                                                            [limitstart] => 380
                                                                                                                                            [filter_order] => published_on
                                                                                                                                            [filter_order_Dir] => desc
                                                                                                                                        )

                                                                                                                                )

                                                                                                                        )

                                                                                                                )

                                                                                                            [user] => JUser Object
                                                                                                                (
                                                                                                                    [isRoot:protected] => 
                                                                                                                    [id] => 0
                                                                                                                    [name] => 
                                                                                                                    [username] => 
                                                                                                                    [email] => 
                                                                                                                    [password] => 
                                                                                                                    [password_clear] => 
                                                                                                                    [block] => 
                                                                                                                    [sendEmail] => 0
                                                                                                                    [registerDate] => 
                                                                                                                    [lastvisitDate] => 
                                                                                                                    [activation] => 
                                                                                                                    [params] => 
                                                                                                                    [groups] => Array
                                                                                                                        (
                                                                                                                            [0] => 9
                                                                                                                        )

                                                                                                                    [guest] => 1
                                                                                                                    [lastResetTime] => 
                                                                                                                    [resetCount] => 
                                                                                                                    [requireReset] => 
                                                                                                                    [_params:protected] => Joomla\Registry\Registry Object
                                                                                                                        (
                                                                                                                            [data:protected] => stdClass Object
                                                                                                                                (
                                                                                                                                )

                                                                                                                        )

                                                                                                                    [_authGroups:protected] => Array
                                                                                                                        (
                                                                                                                            [0] => 1
                                                                                                                        )

                                                                                                                    [_authLevels:protected] => Array
                                                                                                                        (
                                                                                                                            [0] => 1
                                                                                                                            [1] => 1
                                                                                                                        )

                                                                                                                    [_authActions:protected] => 
                                                                                                                    [_errorMsg:protected] => 
                                                                                                                    [_errors:protected] => Array
                                                                                                                        (
                                                                                                                        )

                                                                                                                    [aid] => 0
                                                                                                                )

                                                                                                        )

                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [jrequest] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
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                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
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                                                                                                    [tagsMethod] => 0
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                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
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                                                                                                            [12] => ilayer
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                                                                                                    [attrBlacklist] => Array
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                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
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                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                )

                                                                        )

                                                                    [env] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
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                                                                            [filter:protected] => JFilterInput Object
                                                                                (
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                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
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                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [request] => JInput Object
                                                                        (
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                                                                                (
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                                                                            [filter:protected] => JFilterInput Object
                                                                                (
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                                                                                        (
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                                                                                    [attrArray] => Array
                                                                                        (
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                                                                                    [attrBlacklist] => Array
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                                                                                )

                                                                            [data:protected] => Array
                                                                                (
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                                                                                    [limitstart] => 380
                                                                                    [option] => com_legacyinterface
                                                                                    [view] => commentaries
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                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [server] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
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                                                                                    [tagsMethod] => 0
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                                                                                    [xssAuto] => 1
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                                                                                        (
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                                                                                    [attrBlacklist] => Array
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                                                                                )

                                                                            [data:protected] => Array
                                                                                (
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                                                                                    [HTTP_HOST] => apdev.hubtech.tv
                                                                                    [HTTP_ACCEPT_ENCODING] => x-gzip, gzip, deflate
                                                                                    [HTTP_USER_AGENT] => CCBot/2.0 (http://commoncrawl.org/faq/)
                                                                                    [HTTP_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8
                                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                                    [SERVER_SIGNATURE] => 
                                                                                    [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31
                                                                                    [SERVER_NAME] => apdev.hubtech.tv
                                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                                    [SERVER_PORT] => 80
                                                                                    [REMOTE_ADDR] => 54.83.81.52
                                                                                    [DOCUMENT_ROOT] => /var/www/html/apcms
                                                                                    [REQUEST_SCHEME] => http
                                                                                    [CONTEXT_PREFIX] => 
                                                                                    [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms
                                                                                    [SERVER_ADMIN] => ben@hubtech.tv
                                                                                    [SCRIPT_FILENAME] => /var/www/html/apcms/index.php
                                                                                    [REMOTE_PORT] => 49936
                                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                                    [SERVER_PROTOCOL] => HTTP/1.0
                                                                                    [REQUEST_METHOD] => GET
                                                                                    [QUERY_STRING] => start=380
                                                                                    [REQUEST_URI] => /?start=380
                                                                                    [SCRIPT_NAME] => /index.php
                                                                                    [PHP_SELF] => /index.php
                                                                                    [REQUEST_TIME_FLOAT] => 1516387842.353
                                                                                    [REQUEST_TIME] => 1516387842
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [session] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
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                                                                                            [1] => body
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                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
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                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
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                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
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                                                                                    [attrBlacklist] => Array
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                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                    [__default] => Array
                                                                                        (
                                                                                            [session.counter] => 1
                                                                                            [session.timer.start] => 1516387842
                                                                                            [session.timer.last] => 1516387842
                                                                                            [session.timer.now] => 1516387842
                                                                                            [session.client.browser] => CCBot/2.0 (http://commoncrawl.org/faq/)
                                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                                (
                                                                                                    [data:protected] => stdClass Object
                                                                                                        (
                                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                                (
                                                                                                                    [commentaries] => stdClass Object
                                                                                                                        (
                                                                                                                            [limitstart] => 380
                                                                                                                            [filter_order] => published_on
                                                                                                                            [filter_order_Dir] => desc
                                                                                                                        )

                                                                                                                )

                                                                                                        )

                                                                                                )

                                                                                            [user] => JUser Object
                                                                                                (
                                                                                                    [isRoot:protected] => 
                                                                                                    [id] => 0
                                                                                                    [name] => 
                                                                                                    [username] => 
                                                                                                    [email] => 
                                                                                                    [password] => 
                                                                                                    [password_clear] => 
                                                                                                    [block] => 
                                                                                                    [sendEmail] => 0
                                                                                                    [registerDate] => 
                                                                                                    [lastvisitDate] => 
                                                                                                    [activation] => 
                                                                                                    [params] => 
                                                                                                    [groups] => Array
                                                                                                        (
                                                                                                            [0] => 9
                                                                                                        )

                                                                                                    [guest] => 1
                                                                                                    [lastResetTime] => 
                                                                                                    [resetCount] => 
                                                                                                    [requireReset] => 
                                                                                                    [_params:protected] => Joomla\Registry\Registry Object
                                                                                                        (
                                                                                                            [data:protected] => stdClass Object
                                                                                                                (
                                                                                                                )

                                                                                                        )

                                                                                                    [_authGroups:protected] => Array
                                                                                                        (
                                                                                                            [0] => 1
                                                                                                        )

                                                                                                    [_authLevels:protected] => Array
                                                                                                        (
                                                                                                            [0] => 1
                                                                                                            [1] => 1
                                                                                                        )

                                                                                                    [_authActions:protected] => 
                                                                                                    [_errorMsg:protected] => 
                                                                                                    [_errors:protected] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [aid] => 0
                                                                                                )

                                                                                        )

                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [jrequest] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                )

                                                        )

                                                    [files] => JInputFiles Object
                                                        (
                                                            [decodedData:protected] => Array
                                                                (
                                                                )

                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [env] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [request] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [start] => 380
                                                                    [limitstart] => 380
                                                                    [option] => com_legacyinterface
                                                                    [view] => commentaries
                                                                    [Itemid] => 616
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [server] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [HTTP_AUTHORIZATION] => 
                                                                    [HTTP_HOST] => apdev.hubtech.tv
                                                                    [HTTP_ACCEPT_ENCODING] => x-gzip, gzip, deflate
                                                                    [HTTP_USER_AGENT] => CCBot/2.0 (http://commoncrawl.org/faq/)
                                                                    [HTTP_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8
                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                    [SERVER_SIGNATURE] => 
                                                                    [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31
                                                                    [SERVER_NAME] => apdev.hubtech.tv
                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                    [SERVER_PORT] => 80
                                                                    [REMOTE_ADDR] => 54.83.81.52
                                                                    [DOCUMENT_ROOT] => /var/www/html/apcms
                                                                    [REQUEST_SCHEME] => http
                                                                    [CONTEXT_PREFIX] => 
                                                                    [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms
                                                                    [SERVER_ADMIN] => ben@hubtech.tv
                                                                    [SCRIPT_FILENAME] => /var/www/html/apcms/index.php
                                                                    [REMOTE_PORT] => 49936
                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                    [SERVER_PROTOCOL] => HTTP/1.0
                                                                    [REQUEST_METHOD] => GET
                                                                    [QUERY_STRING] => start=380
                                                                    [REQUEST_URI] => /?start=380
                                                                    [SCRIPT_NAME] => /index.php
                                                                    [PHP_SELF] => /index.php
                                                                    [REQUEST_TIME_FLOAT] => 1516387842.353
                                                                    [REQUEST_TIME] => 1516387842
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [session] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [__default] => Array
                                                                        (
                                                                            [session.counter] => 1
                                                                            [session.timer.start] => 1516387842
                                                                            [session.timer.last] => 1516387842
                                                                            [session.timer.now] => 1516387842
                                                                            [session.client.browser] => CCBot/2.0 (http://commoncrawl.org/faq/)
                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                (
                                                                                    [data:protected] => stdClass Object
                                                                                        (
                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                (
                                                                                                    [commentaries] => stdClass Object
                                                                                                        (
                                                                                                            [limitstart] => 380
                                                                                                            [filter_order] => published_on
                                                                                                            [filter_order_Dir] => desc
                                                                                                        )

                                                                                                )

                                                                                        )

                                                                                )

                                                                            [user] => JUser Object
                                                                                (
                                                                                    [isRoot:protected] => 
                                                                                    [id] => 0
                                                                                    [name] => 
                                                                                    [username] => 
                                                                                    [email] => 
                                                                                    [password] => 
                                                                                    [password_clear] => 
                                                                                    [block] => 
                                                                                    [sendEmail] => 0
                                                                                    [registerDate] => 
                                                                                    [lastvisitDate] => 
                                                                                    [activation] => 
                                                                                    [params] => 
                                                                                    [groups] => Array
                                                                                        (
                                                                                            [0] => 9
                                                                                        )

                                                                                    [guest] => 1
                                                                                    [lastResetTime] => 
                                                                                    [resetCount] => 
                                                                                    [requireReset] => 
                                                                                    [_params:protected] => Joomla\Registry\Registry Object
                                                                                        (
                                                                                            [data:protected] => stdClass Object
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [_authGroups:protected] => Array
                                                                                        (
                                                                                            [0] => 1
                                                                                        )

                                                                                    [_authLevels:protected] => Array
                                                                                        (
                                                                                            [0] => 1
                                                                                            [1] => 1
                                                                                        )

                                                                                    [_authActions:protected] => 
                                                                                    [_errorMsg:protected] => 
                                                                                    [_errors:protected] => Array
                                                                                        (
                                                                                        )

                                                                                    [aid] => 0
                                                                                )

                                                                        )

                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [jrequest] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                )

                                        )

                                    [post] => JInput Object
                                        (
                                            [options:protected] => Array
                                                (
                                                )

                                            [filter:protected] => JFilterInput Object
                                                (
                                                    [tagsArray] => Array
                                                        (
                                                        )

                                                    [attrArray] => Array
                                                        (
                                                        )

                                                    [tagsMethod] => 0
                                                    [attrMethod] => 0
                                                    [xssAuto] => 1
                                                    [tagBlacklist] => Array
                                                        (
                                                            [0] => applet
                                                            [1] => body
                                                            [2] => bgsound
                                                            [3] => base
                                                            [4] => basefont
                                                            [5] => embed
                                                            [6] => frame
                                                            [7] => frameset
                                                            [8] => head
                                                            [9] => html
                                                            [10] => id
                                                            [11] => iframe
                                                            [12] => ilayer
                                                            [13] => layer
                                                            [14] => link
                                                            [15] => meta
                                                            [16] => name
                                                            [17] => object
                                                            [18] => script
                                                            [19] => style
                                                            [20] => title
                                                            [21] => xml
                                                        )

                                                    [attrBlacklist] => Array
                                                        (
                                                            [0] => action
                                                            [1] => background
                                                            [2] => codebase
                                                            [3] => dynsrc
                                                            [4] => lowsrc
                                                        )

                                                )

                                            [data:protected] => Array
                                                (
                                                )

                                            [inputs:protected] => Array
                                                (
                                                )

                                        )

                                    [cookie] => JInputCookie Object
                                        (
                                            [options:protected] => Array
                                                (
                                                )

                                            [filter:protected] => JFilterInput Object
                                                (
                                                    [tagsArray] => Array
                                                        (
                                                        )

                                                    [attrArray] => Array
                                                        (
                                                        )

                                                    [tagsMethod] => 0
                                                    [attrMethod] => 0
                                                    [xssAuto] => 1
                                                    [tagBlacklist] => Array
                                                        (
                                                            [0] => applet
                                                            [1] => body
                                                            [2] => bgsound
                                                            [3] => base
                                                            [4] => basefont
                                                            [5] => embed
                                                            [6] => frame
                                                            [7] => frameset
                                                            [8] => head
                                                            [9] => html
                                                            [10] => id
                                                            [11] => iframe
                                                            [12] => ilayer
                                                            [13] => layer
                                                            [14] => link
                                                            [15] => meta
                                                            [16] => name
                                                            [17] => object
                                                            [18] => script
                                                            [19] => style
                                                            [20] => title
                                                            [21] => xml
                                                        )

                                                    [attrBlacklist] => Array
                                                        (
                                                            [0] => action
                                                            [1] => background
                                                            [2] => codebase
                                                            [3] => dynsrc
                                                            [4] => lowsrc
                                                        )

                                                )

                                            [data:protected] => Array
                                                (
                                                )

                                            [inputs:protected] => Array
                                                (
                                                )

                                        )

                                    [files] => JInputFiles Object
                                        (
                                            [decodedData:protected] => Array
                                                (
                                                )

                                            [options:protected] => Array
                                                (
                                                )

                                            [filter:protected] => JFilterInput Object
                                                (
                                                    [tagsArray] => Array
                                                        (
                                                        )

                                                    [attrArray] => Array
                                                        (
                                                        )

                                                    [tagsMethod] => 0
                                                    [attrMethod] => 0
                                                    [xssAuto] => 1
                                                    [tagBlacklist] => Array
                                                        (
                                                            [0] => applet
                                                            [1] => body
                                                            [2] => bgsound
                                                            [3] => base
                                                            [4] => basefont
                                                            [5] => embed
                                                            [6] => frame
                                                            [7] => frameset
                                                            [8] => head
                                                            [9] => html
                                                            [10] => id
                                                            [11] => iframe
                                                            [12] => ilayer
                                                            [13] => layer
                                                            [14] => link
                                                            [15] => meta
                                                            [16] => name
                                                            [17] => object
                                                            [18] => script
                                                            [19] => style
                                                            [20] => title
                                                            [21] => xml
                                                        )

                                                    [attrBlacklist] => Array
                                                        (
                                                            [0] => action
                                                            [1] => background
                                                            [2] => codebase
                                                            [3] => dynsrc
                                                            [4] => lowsrc
                                                        )

                                                )

                                            [data:protected] => Array
                                                (
                                                )

                                            [inputs:protected] => Array
                                                (
                                                )

                                        )

                                    [env] => JInput Object
                                        (
                                            [options:protected] => Array
                                                (
                                                )

                                            [filter:protected] => JFilterInput Object
                                                (
                                                    [tagsArray] => Array
                                                        (
                                                        )

                                                    [attrArray] => Array
                                                        (
                                                        )

                                                    [tagsMethod] => 0
                                                    [attrMethod] => 0
                                                    [xssAuto] => 1
                                                    [tagBlacklist] => Array
                                                        (
                                                            [0] => applet
                                                            [1] => body
                                                            [2] => bgsound
                                                            [3] => base
                                                            [4] => basefont
                                                            [5] => embed
                                                            [6] => frame
                                                            [7] => frameset
                                                            [8] => head
                                                            [9] => html
                                                            [10] => id
                                                            [11] => iframe
                                                            [12] => ilayer
                                                            [13] => layer
                                                            [14] => link
                                                            [15] => meta
                                                            [16] => name
                                                            [17] => object
                                                            [18] => script
                                                            [19] => style
                                                            [20] => title
                                                            [21] => xml
                                                        )

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                                    [title] => Measuring Tactical Alpha Part II: Examples and Analysis
                                    [slug] => dundee_121214a
                                    [fulltext] => 

When we left off in Part 1, we promised to examine how select Global Tactical Asset Allocation products stack up against the Global Market Portfolio from the perspective of several performance measures – particularly Sharpe ratio, alpha and information ratio.  Without further adieu:

Figure 1. Performance comparison of Global Tactical Asset Allocation products vs. ETF Proxy Global Market Portfolio, Jun 1, 2011 – Nov 28, 2014

GTAA_Comps2

Figure 2. Performance comparison of global risk parity products vs. ETF Proxy Global Market Portfolio, Jun 1, 2011 – Nov 28, 2014

RP_Comps3

Analysis: GestaltU, Data from Yahoo Finance and Bloomberg

A few notes about these tables. First, where stats are labeled (Incep), they are calculated from June 2011, or the product’s inception if it launched subsequent to that date, through the end of November 2014. Second, CAGR numbers are annualized, except where a fund has been operating for less than 1 year. All risk-adjusted performance numbers are annualized from daily data, regardless of the length of track record (daily ratios are multiplied by sqrt(252)). Betas, alphas and t-scores are all since inception, and all relative metrics (IR, alpha, beta, t-scores) are relative to the Global Market Portfolio and based on daily observations.

So what story do these tables tell? Well, first off the Global Market Portfolio hasn’t been a tough bogey to beat in terms of raw returns over the past three years or so, with less than 6% annualized returns. For comparison, the S&P (SPY ETF) has returned over 16% annualized over the period, and a US balanced fund (Vanguard US Balanced ETF) has gained 11% per year. Bear in mind US markets represent over 30% of the global index, so international diversification has been quite a performance drag.

I know many of you with US-centric portfolios are patting yourself on the back. Ain’t self attribution bias grand? Make no mistake, you are US-centric because of home market bias, not superior forecasting abilities, but I will be the first to admit that it’s better to be lucky than smart. I can state with some confidence that US-centric investors are unlikely to experience the same relative success over the next three years. If that’s the case, what are you going to do about it?

In terms of returns relative to the GMP, GTAA funds are a mixed bag. The fund with the highest returns appears to be SMIDX, the SMI Dynamic Allocation fund, but this is somewhat of a red herring because the fund has less than 1/2 the operating history of most other funds. On a risk adjusted basis, JP Morgan’s Efficiente (EFFE) mandate has delivered the highest risk adjusted performance, in terms of Sharpe, Sortino, and Omega over the entire observation period.  More importantly, given its low beta and high alpha scores, EFFE has generated its returns with very little reliance on performance from the underlying indexes. This is a critical point, as funds with a high correlation to the GMP are vulnerable to a negative shift in performance when global markets turn at the end of this cycle.

Investor legend Rob Arnott’s GTAA behemoth, PAAIX, managed under the PIMCO banner, deserves an honourable mention. It also surpassed the GMP’s Sharpe ratio over the past few years, and delivered the second lowest alpha and beta of any fund, despite lower absolute returns.

We included the Good Harbor Tactical Core US fund in our analysis, despite the fact that it is US focused, because it highlights the risk of trying to market time strictly between the stocks and bonds of one market. This is the difference between market timing and GTAA: you make just one bet.We deal with this concept in more detail in our new paper (see below). In our testing, we’ve observed that market timing between stocks and bonds or stocks and cash is a much more difficult challenge than spreading bets across multiple asset classes, and Good Harbor’s unfortunate recent performance lends credence to our own findings.

Given higher average structural allocations to bonds in risk parity funds, products in this class have clearly benefitted from the global race to the bottom in long rates, as average Sharpe ratios are meaningfully higher than average GTAA Sharpe ratios. I strongly suspect this will reverse when the rate cycle finally turns (which admittedly could be quite a while). Setting aside QSPIX for a moment as a special case, note that Invesco’s Balanced Risk portfolio sports the highest Sharpe, Sortino, and Omego ratios over the past 3+ years, as well as the lowest beta and highest alpha. This is a large fund, with $10 billion in AUM according to Morningstar, yet it continues to deliver stellar returns year after year. Not for nothing, it has also generated the highest annualized returns over this recent period.

We mentioned QSPIX is a special case, and it is. This fund, managed by AQR’s esteemed Andrea Frazzini and Ronen Israel, is based on a concept described in a 2012 paper by Antti Ilmamen, Ronen Israel, and Tobias Moskowitz, entitled “Investing with Style: The Case for Style Investing” (currently behind AQR paywall). Antti Ilmamen is one of the greatest investment thinkers alive today, and his books are required reading for every aspiring asset allocator. The authors present compelling evidence of the magnitude, persistence, and structurally low correlations, of the four primary sources of style premia: value, momentum, carry and ‘defensive’. Across all asset classes covered, the authors demonstrate that style premia correlations averaged -0.22, and ranged between -0.6 and +0.21 from 1990 – 2012. Long-term Sharpe ratios for style premia composites across all asset class buckets range from 0.9 for value to 1. 37 for carry over the same period. In simulation, when normalized to a 10% volatility, a combination style premia composites across all asset classes delivered a Sharpe of 2.52 before fees and expenses.

Of course, the authors are aware of the many frictions and pitfalls involved in implementing the strategy, so they included an analysis of the net historical performance after accounting for trading costs (Sharpe declines to 1.9); discounting for model overfitting (Sharpe declines to 0.98), and; risk-management and fees (Sharpe ratio declines to 0.85). This seems to be to be quite a conservative target (see Figure 5.)

Obviously, given the low expected average correlation with traditional 60/40 portfolios, and the high expected Sharpe ratio, QSPIX should substantially improve overall portfolio Sharpe, even with small allocations. For example, a 10% allocation to QSPIX carved out of a 60/40 portfolio might raise overall Sharpe from 0.3 to 0.44, according to the authors.

Overall, I’d say the short snapshot of performance we’ve seen over the past year since inception would not cause me to reject the possibility that QSPIX will deliver against expectations. However, the fund may be mildly vulnerable to liquidity shocks, as it has a gross leverage ratio of 8x (!!), so it should not play the role of a tail hedge in portfolios. In my opinion, the best structural tail hedge is a good CTA fund.

So what can we conclude from our analysis? This article wasn’t meant to recommend, or point fingers, at any particular strategy, but rather to highlight how we might think about the performance of global allocation funds, and what observed performance features might make them attractive. Above all, before committing any capital to these products, we would focus our scrutiny on the process underlying the strategy. What factors do the managers believe are driving returns? What evidence do they have that their methodology is effective? We would want to see much longer trading histories, analyze performance in multiple trading regimes, and understand how the strategy might interact with other holdings in portfolios. Where a long-term live history isn’t available (or even if one is available), we would be keen to see simulations of historical performance using the same process, and understand all the ‘moving parts’ that might affect the character of the strategy.

That said, if we only have live returns to go on, we would focus on performance relative to the only true passive global benchmark, the GMP, rather than making comparisons with specific regional indexes. Specifically, we would seek to harvest as much true alpha as possible relative to the GMP, as strategies with high alphas are less reliant on strong global market performance to deliver returns. After all, aren’t we after diversification? Next we would look at overall risk metrics, especially volatility, but with one eye on drawdowns and beta. Only then would we start to care about absolute returns and Sharpe ratios.

One other metric, Omega ratio, stands out as meaningful, since unlike all of the other performance metrics above, it makes no assumptions about the distribution of returns. The utility of Sharpe, Sortino, alpha, and beta all depend on the assumption of normally distributed returns, but Omega accounts for the fact that returns often stray far from normality, especially over shorter horizons. The formula for Omega ratio looks fancy, but it’s actually easy to calculate. First, since the Omega ratio reflects the relative probability of achieving returns above a minimum required return (MRR), we must first choose an MRR. We chose to use the risk free rate, which is currently zero, and which makes our calculations really easy. But here is the general formula in Excel-friendly language.

Omega={SUM(IF(returns>MRR,returns-MRR))/(SUM(IF(returns<MRR,MRR-returns)))}

Note that the returns variable refers to the vector of returns, so this is a matrix formula. In order for Excel to calculate it, you must hold down both the CTRL key and the ENTER key at the same time.

In any event, you will note that on this measure, and relative to a 0% risk free rate over the period studied, GTAA funds compare favourably relative to the GMP, almost across the board. This suggests that, after accounting for higher moments of the return distributions, an investor would have a higher probability of achieving positive returns using GTAA than the GMP. An interesting observation indeed.

Overall, there are a few worthy examples of successful GTAA mandates and several risk parity products worth considering for active global diversification. I should also mention that Meb Faber’s Cambria has recently launched a very interesting new GTAA ETF, GMOM, based on newer additions to Meb’s ubiquitous paper, “A Quantitative Approach to Tactical Asset Allocation“. Well worth a look.

Lastly, we are excited to get our own GTAA track record audited so that we can add our own numbers to this list as we launch our new firm, ReSolve Asset Management, in the new year.

© Dundee Goodman Private Wealth

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This past week I have been inundated with questions regarding the dive in crude oil prices and the energy sector in general. Is this a fantastic buying opportunity, or is the bigger of something bigger? The answer depends on your time frame.

For a speculative trader looking for a short-term opportunity, as shown in the chart below, oil is now 4-standard deviations oversold and a fairly strong bounce is likely.

Oil-tradesetup-120914

However, longer-term investors may want to use whatever bounce comes to rebalance energy weightings in portfolios as it is quite likely that the dynamics of the oil/energy market have now markedly changed going forward.  As I discussed recently in "No, It's Not Time To Buy Oil Stocks Yet," the longer-term investment opportunity in energy has occurred after the initial bounce.  To Wit:

"As you will notice, each time there is a sharp correction in the NYEI, the subsequent bounce has been an opportunity to sell positiions that are underperforming, experiencing credit related issues or were just poor investments to begin with. Strongly rising markets mask many investment errors made by investors that are quickly, and brutally, revealed during market declines. These bounces give investors opportunities to clear those mistakes.

The subsequent decline provided an ideal opportunity to reallocate portfolios to better quality and performing issues within the portfolio. The current sell-off is likely the first leg of a similar pattern that investors should use to clean up portfolios in energy related investments."

Energy-Index-Trendline-120214

This weekend's reading list is a collection of articles discussing the good, the bad and the ugly of the dive in crude oil prices. It will likely be some time before we know how this particular story ends, but it is a story that is particularly important to Houstonians that have enjoyed oil-driven economic boom for the last five-years.


1) 10 Reasons Why A Severe Drop In Oil Prices Is A Problem by Gail Tverberg via Our Finite World

  • Low prices lead to oil being left in the ground
  • Low prices negatively impact shale extraction and offshore drilling
  • Shale operations have a huge impact on US Employment
  • Low oil prices lead to debt defaults
  • Low oil prices can lead to collapses of exporters
  • Benefits to consumers likely smaller than expected
  • Hope for exported oil and LNG likely to disappear
  • Hoped for renewables lose luster with low oil prices
  • Deflationary pressures
  • Drop in oil prices likely reflective of world reaching debt expansion limit

Read Also: Oil & Banks - As Prices Fall Risks Rise by John Schoen via CNBC

2) Energy Bond Risk Soars To Record Highs via ZeroHedge

"The spread (or risk) of high-yield energy credits surged again today, breaking above 850bps for the first time... The overall high-yield credit market is being dragged wider by this contagion as hedgers try to contain the collapse that is possible. For now, the S&P 500 remains entirely ignorant of the fact that over a third of its CapEx was expected to come from this crushed sector."

 Zero-hedge-energybond-risk-120914

Read Also: Why The Stock Market Is Detached From The Economy via Streettalklive

Read Also: Guess What Happened The Last Time Oil Crashed Like This by Michael Snyder via Conscious Life News

3) Why The Oil Price Decline Is Not A Bad Thing by David Rosenberg via The National Post

"Mr. Rosenberg said the stiff drop in oil prices this year has resulted in U.S. gas prices falling US26¢ to US$2.88 per gallon from US$3.14 a month ago. That, he said, is equivalent to a US$40-billion tax cut that will benefit various sectors including transportation, energy-dependent manufacturers and segments of the consumer discretionary space such as restaurants, electronics, and music and book stores."

Read Also: Why Bottom Falling Out Of Oil Isn't All That Bad by David Rosenberg via The National Post

4) Recession Is The New Stimulus by Jeffrey Snider via Alhambra Partners

"At this point the idea of 'decoupling' enters as if it were valid today in a way it was totally absent in 2008 (the last time “decoupling” was so prevalent). In other words, the global economy may be sinking but the US is supposed to be the bright shining light of contrary good fortune. Thus, less demand around the world is expunged from the domestic trend of rising production and scenarios of import price competition. Of course, I think that is nothing more than the same wishful thinking that drove the 2008 version, but also that it is plainly obvious that emerging market demand for energy is a full part of the lack of forward demand up the supply chain. China may be slowing, but it’s not because China is slowing on its own, rather the US is buying a lot less from China (and everywhere else).

GDP is a spreadsheet or regression with variables to be moved around and nothing more to 'economists.' How else can you arrive at the idea that rapidly gaining bearishness in markets with trillions and trillions on the line is now the go-to 'stimulus?' Maybe the global economy, including the US, will get so bad it will be positively booming."

Read Also: Oil Price Drops - Don't Panic, Really by Cyrus Sanati via Fortune

5) Steep Slide In Oil Prices Is Blessing For Most by James Stewart via The New York Times

"The plunge in oil prices — to about $66 a barrel from over $107 in late June — has many pundits wringing their hands. They have cited the risks of falling prices and social and political unrest overseas, not to mention the economic threat to the booming mid-American oil basin, running from Texas to North Dakota and Alberta.

But if history is any guide, it’s hard to see falling oil prices as anything but good news for everyone whose fortunes aren’t tied to oil, which is to say, most of the world’s population."

Read Also: Plunging Oil Prices Will Starve The World Of Economic Fuel by Chris Martenson via MarketWatch


Read This: Dollar Surge Endangers Global Debt Edifice Warns BIS by Ambrose Evans-Pritchard via The Telegraph

"The BIS has particular authority since its job is to track global lending. It was the only major body to warn of serious trouble before the Great Recession - and did so clearly, without the usual ifs and buts.

It now warns that the world is in many ways even more stretched today than it was in 2008, since emerging markets have been drawn into the global debt morass as well, and some have hit the limits of easy catch-up growth."


"Let me tell you something that we Israelis have against Moses. He took us 40 years through the desert in order to bring us to the one spot in the Middle East that has no oil!" - Golda Meir

Have A Great Weekend

Lance Roberts

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. 

© Streettalk Live

[description] => This past week I have been inundated with questions regarding the dive in crude oil prices and the energy sector in general. Is this a fantastic buying opportunity, or is the bigger of something bigger? The answer depends on your time frame. [author] => Lance Roberts [legacyinterface_firm_id] => 400 [published_on] => 2014-12-12 [digest_date] => 2014-12-12 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-12 19:18:04 [created_by] => 948 [modified_on] => 2014-12-12 19:18:59 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2142 [hits] => 0 ) [2] => stdClass Object ( [legacyinterface_commentary_id] => 2058 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15296 [apv_conversation_id] => [content_type] => market-commentary [title] => OPEC’s Thanksgiving [slug] => guinness_121114 [fulltext] =>

The Organization of the Petroleum Exporting Countries (OPEC) meeting ended on 11/27/14, Thanksgiving Day, with the decision to leave their production quota unchanged and no clarity on when a cut might be forthcoming. The lack of any quota cut, combined with little indication that OPEC were particularly focused in the short term on quota compliance, caught the market by surprise. Crude oil prices and energy equities fell sharply.

We have reflected on the meeting outcome and its implications.

Are OPEC dysfunctional or is Al Naimi of Saudi just being savvy?

We think probably the latter, and reiterate two important criteria for Saudi:

  1. Saudi is interested in the average price of oil that they get; they have a longer investment horizon than most other market participants
  2. Saudi wants to maintain a balance between global oil supply and demand to maintain a price that is acceptable to both producers and consumers

On further analysis, Saudi’s decision to not shoulder an OPEC production cut is consistent with both of the above objectives.

We were not particularly surprised at the ‘no cut’ decision from OPEC, but we had not expected the lack of clarity in their accompanying comments nor the size of the market reaction.

The average price of Brent in 2014 will be around $100, even if it averages $70 for the rest of the year.  If it stays at $70 until April, then averages $90 until December 2015 and then $105 in 2016 and 2017, the average for 2015-17 would be just under $98 per barrel – a reduction that they would hardly notice. We believe that Saudi went to the meeting perfectly willing to cut production to put a floor under the price but were unwilling to take the responsibility alone. While Kuwait and the United Arab Emirates (UAE) would have likely supported such a move, in our opinion, agreement from other members of OPEC about the size of the cut and who within OPEC should shoulder the burden was clearly not forthcoming. With Libya suffering civil unrest, Iranian production depressed by sanctions and Iraq still recuperating, there was clearly not enough cohesion among the other countries to generate a consensus. Saudi still no doubt has a vivid memory of the 1982-1985 period when it was the only OPEC member pulling its weight and took production down to 3 million barrels per day when its capacity was around 10 million barrels per day. In the face of improving non-OPEC supply this time, Saudi clearly does not want to play the role of the lone ‘central banker’ again.

So $78/bbl Brent, as it was at the time of the meeting, was not enough to galvanize the group to make a unanimous decision about production. Crude oil fell by nearly $10 per barrel in the subsequent days; maybe that is enough to see a change of opinion? It is certainly a level which should remind high spending US shale oil companies (as well as some of their more errant OPEC colleagues and Russia) of the need for more capital discipline. If oil prices do not find a floor in relatively short order, we would expect to see an unscheduled OPEC meeting called with an emergency quota reduction and an actual physical reduction in oil supply thereafter.

In terms of informational content, we noted that there was no mention this time of OPEC supporting $100 oil as a sensible oil price for both producers and consumers. This does not change our long-held $100 per barrel long term oil price view (it is driven by economic analysis rather than OPEC commentary), nor our belief that OPEC favor $100 long term.

That said, we sense that Saudi & co. are eyeing US shale oil production growth and would prefer a shallower oil price recovery for the time being, rather than a ‘V’ shaped recovery, i.e. one that doesn’t allow US oil growth to accelerate unabated. If we are right, it is logical for Saudi to tolerate a lower oil price for months rather than weeks.

Analyzing the decision of OPEC not to cut production quotas, it may well be that they are more comfortable with current supply/demand dynamics than many commentators are. Even on current estimates (pre-this period of lower oil prices), the International Energy Agency (IEA) expected second half 2015 supply/demand to be broadly in balance after a period of oversupply in Q1 2015. Real time indicators, such as Asian refining margins and Middle East to Asia tanker rates, are moving in line with season norms and broadly in line with historic ranges – there is no data indicating particular demand weakness in the oil market currently. This does not appear to be a re-run of 2008/09.

So, in all likelihood, Saudi (together with Kuwait and the UAE who are working well together) will probably keep production unchanged (and hence prices in the $60-80 range) until they see signs of capital discipline, particularly in the US. Note their aggregate production is around 15.5 million(m) barrels(b)/day, which is 2.65 million b/day above the level of 12.85 million b/day at the end of 2010. Because many Exploration & Production (E&P) companies have a fair amount of forward oil production hedged, we would expect this stance from OPEC to last for six months or so. Only then, once discipline has been reinstated, will they likely cut production to bring the price back up. North American E&P companies, ironically, should be very grateful to them – some pain now could lead to gain in later periods as investors find their worst fears of a collapse in the oil price much reduced.

What happens to oil supply in a lower price environment?

While oil demand looks fine, and will likely be buoyed by lower prices, we note that the global oil balance has loosened in recent months due to accelerating non-OPEC supply. A key question now is the reaction of non-OPEC supply to those lower prices, should they persist.

With US shale oil, we are in new territory. What we do know is that North American E&P companies live hand to mouth, converting one year’s cash-flows into next year’s capital spending. In 2014, capital expenditure (capex) is likely to be 15% higher than initially expected as a result of oil prices being higher than expected over the year (West Texas Instrument (WTI) likely to average $95 per barrel). Our estimate of US onshore production growth in 2014, accordingly, has gone from 0.8m b/day to 1.2 m b/day. So; 15% more capex brought 400,000 barrels per day of extra peak production. This is the marginal near term investment of the global oil and gas industry and is sufficiently ‘short cycle’ in its nature that we should see a capital spending reaction come through pretty quickly.

Assessing the speed of US oil supply response is difficult, but we thought we would highlight sensitivity analysis carried out very recently by Tudor Pickering Holt which shows:

  • A flat $80 WTI oil price from here would drive a drilling rig reduction of about 200 rigs and slow growth in US oil production to 0.7m b/day in 2015 and 0.4m b/day in 2016 (vs 1.2m b/day in 2014)
  • A flat $70 WTI oil price from here would drive a drilling rig reduction of over 500 rigs and slow growth in US oil production to 0.6m b/day in 2015 and to nearly zero in 2016 (vs 1.2m b/day in 2014)

So far, we have witnessed capex budgets for 2015 that are down around 15% from Continental Resources, 25% from Apache and 50% from Denbury Resources. Moreover, Apache is expecting to cut its rig count by around 50% in 2015. These are pretty dramatic cuts, and we expect to see a lot more announcements of similar size over the next 2-3 months.

We see Russian oil production already starting to roll over, even before lower prices have had a chance to bite. The Russian situation is worsened by sanctions; we are told, for example, that it is currently close to impossible to raise financing for new seismic activity. Lukoil have already announced a 13% cut to 2015 capex.  A combination of the effect of sanctions and a lower oil price could easily result in Russian production down by 0.5m b/day over the next 12 months.

Elsewhere, Brazil is likely to be a brighter spot for production, but the rest of non-OPEC will likely start to struggle further. Recall that in the aftermath of 2008/09 downturn, even though the fall in the oil price was brief, non-OPEC supply outside North America had shifted into decline by 2011.

What does this add up to for oil and equities?

We expect oil to trade in a $60-80 range in the near term. This is an unsupported level which may fluctuate significantly. If this price range persists, we expect North American unconventional supply growth to slow rapidly. And we expect OPEC to announce production cuts by late summer 2015 at the latest, if the physical market is not rebalancing quickly enough. This points to a possible rise in oil prices in the second half of 2015.

Longer term we think oil would likely recover to $100/barrel(bbl), possibly by the end of 2016, then we predict that it would inflate with the world economy, growing at 3% in real terms.

Clearly one’s view of energy equity valuations is dictated by future oil price assumptions. Energy equities have traded off sharply in sympathy with the recent fall in the oil price, such that they appear to discount a long-term crude price of around $70/bbl.

If oil eventually settles back at around the $100 level, we now see a potential upside in the sector of around 50%.

 

Jonathan Waghorn

Portfolio Manager, Guinness Atkinson Global Energy Fund

 

 

Opinions expressed are subject to change, are not guaranteed and should not be considered investment advice.

Mutual fund investing involves risk and loss of principal is possible.  The Fund invests in foreign securities which will involve greater volatility, political, economic and currency risks and differences in accounting methods. The Fund is non-diversified meaning it concentrates its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. The Fund also invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility. The Fund’s focus on the energy sector to the exclusion of other sectors exposes the Fund to greater market risk and potential monetary losses than if the Fund’s assets were diversified among various sectors. The decline in the prices of energy (oil, gas, electricity) or alternative energy supplies would likely have a negative effect on the fund’s holdings.

 The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus and summary prospectus contains this and other important information about the investment company, and it may be obtained by calling 800.951.6566 or visiting gafunds.com. Read it carefully before investing.

Distributed by Quasar Distributors, LLC

 

© Guinness Atkinson

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We expect the policy environment in 2015 to be supportive for stocks. As discussed in our Outlook 2015: In Transit, Republican control of Congress sets up a different policy dynamic in Washington that could have a meaningful impact on broad policy measures such as the Affordable Care Act (ACA), tax reform, the federal budget, and regulations in certain sectors such as energy and financial services. President Obama’s interest in building a legacy may lead to more compromise between the White House and Congress than seen in recent years.

Key Policy Issues to Watch in the Year Ahead

Here are our thoughts on the key policy issues for the rest of 2014 and through 2015:

  • ACA. The president’s signature policy initiative, the ACA (also known as Obamacare), is unlikely to be repealed next year, although there is a strong chance that the most unpopular parts of the law will be repealed. The impending Supreme Court ruling in mid-2015 about the legality of ACA subsidies affecting more than 7 million subscribers may force the Obama administration to work with Congress to make significant changes to
    the law. We would view any ACA-driven weakness as a potential buying opportunity in the healthcare sector, and we are watching for opportunities to take advantage of attractive growth prospects and strong innovation momentum.
  • Tax reform. Broad tax reform, which would likely take the form of closing corporate, personal, and other tax loopholes while lowering the overall tax rate, would be welcomed by markets. However, the Republican majority in the Senate is not large enough to deliver more than piecemeal changes at this point. Bipartisan agreement exists to lower the corporate tax rate; however, without a filibuster-proof Republican majority in the Senate in 2015, the path to accomplishing this is murky. The Republican win in the runoff election in Louisiana this weekend brings the total Republican Senate seats to 54, short of the 60 needed for a filibuster-proof majority.
  • Federal budget. Attempts to address the country’s long-term structural budget problems in 2015 may lead to a return of some policy-induced uncertainty. The big unknown is whether President Obama and the Republican-led Congress will find common ground in 2015 and cut a long-awaited, long-term deal on the budget. Though a long-term deal is unlikely, we are confident a short-term deal to fund the government will be reached ahead of this week’s deadline on December 11, 2014, which would avoid a government shutdown. The odds of another debt ceiling debacle (such as we had in 2011), when the U.S. Treasury reaches the debt ceiling in March 2015, are very low based on the rhetoric coming from both political parties, but the possibility does exist.
  • Energy. The Republican-controlled Congress may help quicken the pace of permitting for oil and gas production, encourage petroleum exports, and could push through the approval of the controversial Keystone XL Pipeline. Progress toward crude oil exports may be slow, given current low prices, although the risk that the pipeline would drive prices higher is a key reason why the project has been delayed. The potential build-out of the Keystone Pipeline, which enjoys bipartisan support, would be positive for energy
    and industrial companies — creating construction jobs, facilitating exports, and alleviating the U.S. oil inventory glut. Transportation stocks such as
    rails should continue to chug along as they benefit from increasing U.S. energy production.
  • Financial services. Under a Republican-controlled Congress, regulatory requirements for regional banks related to the Systemically Important Financial Institution (SIFI) criteria may be eased. The breakpoint for the designation may be raised, potentially to $100 billion in assets from $50 billion, alleviating some of the regulatory burden. Community banks may benefit from a reduction in loans they must retain on their balance sheets. Insurance companies with the SIFI designation may benefit from customized and less onerous capital adequacy guidelines.
  • Defense spending. Operations in Iraq and Syria and the Republican control of Congress help firm up the defense spending outlook and may give the industrials sector a small boost.


A Systemically Important Financial Institution (SIFI) is any firm, as designated by the Federal Reserve, whose collapse would pose a serious risk to the economy.

Presidential Cycle Tailwind

Beyond specific policies, the political calendar in 2015 may also potentially hold good news for stocks. In 2015, we will enter year three of the presidential cycle, historically the best of the four years. This performance pattern, which we believe is at least partly related to pre-election posturing, is shown in Figure 1. Since 1950, during the other three years of the presidential cycle (inauguration year, year two, and the election year), stocks gained an average of about 6%. But during year three (the year prior to the presidential election), stocks have historically produced an average gain of 17%.

These patterns don’t always hold of course. But with year three ahead in 2015, investors have this possible tailwind to add to other potentially positive policy developments under a Republican-controlled Congress. Given the generally favorable fundamental picture we see, including an improving economy, a low probability of recession, growing corporate profits, and well-contained inflation, we expect 2015 could be rewarding for stock investors.  n

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

INDEX DESCRIPTIONS

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

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© LPL Financial

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I live in Houston, which has been a huge economic beneficiary of the sustained increases in oil prices, drilling, refining and related processes. As such, the amount of wealth created in energy-related investments has been enormous and, not surprisingly, a vast majority of individuals have overweighted portfolios in energy with the expectations that "oil prices can only go up."  Of course, this sentiment is certainly understandable when you look at the performance of the energy sector versus the S&P 500 since the turn of the century. (Annualized return, capital appreciation only: S&P 500 3.24% vs Energy 17.71%)

 SP500-Energy-Perf-121014

Not surprisingly, the recent plunge in oil prices, and related energy stocks, has sent investors scurrying for cover. Previous "complacency" has turned to outright "panic" as portfolios, and retirement plans, have been crushed by plunging asset prices.

Strongly rising asset prices, and in this case commodity prices, have driven investor exuberance in the sector leading many to ignore deteriorating fundamentals, excessive leverage, and other financial diseases. However, when prices deteriorate rapidly, investment mistakes are quickly revealed.

It is important to remember that we are not investors. We are speculators placing bets on the direction of the price of an electronic share. More importantly, we are speculating, more commonly known as gambling, with our "savings." We are told by Wall Street that we "must" invest into the financial markets to keep those hard-earned savings adjusted for inflation over time. Unfortunately, due to repeated investment mistakes, the average individual has failed in achieving this goal.

With this in mind, this is an excellent time to review 10 legendary investment lessons from legendary investors. These time-tested rules about "risk" are what have repeatedly separated successful investors from everyone else. (Quote Source: 25iQ)


1) Jeffrey Gundlach, DoubleLine

"The trick is to take risks and be paid for taking those risks, but to take a diversified basket of risks in a portfolio."

This is a common theme that you will see throughout this post. Great investors focus on "risk management" because "risk" is not a function of how much money you will make, but how much you will lose when you are wrong. In investing, or gambling, you can only play as long as you have capital. If you lose too much capital but taking on excessive risk, you can no longer play the game.

Be greedy when others are fearful and fearful when others are greedy. One of the best times to invest is when uncertainty is the greatest and fear is the highest.

2) Ray Dalio, Bridgewater Associates

“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”

Nothing good or bad goes on forever. The mistake that investors repeatedly make is thining "this time is different." The reality is that despite Central Bank interventions, or other artificial inputs, business and economic cycles cannot be repealed. Ultimately, what goes up, must and will come down.

WallStreet wants you to be fully invested "all the time" because that is how they generate fees. However, as an investor, it is crucially important to remember that "price is what you pay and value is what you get." Eventually, great companies will trade at an attractive price. Until then, wait. 

3) Seth Klarman, Baupost

“Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”

Investor behavior, driven by cognitive biases, is the biggest risk in investing. "Greed and fear" dominate the investment cycle of investors which leads ultimately to "buying high and selling low."

 Investor-Psychology-Cycle-082814

4) Jeremy Grantham, GMO

“You don’t get rewarded for taking risk; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it.” 

Successful investors avoid "risk" at all costs, even it means underperforming in the short-term. The reason is that while the media and WallStreet have you focused on chasing market returns in the short-term, ultimately the excess "risk" built into your portfolio will lead to extremely poor long-term returns. Like Wyle E. Coyote, chasing financial markets higher will eventually lead you over the edge of the cliff.

5) Jesse Livermore, Speculator

“The speculator’s deadly enemies are: ignorance, greed, fear and hope. All the statute books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal….”

Allowing emotions to rule your investment strategy is, and always has been, a recipe for disaster. All great investors follow a strict diet of discipline, strategy, and risk management.

6) Howard Marks, Oaktree Capital Management

“Rule No. 1:  Most things will prove to be cyclical. – Rule No. 2:  Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.”

As with Ray Dalio, the realization that nothing lasts forever is critically important to long term investing. In order to "buy low," one must have first "sold high." Understanding that all things are cyclical suggests that after long price increases, investments become more prone to declines than further advances. 

7) James Montier, GMO

"There is a simple, although not easy alternative [to forecasting]... Buy when an asset is cheap, and sell when an asset gets expensive.... Valuation is the primary determinant of long-term returns, and the closest thing we have to a law of gravity in finance."

"Cheap" is when an asset is selling for less than its intrinsic value. "Cheap" is not a low price per share. Most of the time when a stock has a very low price, it is priced there for a reason. However, a very high priced stock CAN be cheap. Price per share is only part of the valuation determination, not the measure of value itself.

8) George Soros, Soros Capital Management

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

Back to risk management, being right and making money is great when markets are rising. However, rising markets tend to mask investment risk that is quickly revealed during market declines. If you fail to manage the risk in your portfolio, and give up all of your previous gains and then some, then you lose the investment game. 

9) Jason Zweig, Wall Street Journal

“Regression to the mean is the most powerful law in financial physics:Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.”

The chart below is the 3-year average of annual inflation-adjusted returns of the S&P 500 going back to 1900. The power of regression is clearly seen. Historically, when returns have exceeded 10% it was not long before returns fell to 10% below the long-term mean which devasted much of investor's capital.

Reversion-To-The-Mean-121014

10) Howard Marks, Oaktree Capital Management

“The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” 

The biggest driver of long-term investment returns is the minimization of psychological investment mistakes. As Baron Rothschild once stated: "Buy when there is blood in the streets." This simply means that when investors are "panic selling," you want to be the one that they are selling to at deeply discounted prices. The opposite is also true. As Howard Marks opined: “The absolute best buying opportunities come when asset holders are forced to sell.”


As an investor, it is simply your job to step away from your "emotions" for a moment and look objectively at the market around you. Is it currently dominated by "greed" or"fear?"  Your long-term returns will depend greatly not only on how you answer that question, but to manage the inherent risk.

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” - Benjamin Graham

Lance Roberts

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. 

© Streettalk Live

[description] => I live in Houston, which has been a huge economic beneficiary of the sustained increases in oil prices, drilling, refining and related processes. As such, the amount of wealth created in energy-related investments has been enormous and, not surprisingly, a vast majority of individuals have overweighted portfolios in energy with the expectations that "oil prices can only go up." [author] => Lance Roberts [legacyinterface_firm_id] => 400 [published_on] => 2014-12-11 [digest_date] => 2014-12-11 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-11 16:13:51 [created_by] => 948 [modified_on] => 2014-12-11 16:15:50 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2126 [hits] => 0 ) [5] => stdClass Object ( [legacyinterface_commentary_id] => 2061 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15299 [apv_conversation_id] => [content_type] => market-commentary [title] => Global Carry Is Correcting [slug] => dynamika_121114 [fulltext] =>

Disclaimer

The information, tools and material presented herein are provided for informational purposes only and are not to be used or considered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities, investment products or other financial instruments, nor to constitute any advice or recommendation with respect to such securities, investment products or other financial instruments. This research report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments.

 

 

 

The day after Thanksgiving we noted that Global Carry has gone parabolic and needs to be watched carefully. It has been mildly correcting since and we encourage investors to stay cautious. We also review where we stand in terms of Risk On/Risk Off factor.

As we have recently explained elsewhere[1] Global Carry is of paramount importance in current financial marketplace of zero or near zero interest rate policies.

Since the Taper Tantrum the Global Carry factor has performed as follows

You can see that the recent move was somewhat parabolic[2] and we hit top on the day after Thanksgiving which was subsequently followed by disturbing ongoing correction.

 

 

Below we refresh our Global Carry proxy portfolios

- SPX E-mini future plus 10y note future:

- US dollar index (“cleanest dirty sheet”) plus DJ index future plus two (shorter duration) 5y note futures:

It is worth to be very careful with the Global Carry at the moment.
Another source of ongoing concern is the Risk On/Risk Off factor which it seems might be intended to come back off the recent Risk Off lows where it stayed for a while after its 15th of October peak:

While nothing dramatic here yet and holiday season is supposed to be Risk Off environment it is worth to be watched carefully too (it can be easily traced in equities, especially Nikkei, and Japanese yen).

 

© Dynamika Capital L.L.C.

 



[1] “Global Carry a.k.a. Risk Parity”, Dynamika Commentary, 16-Oct-2014

[2]  “Global Carry gone parabolic?”, Dynamika Commentary, 29-Nov-2014

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NEW YORK – Children, it has long been recognized, are a special group. They do not choose their parents, let alone the broader conditions into which they are born. They do not have the same abilities as adults to protect or care for themselves. That is why the League of Nations approved the Geneva Declaration on the Rights of the Child in 1924, and why the international community adopted the Convention on the Rights of the Child in 1989.

Sadly, the United States is not living up to its obligations. In fact, it has not even ratified the Convention on the Rights of the Child. The US, with its cherished image as a land of opportunity, should be an inspiring example of just and enlightened treatment of children. Instead, it is a beacon of failure – one that contributes to global sluggishness on children’s rights in the international arena.

Though an average American childhood may not be the worst in the world, the disparity between the country’s wealth and the condition of its children is unparalleled. About 14.5% of the American population as a whole is poor, but 19.9% of children – some 15 million individuals – live in poverty. Among developed countries, only Romania has a higher rate of child poverty. The US rate is two-thirds higher than that in the United Kingdom, and up to four times the rate in the Nordic countries. For some groups, the situation is much worse: more than 38% of black children, and 30% of Hispanic children, are poor.


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© Project Syndicate

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Looking ahead to 2015, the labor market is expected to play the key part in the Fed’s path to policy normalization. However, as we learned from New York Fed President Dudley last week, the Fed will also consider the reaction in financial markets.

Recall that the employment report is comprised of two separate surveys. The Establishment Survey, which covers about 144,000 businesses and about 554,000 individual worksites, yields data on nonfarm payrolls, hours, and earnings. The Household Survey, which samples about 60,000 households, provides data on the unemployment rate and labor force participation (as a rule, the Household Survey does not generate good estimates of levels, such as the size of the labor force or the number of unemployed, but you do get reasonable estimates of ratios, such as the unemployment rate).

Job growth has been relatively strong this year. In fact, in the first 11 months, nonfarm payrolls have risen more than in any year since 1999. Nonfarm payrolls were reported to have risen by 321,000 in November, the largest monthly gain in nearly three years. However, one should take this large gain with a grain of salt. There is a fair amount of noise from month to month and the data are subject to revision. Still, the underlying trend in payrolls is encouraging. Average hourly earnings rose 0.4%, but that too is subject to revision and followed a modest 0.1% rise in October – up 2.1% from a year ago, still well below what might be considered a “normal” pace (3.5% to 4%).

The Household Survey data were less impressive in November. The unemployment rate was unchanged at 5.8%. The employment/population was flat (at 59.2%), up only gradually over the last year (58.6% in November 2013). The e/p ratio for the key age cohort, those aged 25-54, was up moderately over the last year (76.9%, vs. 76.0%), suggesting that labor market slack is being taken up only gradually.

The percentage of people working involuntarily part time and the long-term unemployment rate have both been improving, but they remain relatively high by historical standards.

Monetary policy is expected to be driven by Fed officials’ interpretations of the job market data in the months ahead. How much slack remains in the job market? How rapidly is that slack being taken up? How much wage pressure are we likely to see, and will firms be able to pass higher labor costs along? These are going to be hard question to answer. As we saw in the November Employment Report, the data often send conflicting messages. Monetary policymakers will have to weigh the evidence, but also use that evidence to make projections.

Last week, New York Fed President William Dudley presented his 2015 economic outlook and the implications for monetary policy. What stood out were his comments on the Fed’s reaction to the financial markets’ reaction to monetary policy. The Fed not only has to react to what the data mean for the economic outlook. It also has to react to changing financial conditions. Consider the unhelpful taper tantrum in 2013, when the Fed didn’t really do anything, vs. this year’s drop in bond yields as the Fed gradually reduced its monthly asset purchases. The markets could overreact to Fed policy signals or move in the wrong direction. It’s enough to make your head spin. The October FOMC minutes show that officials were fearful that financial market participants could misinterpret a decision to abandon the “considerable time” phrase. What might the markets do when the Fed signals that a rate hike is imminent?

Ultimately, investors should not fear the Fed. The first hike in short-term interest rates should be viewed as a natural consequence of the improvement seen in the overall economy. There is some danger that the markets might overreact, but the Fed is likely to take that overreaction into account as it considers possible further action – 2015 is going to be fun!

© Raymond James

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“Think of it this way. Lower oil prices are to America what low labor prices were to the BRICs!”... Sara Eisen, CNBC

As most of you know I was in New York City most of last week seeing institutional accounts, doing media and speaking at various events. One of the media appearances was to co-host CNBC’s “Closing Bell” on Tuesday, with the sagacious Sara Eisen, who unsurprisingly gave me the quote of the week. The quote was, “Think of it this way, lower oil prices are to America what lower labor costs were to the BRICs!” For the most part, the balance of the week was spent seeing institutional accounts where I was repeatedly asked about the declining oil prices and if that was going to kill the capital expenditure cycle along with the recent employment gains. My response was, “I don’t believe it!” Our energy team, which I consider to be one of the best on the Street, came out with a MAJOR “call” a few weeks ago stating, “We think crude oil prices are in a bottoming phase.” Plainly I agree, although oil prices have subsequently gone lower than I have been expecting. To this point, I spent a few nights last week at Bobby Van’s across from the entrance to the New York Stock Exchange, where I tipped copious glasses of wine with the good folks of Friends of Fermentation (FOF). In attendance were CNBC’s Bob Pisani and his new producer Jill, the always brilliant Arthur Cashin, a number of portfolio managers (PMs), prime/floor brokers, analysts, etc. I actually promised to send my friend Stan Salvigsen’s treatise titled “The Inflation Handbook,” written when Stan was at Cyrus Lawrence in the early 1980s, to Arthur. Nevertheless, the consensus of the good folks at FOF was that oil prices are indeed in a bottoming phase. If correct, this implies buying the Energy complex into year’s end could prove to be the trade of the year for 2015.

In attendance at FOF was charter member Eric Kaufman, founder and portfolio manager of VE Capital, who knows more about the Master Limited Partnership space (MLPs) than anyone I know. Eric has been telling me for years to avoid the “upstream MLPs,” and to invest in the “midstreams,” and that advice has been spot on! Eric thinks that during tax-loss selling season we are going to get a sentinel chance to buy the high yielding “midstream MLPs” at bargain prices; and, I agree. Also in attendance at Thursday’s FOF was the eagle-eyed economist Joe Brusuelas, who recently joined McGladrey as their Chief Economist after years at Bloomberg. I actually had a conversation with Michael Bloomberg when I was at Bloomberg last week to do some media, and as I understand it, the question du jour was, “Who is responsible for the departure of the best economist we have ever had?” Best economist indeed for at Thursday’s FOF confab Joe told me his number for Friday’s employment number was 320,000. To be sure, Friday’s figures were hard to argue with regarding their strength. Such strong figures were not anticipated by me, although I continue to think the economy is stronger than the surface figures suggest.

Speaking to the employment numbers, the headline figure showed November payrolls increased by an eye-popping 321K versus the expectation of a +230K “print.” Even considering the government’s tweaking of the seasonal adjustments, it is hard to argue Friday’s report was not strong. Moreover, the previous two months were revised upward by 44K. Also encouraging was that average hourly earnings rose by +0.4% (vs. the +0.2%E), and are now up +2.4% YoY, while the average work week expanded to 34.6 hours for the best reading since May 2008. There were some negative discussions from the talking heads about the continuing low workforce participation rate of 62.8%, but as I have said in past missives, I think this is a structural event and thereby nothing to worry about. To wit, there are somewhere between 10,000 and 15,000 baby boomers retiring daily, depending on whose figures you want to use, and that impacts the participation rate. There is also a continuing surge in the folks joining the disability rolls, and many of the millennials are self-employed, both of which negatively affect the participation rate. Further, 10 years ago if you committed a felony 30 years prior, nobody could find out about it. Well, they can find out about it now given the much more stringent background checks, and this too is negatively impacting the participation rate by keeping people off of the employment rolls. The bottom line is the slack in the workforce is dissipating and wage growth is likely to rise in the years ahead.

While I met with numerous institutional accounts, there were two that really stood out. The hour and a half I spent with my friend Phil Orlando at Federated was one of them. The Federated gang from Pittsburg and Boston were also dialed in for a two-way discussion that drew remarkably the same conclusions. Profits should strengthen in 2015, as should the capex cycle, and I believe Phil’s boss (Stephen Auth) targeted 2350 for the S&P 500 (SPX/2075.37) for 2015, which would be consistent with my “up” 10% - 12% in 2015. Every year Mr. Auth’s year-end target price for the SPX is higher than most and every year he seems to be right. It will be interesting to see if he uses that 2350 target in this year’s “roundtable.”

The other interesting meeting was with the folks at Prudential who manage their real estate assets. David Hunt is the CEO of Prudential Investment Management and Marc Halle is one of the portfolio managers. As readers know, our fundamental real estate team is fairly sanguine on the homebuilders currently, believing they have out-run their fundamentals. We are, however, continuing to play that space with the second derivative name Weyerhaeuser (WY/$35.53/Strong Buy). The REITs are another story. Pru’s Marc Halle began by noting the REITs are probably in a sweet spot with commercial properties already contracted for years to come. He likened it to a bond where you look at duration. In a REIT, hotels, since they rent on a night-to-night basis, have a duration that is very short and can re-price quickly. Obviously office space, malls, etc. have a longer duration. He thinks REITs on average yield 4%, will get ~4% internal growth and achieve somewhere between 2% - 3% external growth. That implies a 10% - 12% total return, which is what I forecasted for the SPX this year and what I am looking for in 2015. Marc believes European real estate is expensive with “cap rates” below 5% and that there is no turnaround for France any time soon. He likes the East and West Coast properties in the U.S. and said that Middle America is his favorite Emerging Market (EM). Speaking to EMs, Marc favors Hong Kong and Japan with potential returns of 30% to 35%. Some of the names from our REIT Priority List that have Strong Buy ratings from our fundamental analysts are: American Residential Properties (ARPI/$17.59), Kite Realty (KRG/$27.34) and Sovran Self Storage (SSS/$85.54). Or, you can just buy Marc’s mutual fund, the Prudential Global Real Estate Fund (PURAX/$24.76).

The call for this week: So far the early month weakness has failed to show up, which typically sets the stage for the Santa Clause rally. I have repeatedly stated that it is tough to sell stocks off in the ebullient time-frame between Thanksgiving and the New Year. It can happen, but it is pretty rare! As Joe Slavin, another FOF member, writes, “We have a large number of stocks breaking above past tops to new all-time highs. All-time highs leave just two types of sellers, shorts and profit takers [meaning] stocks can accelerate [on the upside]. These breakouts, and neutral trending bullish [trends] are not necessarily at buy junctures, however both patterns can drive the [equity] markets higher quickly. Add to this the number of bullish names versus bearish [names], and the odds favor we trade to the upside.” Plainly, I agree! This morning, however, there is price weakness with the SPX preopening futures off 6 points at 6:00 a.m. as oil falls again, Italy is downgraded, China’s November imports shrink, German industrial output falls short of expectations, Japan’s economy softens, and the U.S. dollar trades higher. All of this caused one savvy seer to exclaim, “If Santa fails to call, the bear will roam on Broad and Wall.”

© Raymond James

[description] => As most of you know I was in New York City most of last week seeing institutional accounts, doing media and speaking at various events. One of the media appearances was to co-host CNBC’s “Closing Bell” on Tuesday, with the sagacious Sara Eisen, who unsurprisingly gave me the quote of the week. The quote was, “Think of it this way, lower oil prices are to America what lower labor costs were to the BRICs!” [author] => Jeffrey Saut [legacyinterface_firm_id] => 356 [published_on] => 2014-12-11 [digest_date] => 2014-12-11 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-11 16:28:45 [created_by] => 948 [modified_on] => 2014-12-11 16:28:56 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2130 [hits] => 0 ) [9] => stdClass Object ( [legacyinterface_commentary_id] => 2065 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15303 [apv_conversation_id] => [content_type] => market-commentary [title] => Three Winning Arguments for Japan [slug] => blackrock_121114 [fulltext] =>

I travel to Japan every year, normally around early December. The more time I spend there, the more I come to realize what a uniquely distinct country it is. On my trip last week, one of my Japanese colleagues pointed out that Tokyo was starting to allow taller office buildings. I assumed the previous limitation was a function of Japan’s location in a geologically active part of the Pacific. My friend politely laughed. The injunction was due to the fact that no building was supposed to look down on the Imperial Palace.

Whereas city ordinances kept Japanese office buildings relatively shorter, up until recently economic stagnation, deflation and sclerosis had kept Japanese stocks from soaring.

This has obviously changed in recent years. Japanese stocks have been among the best global performers over the past couple of years. I have been positive on this market for some time now, and despite a shaky start to the year and the current recessionary environment, I maintain that view. I would highlight three arguments:

Value. Japanese stocks remain some of the cheapest in the developed world. While Japanese equities rallied sharply in 2013, unlike the United States the gains came from earnings growth rather than multiple expansion. This has left Japan’s stock market a relative bargain in a world where few asset classes are cheap.

Multiple Catalysts. Undervaluation without a catalyst may just be a value trap, but there are several potential catalysts for further gains in Japanese equities: ultra-loose monetary policy, which should continue in 2015, aggressive buying of domestic shares by Japanese pension funds, and rising profitability thanks to share buybacks.

Reforms. Although I would agree that Prime Minister Shinzo Abe has under-delivered on the so-called ‘Third Arrow’ of structural reforms, there have been a few, notable accomplishments. Corporate governance has improved with more outside directors, and female workforce participation is on the rise. Another potential positive development: A Republican Senate makes the Trans-Pacific Partnership, a regional free-trade agreement, marginally more likely to pass. Should it pass, this would be a major victory for Japanese consumers and the economy.

One final point. One of the risks to my view on Japan is that the early election on December 14 could produce a nasty surprise for Prime Minister Abe and the ruling Liberal Democratic Party (LDP) coalition. While market participants see the LDP losing a few seats in the lower house of the Parliament, they are not expecting the ruling party to give away its majority, something that could be a risk factor.

But on the contrary, based on my conversations with Japanese investors and a recent article in a local newspaper, a seemingly lack of viable candidates from the rival Democratic Party of Japan (DPJ) suggests that the LDP may actually increase its majority. To the extent that a bigger majority emerges and the prime minister uses the mandate to push forward more aggressively on structural reforms, I believe Japanese stocks may continue to rise.

Source: Bloomberg

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

 This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

 ©2014 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

iS-14184

[description] => I travel to Japan every year, normally around early December. The more time I spend there, the more I come to realize what a uniquely distinct country it is. On my trip last week, one of my Japanese colleagues pointed out that Tokyo was starting to allow taller office buildings. I assumed the previous limitation was a function of Japan’s location in a geologically active part of the Pacific. My friend politely laughed. The injunction was due to the fact that no building was supposed to look down on the Imperial Palace. [author] => Russ Koesterich [legacyinterface_firm_id] => 50 [published_on] => 2014-12-11 [digest_date] => 2014-12-11 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-11 16:33:53 [created_by] => 948 [modified_on] => 2014-12-11 16:34:11 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2131 [hits] => 0 ) [10] => stdClass Object ( [legacyinterface_commentary_id] => 2066 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15304 [apv_conversation_id] => [content_type] => market-commentary [title] => European Small-Caps: Focus on Companies, Not Countries [slug] => bernstein_121114 [fulltext] =>

Growth in the euro area has slowed sharply, but that’s not true for all companies in the region. We think worries about Europe’s recovery may offer investors the chance to buy quality, small-cap stocks for less than they would pay for similar-caliber companies elsewhere.

Investors are right to be concerned about Europe’s combination of low growth and low inflation. But here’s something to keep in mind: Even when the economy is struggling, some companies will continue to deliver sustainable and profitable growth. And if fundamentally attractive stocks can be had at a discount simply because of where they’re listed, that may represent an opportunity.

The key is figuring out where the best value lies. In our view, there is a compelling opportunity in the European small-cap segment, especially among what we define as “quality growth” names. The best of the bunch offer growth and quality at a discount.

Quality Companies for Less
We recently analyzed a cross-section of nonfinancial companies from various regions, with market capitalizations below $7 billion. To identify a basket of “quality growth” stocks from each region, we used the extensive Credit Suisse Holt database to rank all companies based on EPS growth and excess returns, measured as return on invested capital over cost of capital. Only those companies that landed in the top 40% for both returns and growth made it into the regional baskets. To compare valuations, we relied on the economic P/E ratio, which measures a firm’s value relative to the cash flow it generates.

Here’s what we found: European “quality growth” companies, which include euro-area and non-euro-area firms, are trading at a significant discount to their smaller-cap peers in other regions. This doesn’t appear to be justified by the vast regional differences in quality or growth (Display 1).

In fact, expected earnings growth among “quality growth” small-cap European companies was second only to quality-growth small-caps in North America. It was in line with those in emerging markets and ahead of those in Japan and other developed Asian markets.

European small-caps also score higher on quality than small-caps from emerging markets and Japan. They were about on par with those in North America, but available at a cheaper price (Display 2).

Furthermore, our analysis suggests that European companies have the most potential to improve returns. Corporate profit margins and revenues relative to company assets are depressed everywhere, thanks to tepid global growth. But they are most depressed in Europe. That means returns should improve as a more sustainable European recovery takes hold.

More Monetary Stimulus on the Way
To be sure, Europe’s economic health could get worse before it gets better—a risk that even the best-managed regional companies face. Fortunately, the European Central Bank seems to recognize this risk and has signaled its intentions to expand monetary stimulus. There are certainly execution risks, but also ample room for economic stimulus, which could steer the euro area away from deflation.

And we believe that a gradual recovery in Europe may provide further upside for the cyclical industrial and consumer-discretionary stocks that comprise more than half of the top-quality European SMID-cap companies in our analysis.

In our view, investors looking to add diversification and growth potential to their equity portfolios shouldn’t be frightened by Europe’s macroeconomic malaise. With the proper fundamental analysis, investors can still find value in European small-cap stocks. The trick is to remember that, when it comes to stocks, you’re buying companies, not countries.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.AllianceBernstein Limited is authorized and regulated by the Financial Conduct Authority in the United Kingdom.

Liliana Castillo Dearth is Team Leader and Portfolio Manager for the International Discovery Equity Portfolio, and Alan Connery is a Portfolio Manager for the International Discovery Equity Portfolio, both at AllianceBernstein (NYSE:AB).

© AllianceBernstein

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Stock market leadership virtually always changes when volatility significantly spikes, and the 2008 bear market was no exception. Credit-related asset classes led the markets for the decade prior to 2008 as the global credit bubble inflated.

Since 2008’s bear market, however, leadership has significantly changed and credit-related asset classes have generally underperformed plain, old-fashioned stocks.

Chart 1 below shows the relative performance of credit-related asset classes versus the S&P 500® from 1998 to 2008 and from 2008 to present. The deflation of the global credit bubble has clearly hurt the performance of credit-related asset classes.

The deflation of the global credit bubble remains the prime driver of our positioning for 2015. We continue to underweight or fully avoid credit-related asset classes.

Chart 1:

*Private Equity Performance available through 6/30/14

Source: Richard Bernstein Advisors LLC, MSCI, Standard & Poors, BofA Merrill Lynch, Bloomberg, Cambridge Associates. For Index descriptors, see "Index Descriptions" at end of document

1.  ECB causes Europe to flounder

The European Central Bank (ECB) seems to be trying very hard to be among the worst central banks in history. The ECB actually tightened monetary policy over the past couple of years despite mounting evidence of budding deflation. One does not need a Ph.D. in Economics to know that tightening monetary policy in the face of deflation and contracting private sector credit growth is not a sound monetary policy. The ECB’s continuous missteps have resulted in significantly subpar growth.

The ECB is now claiming they will significantly expand their balance sheet, and such actions might be bullish for European equities. However, recent data suggests they have so far only stopped tightening, and have yet to start easing. If they alter that policy, then European stocks might again be attractive, however, the ECB’s sclerotic policy reaction to building deflation warrants an underweight of European equities. Our portfolios remain underweight Europe, with exposure limited to large cap and defensive stocks.

2.  Japan grows market share

Early in my career at EF Hutton in 1986, our auto analyst stated in our morning meeting that Toyota felt they could gain market share from GM at 120 ¥/$. ¥/$ was 160 at the time, and the entire meeting broke up in laughter. No one could believe that the dollar would depreciate 25% versus the Yen and, if it ever did, Toyota would never gain market share. The Yen eventually traded to 80¥/$, and Toyota nearly put GM out of business.

The point to the story is that Japan at the time had a significant competitive advantage versus the United States. The fact that the Yen might appreciate was a minor hindrance to Japanese companies gaining market share versus US companies. Today, however, Japan’s competitive advantage has been whittled away by the combination of Japanese demographics, Japan’s lack of domestic investment in productive resources, and the improvement in productivity in other parts of the world (including the US).

In the absence of a competitive advantage, companies or countries are forced to compete on price in order to gain market share, and we believe depreciating the Yen is the only route for the Japanese economy to re-emerge within the time frame of most investors. We began this theme when ¥/$ was roughly 85, and we think the Yen may weaken significantly even from today’s depressed levels (roughly 120).

We remain overweight Japan with an emphasis on large cap exporters of finished goods.

3.  Treasuries for diversification…yes, still.

We have become somewhat notorious for our liking of treasuries as a portfolio diversifier. Although not as extreme as it was several years ago, Chart 2 shows the correlation of various asset classes to the S&P 500® and there are relatively few asset classes that have negative correlation to stocks. By including treasuries, we can take stronger risk positions within our multi-asset portfolios, but not increase overall portfolio volatility.

Chart 2:

Source: Richard Bernstein Advisors LLC, MSCI, Standard & Poors, HFRI, BofA Merrill Lynch, Bloomberg.

For Index descriptors, see "Index Descriptions" at end of document.

4.  High Yield Munis remain attractive

High yield municipal bonds are a sizeable portion of most of our multi-asset portfolios because we view them as the most attractive sector of the global fixed-income markets. It seems ironic to us that investors are taking all sorts of risks in sectors like emerging market debt, but refuse to look at US high yield munis.

Chart 3 shows the spread between high yield munis and Iraq government bonds. The spread implies that US high yield municipal bonds are riskier than Iraqi bonds. Isn’t there a brutal civil war taking place in Iraq? One might question fiscal responsibility in Illinois or Michigan, but they’re certainly not Iraq!

Chart 3:

5. Cheap High Beta

Whereas high-beta social media stocks and other “disruptor” stocks (as CNBC calls them) are extraordinarily expensive, other more traditional high-beta stocks appear historically undervalued.  Chart 4 shows the relative PE of low beta and high beta stocks within the S&P 500®.  This chart clearly suggests that investors remain very scared of traditional high beta stocks, but we have significant exposure to this traditional high-beta group which is historically undervalued.

Chart 4:

Our overall positioning of avoiding credit-related asset classes remains largely out-of-favor, and remains the cornerstone of our portfolios.  We will watch these themes closely and reposition accordingly should a more favorable cyclical backdrop potentially outweigh this secular trend.

INDEX DESCRIPTIONS:

The following descriptions, while believed to be accurate, are in some cases abbreviated versions of more detailed or comprehensive definitions available from the sponsors or originators of the respective indices. Anyone interested in such further details is free to consult each such sponsor’s or originator’s website.

The past performance of an index is not a guarantee of future results.

Each index reflects an unmanaged universe of securities without any deduction for advisory fees or other expenses that would reduce actual returns, as well as the reinvestment of all income and dividends.  An actual investment in the securities included in the index would require an investor to incur transaction costs, which would lower the performance results.  Indices are not actively managed and investors cannot invest directly in the indices.

World:  MSCI All Country World Index (ACWI®).  The MSCI ACWI® is a free-float-adjusted, market-capitalization-weighted index designed to measure the equity-market performance of global developed and emerging markets. 

S&P 500®:  Standard & Poor’s (S&P) 500® Index.  The S&P 500® Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad US economy through changes in the aggregate market value of 500 stocks representing all major industries.

S&P 500® High Beta: Standard & Poor’s (S&P) 500®  High Beta Index : The S&P 500® High Beta Index is designed to measure the performance of the 100 constituents in the S&P 500® that are most sensitive to changes in market returns. For this index, the market is represented by the performance of the S&P 500®.

Europe: MSCI Europe Index.  The MSCI Europe Index is a free-float-adjusted, market-capitalization-weighted index designed to measure the equity-market performance of the developed markets in Europe. The MSCI Europe Index consists of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom

Japan: MSCI Japan Index: The MSCI Japan Index is a free-float-adjusted, market-capitalization-weighted index designed to measure the equity-market performance of Japan. 

EM Equity:  MSCI Emerging Markets (EM) Index. The MSCI EM Index is a free-float-adjusted, market-capitalization-weighted index designed to measure the equity-market performance of emerging markets.

U.S. Small Caps:  Russell 2000 Index.  The Russell 2000 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the small-cap segment of the US equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index.  

Gold:  Gold Spot USD/oz Bloomberg GOLDS Commodity.  The Gold Spot price is quoted as US Dollars per Troy Ounce.

US Dollar: : InterContinentalExchange (ICE) US Dollar Index (DXY).  The ICE US Dollar Index, indicating the general international value of the USD, averages the exchange rates between the USD and six major world currencies, using rates supplied by some 500 banks. 

Commodities:  S&P GSCI® Index.  The S&P GSCI® seeks to provide investors with a reliable and publicly available benchmark for investment performance in the commodity markets, and is designed to be a “tradable” index. The index is calculated primarily on a world production-weighted basis and is comprised of the principal physical commodities that are the subject of active, liquid futures markets. 

REITS:  THE FTSE NAREIT Composite Index.  The FTSE NAREIT Composite Index is a free-float-adjusted, market-capitalization-weighted index that includes all tax qualified REITs listed in the NYSE, AMEX, and NASDAQ National Market.

Hedge Fund Index:  HFRI Fund Weighted Composite Index.  The HFRI Fund Weighted Composite Index is a global, equal-weighted index of over 2,000 single-manager funds that report to the HFR (Hedge Fund Research) database.  Constituent funds report monthly net-of-all-fees performance in USD and have a minimum of $50 million under management or a twelve (12)-month track record of active performance.  The Index includes both domestic (US) and offshore funds, and does not include any funds of funds. 

3-Mo T-Bills:  BofA Merrill Lynch 3-Month US Treasury Bill Index.  The BofA Merrill Lynch 3-Month US Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month.  The Index is rebalanced monthly and the issue selected is the outstanding Treasury Bill that matures closest to, but not beyond, three months from the rebalancing date.

Intermediate Treasuries (5-7 Yrs):  The BofA Merrill Lynch 5-7 Year US Treasury Index

The BofA Merrill Lynch 5-7 Year US Treasury Index is a subset of The BofA Merrill Lynch US Treasury Index (an unmanaged Index  which tracks the performance of US dollar denominated sovereign debt publicly issued by the US government in its domestic market).  Qualifying securities must have at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $1 billion. including all securities with a remaining term to final maturity greater than or equal to 5 years and less than 7 years.

Long-term Treasury Index:  BofA Merrill Lynch 15+ Year US Treasury Index.  The BofA Merrill Lynch 15+ Year US Treasury Index is an unmanaged index comprised of US Treasury securities, other than inflation-protected securities and STRIPS, with at least $1 billion in outstanding face value and a remaining term to final maturity of at least 15 years. 

Municipals:  BofA Merrill Lynch US Municipal Securities Index.  The BofA Merrill Lynch US Municipal Securities Index tracks the performance of USD-denominated, investment-grade rated, tax-exempt debt publicly issued by US states and territories (and their political subdivisions) in the US domestic market.  Qualifying securities must have at least one year remaining term to final maturity, a fixed coupon schedule, and an investment-grade rating (based on an average of Moody’s, S&P and Fitch).  Minimum size requirements vary based on the initial term to final maturity at the time of issuance.

High Yield Municipals: Barclays Municipal Custom High Yield Municipals Composite. The Barclays Municipal Custom High Yield Municipals Composite is calculated using a market value weighting methodology and it tracks the high-yield municipal bond market with a 75% weight in non-investment grade municipal bonds and a 25% weight in Baa/BBB-rated investment grade municipal bonds for liquidity and balance.

 High Grade Corporates:  BofA Merrill Lynch 15+ Year AAA-AA US Corporate Index.  The BofA Merrill Lynch 15+ Year AAA-AA US Corporate Index is a subset of the BofA Merrill Lynch US Corporate Index (an unmanaged index comprised of USD-denominated, investment-grade, fixed-rate corporate debt securities publicly issued in the US domestic market with at least one year remaining term to final maturity and at least $250 million outstanding) including all securities with a remaining term to final maturity of at least15 years and rated AAA through AA3, inclusive.  

Private Equity: The Cambridge Associates LLC U.S. Private Equity Index®.  The Cambridge Associates LLC U.S. Private Equity Index® is an end-to-end calculation based on data compiled from 986 U.S. private equity funds (buyout, growth equity, private equity energy and mezzanine funds), including fully liquidated partnerships, formed between 1986 and 2012. Pooled end-to-end return, net of fees, expenses, and carried interest.Historic quarterly returns are updated in each year-end report to adjust for changes in the index sample.

EM Sovereign (USD): The BofA Merrill Lynch US Dollar Emerging Markets Sovereign Plus Index. The BofA Merrill Lynch US Dollar Emerging Markets Sovereign Plus Index tracks the performance of US dollar denominated emerging market and cross-over sovereign debt publicly issued in the Eurobond or US domestic market. Qualifying countries must have a BBB1 or lower foreign currency long-term sovereign debt rating (based on an average of Moody’s, S&P and Fitch). Countries that are not rated, or that are rated “D” or “SD” by one or several rating agencies qualify for inclusion in the index but individual non-performing securities are removed. Qualifying securities must have at least one year remaining term to final maturity, a fixed or floating coupon and a minimum amount outstanding of $250 million. Local currency debt is excluded from the Index.

EM Sovereign (Local): The BofA Merrill Lynch Local Debt Markets Plus Index: The BofA Merrill Lynch Local Debt Markets Plus Index is designed to track the performance of sovereign debt publicly issued and denominated in the issuer's own domestic market and currency other than the more established top-tier sovereign markets. In order to be included in the Index, a country (i) must have at least $10 billion (USD equivalent) outstanding face value of Index qualifying debt (i.e., after imposing constituent level filters on amount outstanding, remaining term to maturity, etc.); and (ii) must have at least one readily available, transparent price source for its securities. In addition, the following countries are specifically excluded from the index: G10 countries, Euro members; all countries with a foreign currency long-term sovereign debt rating of AA3 or higher (based on an average of Moody’s,S&P and Fitch).

Iraqi Bonds: Republic of Iraq Sovereign, Unsecured, Maturity 01/15/2028, id number EF2306852

© Copyright 2014 Richard Bernstein Advisors LLC. All rights reserved.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS

Nothing contained herein constitutes tax, legal, insurance or investment advice, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument. Such an offer or solicitation may only be made by delivery to a prospective investor of formal offering materials, including subscription or account documents or forms, which include detailed discussions of the terms of the respective product, vehicle, service or instrument, including the principal risk factors that might impact such a purchase or investment, and which should be reviewed carefully by any such investor before making the decision to invest. Links to appearances and articles by Richard Bernstein, whether in the press, on television or otherwise, are provided for informational purposes only and in no way should be considered a recommendation of any particular investment product, vehicle, service or instrument or the rendering of investment advice, which must always be evaluated by a prospective investor in consultation with his or her own financial adviser and in light of his or her own circumstances, including the investor's investment horizon, appetite for risk, and ability to withstand a potential loss of some or all of an investment's value. Investing is  subject to market risks. Investors  acknowledge and accept the potential loss of some or all of an investment's value. Past performance is, of course, no guarantee of future results. Views represented are subject to change at the sole discretion of Richard Bernstein Advisors LLC. Richard Bernstein Advisors LLC does not undertake to advise you of any changes in the views expressed herein. 

About Richard Bernstein Advisors:

Richard Bernstein Advisors LLC is an independent investment adviser.  RBA partners with several firms including Eaton Vance Corporation and First Trust Portfolios LP, and currently has $3.4 billion collectively under management and advisement as of November 30, 2014.  RBA acts as sub‐advisor for the Eaton Vance Richard Bernstein Equity Strategy Fund, the Eaton Vance Richard Bernstein All‐Asset Strategy Fund and the Eaton Vance Richard Bernstein Market Opportunities Strategy Fund and also offers income and unique theme‐oriented unit trusts through First Trust. RBA is also the index provider for the First Trust RBA American Industrial RenaissanceTM ETF and the First Trust RBA Quality Income ETF. Additionally, RBA runs ETF asset allocation SMA portfolios at UBS and Merrill Lynch and on select RIA platforms.  RBA's investment insights as well as further information about the firm and products can be found at www.RBAdvisors.com.

[description] => Stock market leadership virtually always changes when volatility significantly spikes, and the 2008 bear market was no exception. Credit-related asset classes led the markets for the decade prior to 2008 as the global credit bubble inflated. Since 2008’s bear market, however, leadership has significantly changed and credit-related asset classes have generally underperformed plain, old-fashioned stocks. [author] => Richard Bernstein [legacyinterface_firm_id] => 370 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 16:35:27 [created_by] => 948 [modified_on] => 2014-12-10 16:35:45 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2116 [hits] => 0 ) [12] => stdClass Object ( [legacyinterface_commentary_id] => 2051 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15289 [apv_conversation_id] => [content_type] => market-commentary [title] => Interest Rates Have Nowhere To Go But Up? [slug] => streettalk_121014 [fulltext] =>

Earlier this week Daniel Druger and Liz McCormick wrote an article for Bloomberg entitled: "One Hundred Years Of Bond History Means Bears Destined To Lose." The crux of the article is contained within the following paragraph:

"With the longest-dated Treasuries now yielding less than half the 6.8 percent average over the past five decades, it’s not hard to see why forecasters say they’re bound to rise as the Federal Reserve prepares to raise interest rates following the most aggressive stimulus measures in its 100-year history."

The premise here is simple. With interest rates near their lowest levels on record, they have nowhere to go from here "but up." This is the consensus of virtually all of the analysts and economists on Wall Street which currently suggests that rates will rise to 3.88% next year on the 30-year treasury.

That was also the belief in June of 2013 when rates did spike on an emerging market bond rout. The majority of the mainstream media, and guru's like Bill Gross, claimed that the "bond bull market" was dead. At that time I wrote an article suggesting they would be quite wrong stating:

"For all of these reasons I am bullish on the bond market through the end of this year. Furthermore, with market volatility rising, economic weakness creeping in and plenty of catalysts to send stocks lower - bonds will continue to hedge long only portfolios against meaningful market declines while providing an income stream."

Since then rates have continued to be in a steady decline as real economic strength has remained close to 2% annually, deflationary pressures have risen and monetary velocity has fallen. The chart below is a history of long-term interest rates going back to 1857. The dashed black line is the median interest rate during the entire period.

Interest-Rate-LongTerm-30yr-120914-2

Interest rates are a function of strong, organic, economic growth that leads to a rising demand for capital over time. There have been two previous periods in history that have had the necessary ingredients to support rising interest rates. The first was during the turn of the previous century as the country became more accessible via railroads and automobiles, production ramped up for World War I and America began the shift from an agricultural to industrial economy.

The second period occurred post-World War II as America became the "last man standing" as France, England, Russia, Germany, Poland, Japan and others were left devastated. It was here that America found its strongest run of economic growth in it history as the "boys of war" returned home to start rebuilding the countries that they had just destroyed. But that was just the start of it.

Beginning in the late 50's, America embarked upon its greatest quest in history as man took the first steps into space. The space race that lasted nearly twenty years led to leaps in innovation and technology that paved the wave for the future of America. Combined with the industrial and manufacturing backdrop, America experienced high levels of economic growth and increased savings rates which fostered the required backdrop for higher interest rates.

Currently, the U.S. is no longer the manufacturing powerhouse it once was and globalization has sent jobs to the cheapest sources of labor. Technological advances continue to reduce the need for human labor and suppress wages as productivity increases. Today, the number of workers between the ages of 16 and 54 is at the lowest level relative to that age group since 1976. As discussed recently, this is a structural problem that continues to drag on economic growth as nearly 1/4th of the American population is now dependent on some form of governmental assistance.

Is Everyone Still Wrong?

This structural employment problem remains the primary driver as to why "everybody" is still wrong in expecting rates to rise.  As I addressed previously in "Interest Rate Predictions Meet Rule #9:"

Interest-Rates-GDP-Inflation-120914

"As you can see there is a very high correlation, not surprisingly, between these three components (inflation, economic and wage growth) and the level of interest rates. Interest rates are not just a function of the investment market, but rather the level of "demand" for capital in the economy. When the economy is expanding organically, the demand for capital rises as businesses expand production to meet rising demand. Increased production leads to higher wages which in turn fosters more aggregate demand. As consumption increases, so does the ability for producers to charge higher prices (inflation) and for lenders to increase borrowing costs.

However, in the current economic environment this is not the case. The need for capital remains low, outside of what is needed to absorb incremental demand increases caused by population growth, as demand remains weak. While employment has increased since the recessionary lows, much of that increase has been the absorption of increased population levels. Many of those jobs remain centered in lower wage paying and temporary jobs which does not foster higher levels of consumption."

Currently, there are few economic tailwinds prevalent that could sustain a move higher in interest rates. The reason is the higher interest reduces the flow of capital within the economy. For an economy that remains dependent on the generosity of Central Bankers, rising rates are not the outcome that "stock market bulls" want. 

The chart and table below show what happens to the financial markets, and the economy, when interest rates increase.

Interest-Rates-SP500-043014

Interest-Rates-SP500-Table-043014

The problem with most of the forecasts for the end of the bond bubble is the assumption that we are only talking about the isolated case of a shifting of asset classes between stocks and bonds.  However, the issue of rising borrowing costs spreads through the entire financial ecosystem like a virus. The rise and fall of stock prices has very little to do with the average American and their participation in the domestic economy. Interest rates, however, are an entirely different matter.

While there is not much downside left for interest rates to fall in the current environment, there is also not a tremendous amount of room for increases. Since interest rates affects "payments," increases in rates quickly have negative impacts on consumption, housing and investment.

This idea suggests is that there is one other possibility that the majority of analysts and economists ignore which I call the "Japan Syndrome." 

Japan-InterestRates-120914

Japan is has been fighting many of the same issues for the past two decades. The"Japan Syndrome" suggests that while interest rates are near lows it is more likely a reflection of the real levels of economic growth, inflation and wages. If that is true, then rates are most likely "fairly valued" which implies that the U.S. couldremain trapped within the current trading range for years as the economy continues to"muddle" along.

Will the "bond bull" market eventually come to an end?  Yes, eventually. However, the catalysts needed to create the type of economic growth required to drive interest rates substantially higher, as we saw previous to the 1960-70's, are simply not available today. This will likely be the case for many years to come as the Fed, and the administration, come to the inevitable conclusion that we are now caught within a"liquidity trap" along with the bulk of developed countries.

Lance Roberts

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management.

© Streettalk Live

[description] => Earlier this week Daniel Druger and Liz McCormick wrote an article for Bloomberg entitled: "One Hundred Years Of Bond History Means Bears Destined To Lose." The premise here is simple. With interest rates near their lowest levels on record, they have nowhere to go from here "but up." This is the consensus of virtually all of the analysts and economists on Wall Street which currently suggests that rates will rise to 3.88% next year on the 30-year treasury. [author] => Lance Roberts [legacyinterface_firm_id] => 400 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 16:38:04 [created_by] => 948 [modified_on] => 2014-12-10 16:39:15 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2117 [hits] => 0 ) [13] => stdClass Object ( [legacyinterface_commentary_id] => 2052 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15290 [apv_conversation_id] => [content_type] => market-commentary [title] => Dealing with Divergence [slug] => blackrock_121014 [fulltext] =>

Central bank and economic divergence have been the underlying themes in my recent writings, and these are having, and will continue to have, significant influence on financial market direction. Going into 2015, how does that impact your investments, and where should you focus your attention? This is the focus of BlackRock’s 2015 Market Outlook, released today.

First, some background. These last few post-crisis years could be called the Age of Recovery: The Federal Reserve and other central banks have kept interest rates extraordinarily low to try to revive their economies. In doing so, they’ve helped stocks, but the low rates have made it much more difficult for investors in need of income. In addition, a period of unusually low rates has had the predictable effect of pushing up valuations in several asset classes as investors stretch for yield.

Now we are entering what we at BlackRock are calling the Age of Divergence: The U.S., U.K. and select emerging markets are getting stronger while other regions—including much of Europe—are still struggling. The result is that central banks are beginning to take different paths, with the Fed setting a course for higher interest rates and the European Central Bank and Bank of Japan doing the opposite.

What does this mean for you and your investment portfolio in the New Year?

One of the consequences of the diverging central bank actions is that it should lead to a stronger dollar. That has implications for the markets, such as downward pressure on both commodities and inflation.

With equities, it is hard to find bargains, but we believe stocks are still the best place to be. But you’ll have to be even pickier about the stocks you select and consider expanding your investment horizons beyond the U.S. We prefer U.S. cyclical stocks, Japanese equities, and emerging markets in Asia, but are keeping an eye out for opportunities in Europe, where the looser monetary policy could help stocks, particularly cyclical companies.

As for fixed income, we would still tread lightly in the bond market. Short-term bonds will bear the brunt of a Fed rate hike. Indeed, as a write in in my weekly commentary, this is already starting to happen; the yield on the two-year U.S. Treasury rose last week to over 0.65%, the highest level since the spring of 2011. Longer-term rates, on the other hand, should inch up at a gentler pace and are likely to remain low relative to their history. But all of this means finding a steady income stream will continue to be a challenge.

This is the world as my BlackRock colleagues and I see it. Of course, as is always the case in financial markets, uncertainty is one of the few certainties. In particular, we believe that most of the geopolitical trouble spots throughout the world are ‘frozen conflicts’; few are likely to be reconciled over the next year. Here at home, the big risk would be a quicker tightening campaign by the Fed that takes investors by surprise.

Overall, however, investors should avoid the temptation to cash out all their gains. Stocks may not march upward in a straight line, but we believe they should continue to do relatively well in 2015—and better than bonds and cash.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.

This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

©2014 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

iS-14206

[description] => From the Age of Recovery to the Age of Divergence, we look forward to 2015 with an overview of the investment world and explore the different themes that will matter in the New Year. [author] => Russ Koesterich [legacyinterface_firm_id] => 50 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 16:42:02 [created_by] => 948 [modified_on] => 2014-12-10 16:42:18 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2118 [hits] => 0 ) [14] => stdClass Object ( [legacyinterface_commentary_id] => 2053 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15291 [apv_conversation_id] => [content_type] => market-commentary [title] => Who’s Really in The Kingdom’s Gun Sights? [slug] => advisorshares_121014 [fulltext] =>

By: Doug Holt, Energy Analyst for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (HYLD)

According to the EIA, U.S. crude oil imports averaged about 7.3 million barrels per day last week with Canadian barrels making up 3.2 million barrels of the total.1 U.S. commercial reserves increased by 1.9 million barrels week over week where total inventories fell 3.7 million barrels2 versus expectations of a build of 950,000.3 Are we at the beginnings of a rebalancing of the market? Possibly. New well permits across the top three fields in the U.S. have reportedly fallen off dramatically in November, and given the dynamics of shale production, this may quickly impair U.S. production growth forecasts.

It’s no secret that oil’s plummet from above $100/bbl to current levels has hit the North American oil industry hard. Both stocks and bond prices of E&P (exploration and production) and service companies in Canada and the U.S. have dropped markedly over the last couple of months. That said, the medium-term impacts of this price decline will likely not be felt quite so equally across the North American or, indeed, the global market due to fundamental differences in business models, existing leverage and currency arbitrages that certain producers enjoy.

We have discussed the challenges we see with the shale oil business model many times, specifically that the exceptionally high decline rates and the production costs lead to an expensive treadmill that we believe many of these companies can never get off of. Declines in U.S. shale are as high as 90-95% in the first two years.4 A sustainable production model in our view is not one that requires a company to race like mad to punch more holes in the ground just to maintain existing production.  That said, we acknowledge that there is definitely money to be made in tight oil and we like these plays at the project level, where payouts are quick and the wells are financed with the right term of debt (short-term, commensurate with the life of the project). But we do not support them as businesses that we can lend money to over the long term due to excessive capex requirements that lead to chronic negative free cash flow.

Numerous theories exist about why the Saudis elected not to cut production at the November 27th meeting. Ours quite simply is that the rapidly growing U.S. shale production in recent years, coupled with the return of missing barrels from the likes of Iraq and Libya, threw the market out of whack and resulted in a crude oversupply. The production adds from these regions have had the follow on consequence of creating an increasingly competitive market in Asia, where the Saudis have the vast majority of their market share. In an effort to protect market share and rebalance the market, the Kingdom has taken very deliberate action to target high cost shale producers at the margin who have used leverage to finance their operations. Do we think that the Russians, the rest of OPEC and the majors around the globe are involved in this? Yes we do.

The main opposition to this concept comes from the other main conspiracy theory that is floating around these days that is centered on Russia and goes like this: the Saudis and the U.S. are in collusion to punish Putin for his actions in the Ukraine. The Saudis support the U.S. in this because the quid pro quo here is that the Saudi’s get U.S. support in Middle East affairs, where ISIS is running amuck, and the U.S. gets to teach Putin a lesson. It’s not a bad theory, it just fails to recognize some economic realities that we have long known and have been exploiting, such as the currency differentials impacting the actual realized prices in various geographies.

The fate of resource based economies like Canada rest in the strength of commodity prices. The Canadian dollar tends to rise and fall with oil as a result of this.  As a consequence, Canadian producers have been partially insulated by the decline in the price of oil because of the fact they sell oil in US dollars (USD) but incur costs in Canadian dollars (CAD). Thus at a USD/CAD exchange of $1.135, which is where it approximately stands today, a Canadian producer is realizing a price of C$75.52 on WTI of $67.43 (in US$).6

Russia is also highly dependent on oil revenues for its economy. Much has been written and said about Russia’s need of $100 oil to balance its budget. Indeed, recent reports peg the impact of oil’s price decline as costing Russia about $100 billion per year. However, like Canada’s loonie, the ruble has devalued to the dollar along with the fall in the price of oil. The chart below represents the ruble’s decline over recent months in relation to the USD.7

When one considers the impact of the price decline on regional Russian crudes such as the East Siberian Pacific Ocean oil8, when coupled with the currency arbitrage of a falling ruble, it is clear the Russians aren’t the intended victim in this Saudi murder mystery. In fact, at the quoted exchange rates and a price of $69.32 for this type of crude at the time of writing, Russian producers are actually realizing a ruble price today that is only 4.5-5% less than what they were receiving in early June of this year.9 Yes, over the longer term a falling ruble will have far wider reaching impacts on the Russian economy and purchasing power, but one still has to ask the question of whether it is logical to think that making the whole world suffer just to show Putin he can’t misbehave is realistic?

Marginal production out of high cost sources like shale are clearly the easiest and most logical target of the Kingdom’s recent decision not to cut production. By killing off some of the shale production it’s a win for nearly everyone but the U.S. Eventually, we’d expect formerly displaced light oil imports will return to the U.S. and market share competition in places such as Asia will ease up.

At Peritus we have long been of the opinion that many shale producer business models are flawed and unsustainable, and now that oil has fallen so precipitously, cracks in already stretched balance sheets are starting to appear. Energy represents 18% of the U.S. high yield market.10 Capital expenditures commonly exceeded cash flows of many shale producers at $100/bbl. How do you think they will they fare at $70 with wells that decline by 90-95% every two years?

While calm waters are a ways off for the oil markets and along the way there will undoubtedly continue to be unexpected supply disruptions out of the Middle East and Africa that will add volatility to prices, we expect the medium to longer term supply and demand dynamics will lead to a rebound in oil prices, benefiting those that are able to withstand these shorter-term price dynamics.

1 Source: U.S. Energy Information Administration, Weekly Petroleum Status Report, week ending 11/28/14 (November 2008).

2 Source: U.S. Energy Information Administration, Weekly Petroleum Status Report, week ending 11/28/14 (November 2008).

3 Data based on expectations from Bloomberg.

4 Determination based on Peritus’ research.

5 Prices and exchange rates as of 12/3/14.

6 Prices and exchange rates as of 12/3/14.

7 Data sourced from Bloomberg, covers the period 3/31/14 to 12/3/14.

8 Data sourced from Bloomberg, covers the period 3/31/14 to 12/4/14.

9  Prices and currency rate as of 12/3/14.

10 This statistic for the J.P. Morgan High Yield Index, constrained. Acciavatti, Peter, Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update,” J.P. Morgan North American High Yield and Leveraged Loan Research, November 21, 2014, p. 6

© AdvisorShares

[description] => According to the EIA, U.S. crude oil imports averaged about 7.3 million barrels per day last week with Canadian barrels making up 3.2 million barrels of the total. U.S. commercial reserves increased by 1.9 million barrels week over week where total inventories fell 3.7 million barrels versus expectations of a build of 950,000.3 Are we at the beginnings of a rebalancing of the market? Possibly. [author] => Doug Holt [legacyinterface_firm_id] => 14 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 16:48:10 [created_by] => 948 [modified_on] => 2014-12-10 16:48:20 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2119 [hits] => 0 ) [15] => stdClass Object ( [legacyinterface_commentary_id] => 2054 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15292 [apv_conversation_id] => [content_type] => market-commentary [title] => Follow the ECB Compass [slug] => pimco_121014 [fulltext] =>
  • As the European Central Bank continues to expand its balance sheet to counter low growth and ​low inflation, we believe European duration should remain relatively well-anchored and European assets should be well supported. 
  • Looking ahead, in a world of low yielding European core rates, we believe credit will continue to attract investors. We continue to see spread compression opportunities in peripheral sovereign, fundamentally improving banks and high yield. 

In the midst of market volatility, macroeconomic uncertainty and geopolitical risks, we believe the European Central Bank’s (ECB) recent policy actions provide investors with a relative certainty: The ECB will remain accommodative. In turn, we believe European duration may be relatively well-anchored and European assets may be supported via the ECB’s expanded stimulus measures.

ECB tool kit
Short of large scale sovereign bond purchases, as we have seen in the U.S. and the UK, the ECB has taken a number of steps to date to ease liquidity conditions in the eurozone and assure investors of its continued pledge to do “whatever it takes”:

  • Forward expectations. The ECB is committed to keeping its policy rate “at present levels for an extended period of time in view of the current outlook for inflation”. (ECB, 7 August 2014)

  • Targeted longer-term refinancing operations (TLTRO). The ECB is providing European banks with up to €1 trillion in the form of four-year loans at 15 basis points (bps) via its TLTRO programme. Financing will be provided in eight quarterly tranches. We believe this will have several effects: It will add liquidity, reduce the supply of European banks’ short-dated bonds to the market and likely improve banks’ profitability by significantly reducing their cost of funding. The first tranche of €82.6 billion was provided in September this year, with the next tranche due to take place on 11 December 2014.

  • Asset purchase programmes. The ECB is committed to purchasing asset-backed securities (ABS) and covered bonds for “at least” the next two years as the central bank looks to expand its balance sheet by approximately €1 trillion to further ease financial conditions in the eurozone and support its goal to anchor inflation expectations. By removing ABS and covered bonds from the market in exchange for cash, the ECB is injecting further liquidity in the market in the hope that investors will use this cash to purchase other risk assets (ultimately lending to individuals and companies). This will support European ABS and covered bond markets, which have already tightened this year in anticipation of the ECB’s purchases. And it may percolate through to other risk assets via the portfolio channel effect described above.

We do not think the ECB will stop here: After all, its objective, often stated by ECB President Mario Draghi, is to “maintain inflation rates below but close to 2%”. And so far, the ECB is not meeting its objective. With current headline inflation in the eurozone running at close to 0%, Mr. Draghi is rightly concerned that if ]inflation runs too low for too long, the ECB risks de-anchoring long-term inflation expectations (see Figure 1).

The risk of de-anchoring long-term inflation expectations is that this could trigger – similar to what Japan experienced – a negative spiral of self-fulfilling prophecy: If individuals expect low inflation, if they believe their wages will not increase and prices will fall, they will delay consumption, slowing economic activity and, ultimately, depressing prices further into a deflationary spiral. Mr. Draghi has stated, “Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate.” (ECB, 6 November 2014). However, policy rates are already near zero and Mr. Draghi has exhausted nearly all of the ECB’s tools, except one: a broad asset purchase programme, often known as quantitative easing.

More recently, Mr. Draghi indicated in his speech on 21 November 2014 that the ECB is already engaged in quantitative easing, and ready to do more ”without delay”. He stated, ”If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases”.

With that in mind, which asset class will be next on the ECB’s asset purchase list? Corporate bonds, European agencies, government bonds? Regardless of the specifics, additional asset purchases would be broadly supportive for European assets.

Sovereign bonds
We believe peripheral sovereign bonds remain an attractive carry trade, such as Italian 10-year government bonds at 2.02%, which are trading 130 bps wider than 10-year German Bunds at 0.7% (Bloomberg, 1 December 2014). Should the ECB commit to purchasing sovereign bonds, they could potentially provide attractive carry and further spread compression.

Improving financials
We also like financials. Since 2011, while corporates have been gradually releveraging from a very low base, banks are forced to deleverage as European regulators require ever higher capital ratios, better liquidity and lower total leverage. The ongoing de-risking and deleveraging trend is great news for bank creditors, and current market valuations present attractive opportunities to invest in this improving credit trend. We currently express our high conviction view in financials in two ways: For stronger banks, we invest in the subordinated part of the capital structure offering yields of around 4%–6% (see Figure 2), while for second tier banks, we invest in senior bonds. We find peripheral senior bank bonds particularly attractive at current yields (100 bps to 200 bps over Libor for three- to four-year maturities) given the ECB’s available four-year financing at 15 bps, which we expect will tighten peripheral bank credit spreads over the next 12 months.

High yield: supportive fundamentals
Finally, after four months of spread widening, global high yield is relatively attractive, with yields north of 6%. While we need to be very careful in an environment where eurozone growth is very weak, fundamentals are largely intact: There is very little high yield debt maturing over the next two to three years (see Figure 3). In the absence of a growth shock, default rates will remain low. With government yields (particularly in Europe) and default rates remaining low, investors will continue to search for carry; and high yield should remain well supported.

Within the high yield market, we favour higher-quality, BB-rated credits, secured first lien bonds as well as “rising stars” (credits that we expect will be upgraded to investment grade over the next one to two years).

We find a number of potential rising stars among financial services companies in the U.S., as well as in the North American energy sector, which is benefitting from the shale revolution and experiencing very fast growth, which allows for quick deleveraging and further investments.

In Europe, where the recovery is more fragile, we see a greater focus on industry consolidation. Positioning in potential acquisition targets may provide attractive total return opportunities, as we saw with GE’s acquisition of Alstom’s energy business, buildings material group Holcim’s acquisition of Lafarge and home appliance company Whirlpool’s acquisition of Indesit. We expect further consolidation to take place in the telecommunications sector going forward.

Conclusion
In a world of relatively low government yield, European (and global) credit markets offer some attractive opportunities for higher returns. Investors may favour flexible, diversified credit strategies, which can take advantage of market opportunities and deliver attractive return potential in the range of 4%–6%, with similar levels of volatility.

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Convertible securities may be called before intended, which may have an adverse effect on investment objectives. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.

References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold such securities. PIMCO products and strategies may or may not include the securities referenced and, if such securities are included, no representation is being made that such securities will continue to be included. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. It is not possible to invest direct in an unmanaged index.

This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world.

©2014, PIMCO.

[description] => As the European Central Bank continues to expand its balance sheet to counter low growth and ​low inflation, we believe European duration should remain relatively well-anchored and European assets should be well supported. Looking ahead, in a world of low yielding European core rates, we believe credit will continue to attract investors. We continue to see spread compression opportunities in peripheral sovereign, fundamentally improving banks and high yield. [author] => Eve Tournier [legacyinterface_firm_id] => 335 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 16:51:51 [created_by] => 948 [modified_on] => 2014-12-10 16:52:13 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2120 [hits] => 0 ) [16] => stdClass Object ( [legacyinterface_commentary_id] => 2055 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15293 [apv_conversation_id] => [content_type] => market-commentary [title] => November Jobs Report Wasn't So Great After All [slug] => halbert_121014 [fulltext] =>

1.  November Unemployment Report Was a Surprise

2.  November Jobs Report Was Not All Good News

3.  America Still a Long Way From Full Employment

4.  Conclusions on the November Jobs Report

5.  Could Relief For Businesses be on the Way Next Year?

6.  President Obama Considering Sanctions Against Israel?

November Unemployment Report Was a Surprise

Last Friday’s unemployment report for November was a stunner, at least on the surface. US businesses ramped-up hiring across the board in November, putting 2014 on pace to be the best year for job growth since 1999.

Non-farm employers added a seasonally-adjusted 321,000 jobs in November, the most in one month since January 2012, according to the Bureau of Labor Statistics (BLS). That number was substantially higher than the pre-report consensus of just 230,000.

Only 7,000 of the 321,000 new jobs came from government. Nearly all parts of the private sector contributed, including 28,000 new jobs in manufacturing. With total upward job revisions of 44,000 for September and October, the economy has added 2.65 million jobs in the last 12 months.

Change in jobs

Also encouraging is that wages rose at a faster clip in November, with average hourly earnings rising nine cents to $24.66. Wage increases year-over-year were 2.1%, which remains historically low, but the November gains are a glimmer that rising job prospects are beginning to flow to workers via bigger paychecks.

Those paychecks and prospects lured another 119,000 Americans back into the workforce in November, which is the main reason the unemployment rate held at 5.8% despite the healthy jobs gains. The labor participation rate didn’t budge from a sickly 62.8%, but if job creation continues at this pace more people will likely return to work.

One hopeful sign: Those saying they were working part-time but wanted full-time employment fell by 177,000. About 6.9 million Americans are working part-time because they cannot find full-time positions. The broadest measure of unemployment, which includes these workers, dropped to 11.3%, down 0.1% from October. Those out of work for 27 weeks or more fell by 101,000. A rising tide lifts even the long-term unemployed.

The best news would be that this jobs trend signals renewed confidence by employers in the prospects for economic growth. The last two quarters were robust at 4.6% and 3.9%, respectively, in annual GDP and would represent the strongest growth since the mid-2000s, if the pace continues. The declines in oil prices, and thus gasoline, are giving consumers a boost in spending power that will further encourage business investment and hiring.

President Obama said on Friday that the United States has added more jobs over the last four years than Europe, Japan, and all other advanced countries combined (I have no idea if that is true). Other US officials noted that job growth in November was driven by better paying blue-collar and higher-skill sectors, a contrast to the low-wage boom earlier in the recovery.

November Jobs Report Was Not All Good News

As is the case with most government reports, last week’s turbocharged jobs headline came in-part thanks to “seasonal adjustments” and other wizardry at the Bureau of Labor Statistics, which reported that US job growth hit 321,000 in November.

Those numbers – from the “establishment survey” (employer payroll numbers) which counts the number of jobs – sound nice on the surface, and they certainly present reasons for confidence that the job market continues to mend.  However, the “household survey,” which is a head-count of those actually working, shows a very different picture.

According to the household survey, that big headline number of 321,000 new jobs translated into only 4,000 more Americans working in November than in October. For example, a person working two or three jobs is only counted once in the household survey – versus two or three times in the establishment survey. Yet that difference in counting can’t account for the big discrepancy between the two surveys in November, and suggests some major revisions to one or both surveys in January.

In November, 119,000 new people entered the labor force, according to the BLS, but another 115,000 filed for first-time unemployment benefits – again, a net of only 4,000 more Americans working. As a result of this relatively small number of net new workers, the unemployment rate remained at 5.8%. And the labor force participation rate remained at 62.8%, which is just off the year’s worst level and around a 36-year low.

And there’s more: Full-time jobs declined by 150,000, while lower-paying part-time positions increased by 77,000 – that’s not good. There were 110,000 fewer married men at work, while married women saw their ranks shrink by 59,000.

As for the nine cent per hour wage increase, supervisors and managers got most of the pay raises and the benefit of extra hours worked in November. For production and non-supervisory workers who make up the vast majority of the work force, average hourly pay rose by only four cents, to $20.74, and the average workweek was unchanged, at 33.8 hours.

Even that overstates the day-to-day reality and prospects for many workers. Fully a quarter of the jobs created in November were in retail and in leisure and hospitality, fields that in general do not offer enough pay or hours to make a decent living.

Finally, let’s not forget that 9.1 million remain unemployed, which is 1.9 million more than there were in November 2007 before the financial crisis and the Great Recession began.

America Still a Long Way From Full Employment

Philadelphia Fed President Charles Plosser proclaimed on Wednesday of last week that “the economy is near full employment.” While that’s what you might expect a hawkish central banker who’s anxious to raise the Fed Funds rate to say, he is simply wrong. With the unemployment rate at 5.8%, the economy is still a good way from full employment.

No matter your economic perspective, there is no arguing that this recovery from the crisis of 2008 has been extremely lame, at best. Historically, full employment in the US rests somewhere below a 5% unemployment rate and coincides with an increase in the labor-force participation rate, along with a healthy, meaningful increase in wages.

participation rate

As illustrated at left, the labor force participation rate is trending down and remains near a 36-year low. The last time the economy was at full employment was in 2000 when unemployment averaged 4% for the year.

While President Obama touts this economic “recovery,” there are still over 3 million Americans mired in the long-term unemployed camp. And many of those who were hired are in temporary or part-time slots, or full-time positions that pay less than their previous salaries.

These are the people who have either taken part-time work because they can’t find a full-time job, have been jobless for 27 weeks or more, or are considered “marginally attached to the labor force,” meaning they have looked for work in the past 12 months, but not in the most recent four weeks.

This does not include the 770,000 “discouraged workers.” These are the folks who have stopped looking altogether because they believe that no jobs are available for them – a true American tragedy.

Conclusions on the November Jobs Report

Clearly the November employment report was a positive surprise.  The 321,000 new jobs added last month was the highest reading since January 2012 and was substantially above the pre-report consensus of 230,000.

The fact that 119,000 more workers re-entered the workforce in November, in excess of those leaving it, was another positive surprise. The rise in average hourly earnings by nine cents to $24.66 was also better than expected.

The question is, will such job growth continue? Or was this a one-month, seasonal anomaly?

Keep in mind that not all of the news in the November jobs report was positive. While the headline new jobs number was 321,000, a deeper dive into the data reveals that there were only 4,000 more Americans working at the end of November. Full-time jobs declined by 150,000, while part-time positions increased by 77,000 – that’s not good.

And finally, despite comments from Philly Fed President Charles Plosser last week, the US economy is not close to full employment. We’ll have to monitor the jobs data over the next few months to see if the November breakout was for real. Let’s hope it is!

Could Relief For Businesses be on the Way Next Year?

With the mid-term elections delivering the Senate to the Republicans, many feel there may be some tax relief on the way next year. For years the economy has had to face a policy bias toward imposing ever-higher costs on private business. You know the litany: the 2007 energy bill, Obamacare, Dodd-Frank, burdens on fossil fuels, higher taxes, and so much more.

The GOP House that was elected in 2010 delayed a tax increase but President Obama’s re-election imposed it in 2013. His Administration’s rule-by-regulation continues, but at least Congress will do no more harm with the GOP in charge.

The key point is that for the first time in years, Washington may even have a “growth bias.” Hopefully Congress will attempt to reform the business tax code, ease or repeal regulations, reduce the burdens of Obamacare, and otherwise remove barriers to job creation. It’s impossible to know how much will pass while Mr. Obama is still president, but some pro-growth measures will hopefully make it through.

The psychological effect of this change shouldn’t be underrated. American businesses have been hunkered down for years, even with a rising stock market and near-zero interest rates, because CEOs haven’t known what damage Washington might do next. Now the main question is what good might happen now that the Republicans are in charge of both houses of Congress.

With Congress mostly checking Mr. Obama, the biggest remaining policy uncertainty is when and how quickly the Federal Reserve will continue its march back to monetary policy normalcy. The Fed ended its massive QE bond-buying program in October, and the economy survived. Now the question is, what will happen when the Fed begins to hike the Fed Funds rate next year?

President Obama Considering Sanctions Against Israel?

Rumors are swirling in Washington that President Obama is seriously considering new sanctions against Israel. Sanctions against Israel, our strongest ally in the Middle East? You’ve got to be kidding, right? Maybe not.

Dozens of House Republicans on Friday demanded that President Barack Obama explain and clarify the latest reports that say his administration is considering new sanctions against Israel.

The Obama administration has repeatedly said it disapproves of Israel’s decision to build new homes in East Jerusalem, and that this construction “undermines the peace process.” But officials on Friday refused to confirm or deny reports that they are considering sanctions against Israel.

A letter sent Friday to Obama by Rep. Mark Meadows (R-NC) and 44 other House Republicans demanded more clarity than what’s been offered so far. Reportedly, the letter included the following:

“Recent reports suggest that your administration has held classified meetings over the past several weeks to discuss the possibility of imposing sanctions against Israel for its decision to construct homes in East Jerusalem. We urge you and your administration to clarify these reports immediately.

Israel is one of our strongest allies, and the mere notion that the administration would unilaterally impose sanctions against Israel is not only unwise, but is extremely worrisome. Such reports send a clear message to our friends and enemies alike that such alliances with the United States government can no longer be unquestionably trusted.”

The letter also said Congress has not given the White House any authority to sanction Israel, and in fact just passed legislation last week – by a unanimous vote – to boost US-Israel security ties.

“While it is our hope that these reports are untrue, the fact that your administration has failed to denounce or clarify them is deeply troubling. We urge you to quickly and sharply address these concerns, as well as take the steps necessary to demonstrate America’s unwavering support for Israel.”

White House Press Secretary Josh Earnest admitted on Friday that he is aware of news reports that the United States is considering sanctions against Israel, but wouldn’t say if they are true. Fox News reporter Ed Henry asked Earnest about the reports and said, “I wondered if you could say true or false.” Ernest responded:

“I’ve been informed of some of these reports. What I can tell you is that I’m not going to talk about any internal deliberations inside the administration and certainly not inside the White House.”

The point is, he did not deny it.

The Israel sanctions discussions are said to have begun after Prime Minister Benjamin Netanyahu visited the White House in October and clashed with President Obama over the construction of a new housing development in East Jerusalem.

The administration warned Israel that the project would raise questions about Israel’s commitment to peace with the Palestinians. Netanyahu reportedly replied that Israel does not accept restrictions on where Jews can live, and that Arabs and Jews in the Israeli capital should be allowed to purchase homes wherever they choose.

The decision to even consider sanctions against Israel is, in my view, a part of Obama’s “Temper-Tantrum” (as I called it last week), since the shellacking he and the Democrats suffered in the mid-term elections on November 4.

I’ve said it before and will say it again: This man will stop at nothing to advance his ultra-liberal agenda, no matter if doing so would be damaging for America. If anyone doubted me, this latest threat of sanctions against Israel should convince you.

While I have no doubt that Obama would love to levy sanctions on Israel, my bet is that he will back off due to heavy objections – and it won’t surprise me if his press secretary denies that it was ever a serious consideration. We’ll see.

Warmest holiday regards,

Gary D. Halbert

Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

© Halbert Wealth Management

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Faithful followers will already know that we do not rely on meetings with management or analyst reports in our methodology for finding the world's best knowledge leaders.  And, while we have developed a more objective, data-driven process, it is always interesting to at least take a look at how our various tools compare with the consensus from the street.  Some of the most striking differences arise when we compare companies' rating changes with a quick look at our point-and-figure charts.

 
For instance, Vestas Wind Systems has been upgraded nine times in the last 100 days-- the most of any company in the MSCI AC World Index, comprised of nearly 2500 names from both the developed and emerging world.
 
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Based on this metric alone, one might imagine that the picture looks bright for this Danish Industrial.  The stock has clearly enjoyed a decent period of relative outperformance over the last couple of years, following a significant low in 2012:
 
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What might concern us, however, is that the uptrend seems to be struggling at a point of long-term resistance (between row I and row J).  This is not to say that resistance can't be overcome-- it simply prompts us to question the consensus that this security can live up to the index-leading analyst optimism.
 
Taking a look at some more examples of upgrade leaders in the last 100 days, we find that quite a few of them have relative strength charts (and, therefore, relative momentum) that could be interpreted to contradict the improvements in consensus:
 
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[description] => Faithful followers will already know that we do not rely on meetings with management or analyst reports in our methodology for finding the world's best knowledge leaders. And, while we have developed a more objective, data-driven process, it is always interesting to at least take a look at how our various tools compare with the consensus from the street. [author] => Team [legacyinterface_firm_id] => 173 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 17:03:33 [created_by] => 948 [modified_on] => 2014-12-10 17:03:45 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2122 [hits] => 0 ) [18] => stdClass Object ( [legacyinterface_commentary_id] => 2057 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15295 [apv_conversation_id] => [content_type] => market-commentary [title] => Lessons Learned in 2014 [slug] => bernstein_121014 [fulltext] =>

In 2014, US stocks forged ahead, international developed and emerging-market stocks lagged, bonds did better than expected, and the IRS took a bigger bite. Here are some lessons for US investors to carry forward into 2015.

Lesson 1: The US Market Keeps on Ticking

Geopolitical crises were in the headlines throughout 2014: the threat from ISIS in Syria and Iraq, tensions between Russia and Ukraine, fighting in Gaza, the Ebola epidemic in West Africa, slower growth in China, and economic stagnation in both the Eurozone and Japan. Yet the US equity market still motored ahead.

We are living in a global economy. If the rest of the world is struggling, can US companies continue to prosper?

In the medium term, the answer could be yes. The US is still in the early stages of a cyclical expansion, and we think the overall growth rate will be supported by key trends among consumers, governments, and companies. US consumers paid down debt after the financial crisis and are now beginning to spend again—cautiously. Similarly, US federal and local governments pared back during the immediate post-crisis years, and they are now able to increase their budgets. Finally, US companies are gaining market share globally, and US manufacturing is now undergoing something of a renaissance. We think that these trends could continue for a while and that they are positive for US stockholders.

It would be a serious mistake to think that the US market is invulnerable, but it would be just as erroneous to underestimate its resiliency.

Lesson 2:  Diversification Means Owning Laggards

After leading globally in 2013, in 2014 through November the US stock market beat developed international developed stock markets by 15.5 percentage points in US dollar terms; it beat emerging markets by 11.5 percentage points, as shown in the first Display, below. This outperformance by US stocks has some investors ready to throw in the towel on global investing.

Why Be Global/ No Market Always Wins

We think selling an asset after a stretch of lagging performance is a bad decision. Often, the lagging asset may be more attractive looking ahead. And that’s what we’re seeing in developed international stocks markets, where valuations are more attractive than in the US stock market.

Since 1990, non-US stock markets have outperformed the US market more than half the time. Since no one can be certain just when this will occur, we think it’s wise to own stocks in all regions.

A similar argument can be made for diversification by size. Large-cap US stocks trounced small- and mid-caps by 8.4 percentage points so far in 2014, but large-caps trailed smaller stocks by 11.7 percentage points annualized from 2001 through 2003. The key is to hold stocks across the size spectrum.

Diversification remains a fundamental tenet of smart investing—both as a way to manage risk and as a way to maximize return.

Lesson 3: Eat Your Bonds—They’re Good for You!

High-quality intermediate bonds in a portfolio serve, above all, as a counterweight to stocks. When stock values tumble, bond values typically rise and help to offset the declines. As the second Display, below, shows, when the stock market dipped from mid-September to mid-October, a 60% stock/40% bond portfolio gave investors a smoother ride than an all-stock portfolio—smooth enough that some might have stayed in the market rather than fleeing in fear.

The Stabilizing Effect of Bonds

Of course, investors also like the income bonds provide. And through November 2014, core bond strategies delivered about 4% in total return—less than bonds have returned over the past 30 years, but a bit above the 3.5% we project for them over the next 30 years.

Don’t neglect bonds. Even with today’s lower yields, they can help you sleep at night. Investors should have enough bonds on their plate to be confident they will be able to withstand the next market downturn—whenever it happens.

Lesson 4: If You’re Afraid to Invest, Dollar-Cost Average

In 2014, too many investors sat on the sidelines in cash, convinced that they’d missed the bull run and afraid that if they invested now, the market would soon tumble and afflict them with buyer’s remorse.

Dollar-cost averaging can reduce the odds of experiencing these painful regrets. Our research shows that investing all at once has historically been the more effective approach, as shown in the third Display,below. But if the market turns volatile, dollar-cost averaging can help to dampen the effects. If stocks fall right after your first purchase, you’ll take a hit, but you’ll also be able to buy your next installment at a lower price. If you average into the market within a limited period of time—say six months or a year—you’ll likely be better off than if you’d stayed on the sidelines.

Historically, Investing Immediately Has Maximized ReturnsYou can think of dollar-cost averaging as a kind of regret insurance. Beyond this emotional benefit, the key advantage is that it gets you to your strategic asset allocation target, albeit after a delay. Like all insurance, dollar-cost averaging has a price—lower returns, typically, during the period of averaging in. But the longer-term benefits of being fully invested can outweigh this cost.

Lesson 5: Be Tax Savvy

In April 2014, taxpayers in the top bracket saw their final 2013 tax bills at new, higher rates. There may be further unpleasant surprises ahead for the 2014 tax year. The rising stock market has left investors with few or no remaining capital loss carryforwards, so to rebalance or spend from their portfolios, they have to realize capital gains. Smart strategies can help minimize the resulting tax bills that will arrive next year.

There are two ways to reduce taxes: avoidance and deferral. Avoidance permanently eliminates or reduces a tax, while deferral puts off payment into a later tax year. Avoidance is worth more to your bottom line. 

By diligently tracking and timing trades, you can ensure that capital gains will be long-term and dividends will be qualified. This permanently reduces the rates at which they are taxed.  

Another way to avoid taxes in the current year is through charitable contributions. Cash gifts avoid taxes by creating a tax deduction, but savvy taxpayers can further avoid tax by giving appreciated securities, thereby also eliminating an embedded capital gain. Additional techniques, such as converting a traditional IRA to a Roth IRA and contributing to a 529 plan, can provide tax benefits further into the future.

While not as valuable, tax deferral can also help reduce the current year tax bill. First, to the extent you can defer taking gains until after January 1, you can delay the tax hit. Next, volatility could create an opportunity. If the price of a stock falls below your basis in it, you can harvest the loss to reduce your tax bill in the current year. Some investors seized this opportunity in mid-October, but rising stock markets since then have limited loss harvesting opportunities for the remainder of 2014.

You also can defer taxes by making larger contributions to retirement vehicles such as 401(k), IRA, and Keogh plans. Timing is important: In a rising market, making contributions early next year can help you shelter more growth over the course of 2015.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

The views expressed herein do not constitute and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation. 

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein.

Seth J. Masters is Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.

© AllianceBernstein

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There can be little doubt that data releases rather than experience or intuition are driving the economic conversation. This is perhaps a function of the disconnection that many people feel about an economy that they no longer understand. Rather than trusting their own eyes or their own gut to form an opinion, it's much easier to grab a set of convenient numbers. The big question then becomes what numbers you choose to look at and which you choose to ignore. 

While there are a great many types of economic data releases, issued by a myriad of public and private sources, two reports have risen above the rest in importance: the Quarterly GDP estimates issued by the Bureau of Economic Analysis, and the monthly jobs report issued by the Bureau of Labor Statistics. And those two reports have been recently coming up roses. The 3rd quarter GDP growth report, released on November 25th, revised growth upwards to an annualized rate of 3.9%, and the November Jobs report, released on December 5th, showed the creation of 321,000 new jobs in November, the highest monthly total in nearly three years. These reports have solidified the views of the mass of analysts that the U.S. economy is currently firing on all cylinders.

But to make this conclusion, almost all the other data sets, which used to be considered significant, have been either ignored or, when that proves impossible, rationalized away to make the figures unimportant. This never happens with strong data, which is typically accepted at face value.

In the weeks leading up to, and the days after, the recent GDP and jobs reports, a torrent of data releases came in that were almost universally awful. However, in our current era of journalistic lethargy, these reports have received almost no attention at all.

While it would be too long and boring to list all of these moribund statistics, here is a brief overview, in chronological order, of what you are likely not hearing:

November 24 - The Chicago Fed National Activity Index, which weighs 85 different economic indicators to gauge the national economy, fell to 0.14 in October from 0.29 in September. The three-month average declined to negative 0.01 from positive 0.12. The index is designed so that readings above zero indicate above-trend growth.


November 24 - Markit's Flash PMI, which measures service sector health, came in at 56.3 for November, missing expectations of 57.3. This is the lowest reading for the index since April, and the fifth consecutive month of declines.

November 25 - The Richmond Fed Manufacturing Index came in at a very weak 4 for November, which is down sharply from the 20 posted in October, and far below economist expectations. Consensus expectations were for 16, with survey respondents ranging from 12 to 24.

November 25 - The Commerce Department reported that growth in corporate profits (adjusted for depreciation and the value of inventories) slowed sharply in the third quarter to a 2.1% annual rate, down from an 8.4% annualized rate in the second quarter.

November 25 - The Case Shiller 20-City Index showed year over year price gains of only 4.9%, the lowest reading since October 2012. This continues a trend of a decreasing rate of home price appreciation.

November 25 - The Conference Board reported that U.S. Consumer Confidence dropped to 88.7 in November from a revised 94.1 in October. The November drop was unexpected and puts the index at its lowest reading since June. Economists surveyed by The Wall Street Journal had forecast November to come in at 96.5.

November 26 - U.S. durable-goods orders rebounded 0.4 percent in October after September's decline of 0.9 percent. However, the rise largely reflected a 45.3% surge in demand for defense aircraft and parts, which masked weak demand elsewhere. Excluding transportation, orders fell 0.9%, the biggest drop since December 2013. Excluding defense-related products, orders fell 0.6%.


November 26 - Personal income rose by only .2% in October, half of the .4% expected by economists.Personal spending also increased by .2%, but this was 33% less than the .3% consensus expectations.

November 26 - Manufacturing activity in the Chicago-area expanded 60.8 in November, which represents a significant drop from 66.2 in October. The decline was larger than the consensus expectations for a decline to 63.


December 3 - Mortgage applications decreased 7.3% from the week earlier, the second straight week of declines.


December 3 - The National Retail Federation reported that Thanksgiving weekend retail sales came in at a disappointing $51 billion, down 11% from 2013. This data includes the entire four day weekend, in which many retailers operated under longer hours than they have in years past.

December 5 - Although the Trade Deficit narrowed slightly to $43.4 billion in October, the figure was actually higher than the consensus estimates and only came down because the September numbers were revised higher. In addition, the trade deficit in manufactured products hit $71.2 billion, the highest on record.


December 5 - Factory orders fell for the third consecutive month, shrinking 0.7% (more than double the .0.3% rate that had been expected) in October after declining 0.5% in September.


December 5 - Consumer credit rose $13.2 billion in October but the increase was far less than the $16.8 billion expected by a Bloomberg survey of economists (September's rate that had also come in well below the consensus estimate was revised even lower). The gain was largely centered on a $12.3 billion increase in non-revolving credit that includes auto financing and the government's acquisition of student loans from private lenders. Revolving credit rose only $0.9 billion, down from an already disappointing $1.4 billion in September.

Although the national elections are generally not counted as an economic indicator, the November mid-term elections reflected overwhelming economic dissatisfaction among voters, which resulted in a drubbing at the polls for Democrats associated with the President's agenda.

So if the majority of the granular reports of weak economic activity persist and the public remains unaware or unconvinced that the economy is improving, how could it be that the two most followed reports could be so strong?

There is much in both the GDP and the Jobs Report that is dependent on forward-looking expectations. I believe that both reports are showing improvement because businesses are building inventory and hiring staff in anticipation of an economy that they believe will continue to improve. It's like the Field of Dreams recovery, prepare for it and it will come. But I think businesses are following the false narrative, and ignoring, or rationalizing, the bad data as thoroughly as does the media.  When they realize they were fooled by the hype, jobs will be lost, and GDP will fall.

Furthermore, the GDP and jobs data would certainly be far weaker if the Federal Reserve were not providing so much monetary support. Sure, they have discontinued the vast majority of the QE, but interest rates are still at zero percent. What would GDP or job growth look like if consumers, businesses, and the federal government were forced to pay anything that approaches the historically normal interest rates on our much greater than normal level of debt? My guess is that it will be awhile before we find out, as I believe that as the bloom comes off the recovery rose, the Fed will launch another round of QE before it gets around to raising interest rates.

Best Selling author Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital.

© Euro Pacific Capital

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[attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [start] => 380 ) [inputs:protected] => Array ( ) ) [post] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [cookie] => JInputCookie Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [files] => JInputFiles Object ( [decodedData:protected] => Array ( ) [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [env] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [request] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [start] => 380 [limitstart] => 380 [option] => com_legacyinterface [view] => commentaries [Itemid] => 616 ) [inputs:protected] => Array ( ) ) [server] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [HTTP_AUTHORIZATION] => [HTTP_HOST] => apdev.hubtech.tv [HTTP_ACCEPT_ENCODING] => x-gzip, gzip, deflate [HTTP_USER_AGENT] => CCBot/2.0 (http://commoncrawl.org/faq/) [HTTP_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8 [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => apdev.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 54.83.81.52 [DOCUMENT_ROOT] => /var/www/html/apcms [REQUEST_SCHEME] => http [CONTEXT_PREFIX] => [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms [SERVER_ADMIN] => ben@hubtech.tv [SCRIPT_FILENAME] => /var/www/html/apcms/index.php [REMOTE_PORT] => 49936 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.0 [REQUEST_METHOD] => GET [QUERY_STRING] => start=380 [REQUEST_URI] => /?start=380 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1516387842.353 [REQUEST_TIME] => 1516387842 ) [inputs:protected] => Array ( ) ) [session] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [__default] => Array ( [session.counter] => 1 [session.timer.start] => 1516387842 [session.timer.last] => 1516387842 [session.timer.now] => 1516387842 [session.client.browser] => CCBot/2.0 (http://commoncrawl.org/faq/) [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 380 [filter_order] => published_on [filter_order_Dir] => desc ) ) ) ) [user] => JUser Object ( [isRoot:protected] => [id] => 0 [name] => [username] => [email] => [password] => [password_clear] => [block] => [sendEmail] => 0 [registerDate] => [lastvisitDate] => [activation] => [params] => [groups] => Array ( [0] => 9 ) [guest] => 1 [lastResetTime] => [resetCount] => [requireReset] => [_params:protected] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( ) ) [_authGroups:protected] => Array ( [0] => 1 ) [_authLevels:protected] => Array ( [0] => 1 [1] => 1 ) [_authActions:protected] => [_errorMsg:protected] => [_errors:protected] => Array ( ) [aid] => 0 ) ) ) [inputs:protected] => Array ( ) ) [jrequest] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) ) ) [env] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [request] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [start] => 380 [limitstart] => 380 [option] => com_legacyinterface [view] => commentaries [Itemid] => 616 ) [inputs:protected] => Array ( ) ) [server] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [HTTP_AUTHORIZATION] => [HTTP_HOST] => apdev.hubtech.tv [HTTP_ACCEPT_ENCODING] => x-gzip, gzip, deflate [HTTP_USER_AGENT] => CCBot/2.0 (http://commoncrawl.org/faq/) [HTTP_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8 [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => apdev.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 54.83.81.52 [DOCUMENT_ROOT] => /var/www/html/apcms [REQUEST_SCHEME] => http [CONTEXT_PREFIX] => [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms [SERVER_ADMIN] => ben@hubtech.tv [SCRIPT_FILENAME] => /var/www/html/apcms/index.php [REMOTE_PORT] => 49936 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.0 [REQUEST_METHOD] => GET [QUERY_STRING] => start=380 [REQUEST_URI] => /?start=380 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1516387842.353 [REQUEST_TIME] => 1516387842 ) [inputs:protected] => Array ( ) ) [session] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [__default] => Array ( [session.counter] => 1 [session.timer.start] => 1516387842 [session.timer.last] => 1516387842 [session.timer.now] => 1516387842 [session.client.browser] => CCBot/2.0 (http://commoncrawl.org/faq/) [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 380 [filter_order] => published_on [filter_order_Dir] => desc ) ) ) ) [user] => JUser Object ( [isRoot:protected] => [id] => 0 [name] => [username] => [email] => [password] => [password_clear] => [block] => [sendEmail] => 0 [registerDate] => [lastvisitDate] => [activation] => [params] => [groups] => Array ( [0] => 9 ) [guest] => 1 [lastResetTime] => [resetCount] => [requireReset] => [_params:protected] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( ) ) [_authGroups:protected] => Array ( [0] => 1 ) [_authLevels:protected] => Array ( [0] => 1 [1] => 1 ) [_authActions:protected] => [_errorMsg:protected] => [_errors:protected] => Array ( ) [aid] => 0 ) ) ) [inputs:protected] => Array ( ) ) [jrequest] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) ) ) [files] => JInputFiles Object ( [decodedData:protected] => Array ( ) [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [env] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [request] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [start] => 380 [limitstart] => 380 [option] => com_legacyinterface [view] => commentaries [Itemid] => 616 ) [inputs:protected] => Array ( ) ) [server] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [HTTP_AUTHORIZATION] => [HTTP_HOST] => apdev.hubtech.tv [HTTP_ACCEPT_ENCODING] => x-gzip, gzip, deflate [HTTP_USER_AGENT] => CCBot/2.0 (http://commoncrawl.org/faq/) [HTTP_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8 [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => apdev.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 54.83.81.52 [DOCUMENT_ROOT] => /var/www/html/apcms [REQUEST_SCHEME] => http [CONTEXT_PREFIX] => [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms [SERVER_ADMIN] => ben@hubtech.tv [SCRIPT_FILENAME] => /var/www/html/apcms/index.php [REMOTE_PORT] => 49936 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.0 [REQUEST_METHOD] => GET [QUERY_STRING] => start=380 [REQUEST_URI] => /?start=380 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1516387842.353 [REQUEST_TIME] => 1516387842 ) [inputs:protected] => Array ( ) ) [session] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [__default] => Array ( [session.counter] => 1 [session.timer.start] => 1516387842 [session.timer.last] => 1516387842 [session.timer.now] => 1516387842 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When we left off in Part 1, we promised to examine how select Global Tactical Asset Allocation products stack up against the Global Market Portfolio from the perspective of several performance measures – particularly Sharpe ratio, alpha and information ratio.  Without further adieu:

Figure 1. Performance comparison of Global Tactical Asset Allocation products vs. ETF Proxy Global Market Portfolio, Jun 1, 2011 – Nov 28, 2014

GTAA_Comps2

Figure 2. Performance comparison of global risk parity products vs. ETF Proxy Global Market Portfolio, Jun 1, 2011 – Nov 28, 2014

RP_Comps3

Analysis: GestaltU, Data from Yahoo Finance and Bloomberg

A few notes about these tables. First, where stats are labeled (Incep), they are calculated from June 2011, or the product’s inception if it launched subsequent to that date, through the end of November 2014. Second, CAGR numbers are annualized, except where a fund has been operating for less than 1 year. All risk-adjusted performance numbers are annualized from daily data, regardless of the length of track record (daily ratios are multiplied by sqrt(252)). Betas, alphas and t-scores are all since inception, and all relative metrics (IR, alpha, beta, t-scores) are relative to the Global Market Portfolio and based on daily observations.

So what story do these tables tell? Well, first off the Global Market Portfolio hasn’t been a tough bogey to beat in terms of raw returns over the past three years or so, with less than 6% annualized returns. For comparison, the S&P (SPY ETF) has returned over 16% annualized over the period, and a US balanced fund (Vanguard US Balanced ETF) has gained 11% per year. Bear in mind US markets represent over 30% of the global index, so international diversification has been quite a performance drag.

I know many of you with US-centric portfolios are patting yourself on the back. Ain’t self attribution bias grand? Make no mistake, you are US-centric because of home market bias, not superior forecasting abilities, but I will be the first to admit that it’s better to be lucky than smart. I can state with some confidence that US-centric investors are unlikely to experience the same relative success over the next three years. If that’s the case, what are you going to do about it?

In terms of returns relative to the GMP, GTAA funds are a mixed bag. The fund with the highest returns appears to be SMIDX, the SMI Dynamic Allocation fund, but this is somewhat of a red herring because the fund has less than 1/2 the operating history of most other funds. On a risk adjusted basis, JP Morgan’s Efficiente (EFFE) mandate has delivered the highest risk adjusted performance, in terms of Sharpe, Sortino, and Omega over the entire observation period.  More importantly, given its low beta and high alpha scores, EFFE has generated its returns with very little reliance on performance from the underlying indexes. This is a critical point, as funds with a high correlation to the GMP are vulnerable to a negative shift in performance when global markets turn at the end of this cycle.

Investor legend Rob Arnott’s GTAA behemoth, PAAIX, managed under the PIMCO banner, deserves an honourable mention. It also surpassed the GMP’s Sharpe ratio over the past few years, and delivered the second lowest alpha and beta of any fund, despite lower absolute returns.

We included the Good Harbor Tactical Core US fund in our analysis, despite the fact that it is US focused, because it highlights the risk of trying to market time strictly between the stocks and bonds of one market. This is the difference between market timing and GTAA: you make just one bet.We deal with this concept in more detail in our new paper (see below). In our testing, we’ve observed that market timing between stocks and bonds or stocks and cash is a much more difficult challenge than spreading bets across multiple asset classes, and Good Harbor’s unfortunate recent performance lends credence to our own findings.

Given higher average structural allocations to bonds in risk parity funds, products in this class have clearly benefitted from the global race to the bottom in long rates, as average Sharpe ratios are meaningfully higher than average GTAA Sharpe ratios. I strongly suspect this will reverse when the rate cycle finally turns (which admittedly could be quite a while). Setting aside QSPIX for a moment as a special case, note that Invesco’s Balanced Risk portfolio sports the highest Sharpe, Sortino, and Omego ratios over the past 3+ years, as well as the lowest beta and highest alpha. This is a large fund, with $10 billion in AUM according to Morningstar, yet it continues to deliver stellar returns year after year. Not for nothing, it has also generated the highest annualized returns over this recent period.

We mentioned QSPIX is a special case, and it is. This fund, managed by AQR’s esteemed Andrea Frazzini and Ronen Israel, is based on a concept described in a 2012 paper by Antti Ilmamen, Ronen Israel, and Tobias Moskowitz, entitled “Investing with Style: The Case for Style Investing” (currently behind AQR paywall). Antti Ilmamen is one of the greatest investment thinkers alive today, and his books are required reading for every aspiring asset allocator. The authors present compelling evidence of the magnitude, persistence, and structurally low correlations, of the four primary sources of style premia: value, momentum, carry and ‘defensive’. Across all asset classes covered, the authors demonstrate that style premia correlations averaged -0.22, and ranged between -0.6 and +0.21 from 1990 – 2012. Long-term Sharpe ratios for style premia composites across all asset class buckets range from 0.9 for value to 1. 37 for carry over the same period. In simulation, when normalized to a 10% volatility, a combination style premia composites across all asset classes delivered a Sharpe of 2.52 before fees and expenses.

Of course, the authors are aware of the many frictions and pitfalls involved in implementing the strategy, so they included an analysis of the net historical performance after accounting for trading costs (Sharpe declines to 1.9); discounting for model overfitting (Sharpe declines to 0.98), and; risk-management and fees (Sharpe ratio declines to 0.85). This seems to be to be quite a conservative target (see Figure 5.)

Obviously, given the low expected average correlation with traditional 60/40 portfolios, and the high expected Sharpe ratio, QSPIX should substantially improve overall portfolio Sharpe, even with small allocations. For example, a 10% allocation to QSPIX carved out of a 60/40 portfolio might raise overall Sharpe from 0.3 to 0.44, according to the authors.

Overall, I’d say the short snapshot of performance we’ve seen over the past year since inception would not cause me to reject the possibility that QSPIX will deliver against expectations. However, the fund may be mildly vulnerable to liquidity shocks, as it has a gross leverage ratio of 8x (!!), so it should not play the role of a tail hedge in portfolios. In my opinion, the best structural tail hedge is a good CTA fund.

So what can we conclude from our analysis? This article wasn’t meant to recommend, or point fingers, at any particular strategy, but rather to highlight how we might think about the performance of global allocation funds, and what observed performance features might make them attractive. Above all, before committing any capital to these products, we would focus our scrutiny on the process underlying the strategy. What factors do the managers believe are driving returns? What evidence do they have that their methodology is effective? We would want to see much longer trading histories, analyze performance in multiple trading regimes, and understand how the strategy might interact with other holdings in portfolios. Where a long-term live history isn’t available (or even if one is available), we would be keen to see simulations of historical performance using the same process, and understand all the ‘moving parts’ that might affect the character of the strategy.

That said, if we only have live returns to go on, we would focus on performance relative to the only true passive global benchmark, the GMP, rather than making comparisons with specific regional indexes. Specifically, we would seek to harvest as much true alpha as possible relative to the GMP, as strategies with high alphas are less reliant on strong global market performance to deliver returns. After all, aren’t we after diversification? Next we would look at overall risk metrics, especially volatility, but with one eye on drawdowns and beta. Only then would we start to care about absolute returns and Sharpe ratios.

One other metric, Omega ratio, stands out as meaningful, since unlike all of the other performance metrics above, it makes no assumptions about the distribution of returns. The utility of Sharpe, Sortino, alpha, and beta all depend on the assumption of normally distributed returns, but Omega accounts for the fact that returns often stray far from normality, especially over shorter horizons. The formula for Omega ratio looks fancy, but it’s actually easy to calculate. First, since the Omega ratio reflects the relative probability of achieving returns above a minimum required return (MRR), we must first choose an MRR. We chose to use the risk free rate, which is currently zero, and which makes our calculations really easy. But here is the general formula in Excel-friendly language.

Omega={SUM(IF(returns>MRR,returns-MRR))/(SUM(IF(returns<MRR,MRR-returns)))}

Note that the returns variable refers to the vector of returns, so this is a matrix formula. In order for Excel to calculate it, you must hold down both the CTRL key and the ENTER key at the same time.

In any event, you will note that on this measure, and relative to a 0% risk free rate over the period studied, GTAA funds compare favourably relative to the GMP, almost across the board. This suggests that, after accounting for higher moments of the return distributions, an investor would have a higher probability of achieving positive returns using GTAA than the GMP. An interesting observation indeed.

Overall, there are a few worthy examples of successful GTAA mandates and several risk parity products worth considering for active global diversification. I should also mention that Meb Faber’s Cambria has recently launched a very interesting new GTAA ETF, GMOM, based on newer additions to Meb’s ubiquitous paper, “A Quantitative Approach to Tactical Asset Allocation“. Well worth a look.

Lastly, we are excited to get our own GTAA track record audited so that we can add our own numbers to this list as we launch our new firm, ReSolve Asset Management, in the new year.

© Dundee Goodman Private Wealth

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This past week I have been inundated with questions regarding the dive in crude oil prices and the energy sector in general. Is this a fantastic buying opportunity, or is the bigger of something bigger? The answer depends on your time frame.

For a speculative trader looking for a short-term opportunity, as shown in the chart below, oil is now 4-standard deviations oversold and a fairly strong bounce is likely.

Oil-tradesetup-120914

However, longer-term investors may want to use whatever bounce comes to rebalance energy weightings in portfolios as it is quite likely that the dynamics of the oil/energy market have now markedly changed going forward.  As I discussed recently in "No, It's Not Time To Buy Oil Stocks Yet," the longer-term investment opportunity in energy has occurred after the initial bounce.  To Wit:

"As you will notice, each time there is a sharp correction in the NYEI, the subsequent bounce has been an opportunity to sell positiions that are underperforming, experiencing credit related issues or were just poor investments to begin with. Strongly rising markets mask many investment errors made by investors that are quickly, and brutally, revealed during market declines. These bounces give investors opportunities to clear those mistakes.

The subsequent decline provided an ideal opportunity to reallocate portfolios to better quality and performing issues within the portfolio. The current sell-off is likely the first leg of a similar pattern that investors should use to clean up portfolios in energy related investments."

Energy-Index-Trendline-120214

This weekend's reading list is a collection of articles discussing the good, the bad and the ugly of the dive in crude oil prices. It will likely be some time before we know how this particular story ends, but it is a story that is particularly important to Houstonians that have enjoyed oil-driven economic boom for the last five-years.


1) 10 Reasons Why A Severe Drop In Oil Prices Is A Problem by Gail Tverberg via Our Finite World

  • Low prices lead to oil being left in the ground
  • Low prices negatively impact shale extraction and offshore drilling
  • Shale operations have a huge impact on US Employment
  • Low oil prices lead to debt defaults
  • Low oil prices can lead to collapses of exporters
  • Benefits to consumers likely smaller than expected
  • Hope for exported oil and LNG likely to disappear
  • Hoped for renewables lose luster with low oil prices
  • Deflationary pressures
  • Drop in oil prices likely reflective of world reaching debt expansion limit

Read Also: Oil & Banks - As Prices Fall Risks Rise by John Schoen via CNBC

2) Energy Bond Risk Soars To Record Highs via ZeroHedge

"The spread (or risk) of high-yield energy credits surged again today, breaking above 850bps for the first time... The overall high-yield credit market is being dragged wider by this contagion as hedgers try to contain the collapse that is possible. For now, the S&P 500 remains entirely ignorant of the fact that over a third of its CapEx was expected to come from this crushed sector."

 Zero-hedge-energybond-risk-120914

Read Also: Why The Stock Market Is Detached From The Economy via Streettalklive

Read Also: Guess What Happened The Last Time Oil Crashed Like This by Michael Snyder via Conscious Life News

3) Why The Oil Price Decline Is Not A Bad Thing by David Rosenberg via The National Post

"Mr. Rosenberg said the stiff drop in oil prices this year has resulted in U.S. gas prices falling US26¢ to US$2.88 per gallon from US$3.14 a month ago. That, he said, is equivalent to a US$40-billion tax cut that will benefit various sectors including transportation, energy-dependent manufacturers and segments of the consumer discretionary space such as restaurants, electronics, and music and book stores."

Read Also: Why Bottom Falling Out Of Oil Isn't All That Bad by David Rosenberg via The National Post

4) Recession Is The New Stimulus by Jeffrey Snider via Alhambra Partners

"At this point the idea of 'decoupling' enters as if it were valid today in a way it was totally absent in 2008 (the last time “decoupling” was so prevalent). In other words, the global economy may be sinking but the US is supposed to be the bright shining light of contrary good fortune. Thus, less demand around the world is expunged from the domestic trend of rising production and scenarios of import price competition. Of course, I think that is nothing more than the same wishful thinking that drove the 2008 version, but also that it is plainly obvious that emerging market demand for energy is a full part of the lack of forward demand up the supply chain. China may be slowing, but it’s not because China is slowing on its own, rather the US is buying a lot less from China (and everywhere else).

GDP is a spreadsheet or regression with variables to be moved around and nothing more to 'economists.' How else can you arrive at the idea that rapidly gaining bearishness in markets with trillions and trillions on the line is now the go-to 'stimulus?' Maybe the global economy, including the US, will get so bad it will be positively booming."

Read Also: Oil Price Drops - Don't Panic, Really by Cyrus Sanati via Fortune

5) Steep Slide In Oil Prices Is Blessing For Most by James Stewart via The New York Times

"The plunge in oil prices — to about $66 a barrel from over $107 in late June — has many pundits wringing their hands. They have cited the risks of falling prices and social and political unrest overseas, not to mention the economic threat to the booming mid-American oil basin, running from Texas to North Dakota and Alberta.

But if history is any guide, it’s hard to see falling oil prices as anything but good news for everyone whose fortunes aren’t tied to oil, which is to say, most of the world’s population."

Read Also: Plunging Oil Prices Will Starve The World Of Economic Fuel by Chris Martenson via MarketWatch


Read This: Dollar Surge Endangers Global Debt Edifice Warns BIS by Ambrose Evans-Pritchard via The Telegraph

"The BIS has particular authority since its job is to track global lending. It was the only major body to warn of serious trouble before the Great Recession - and did so clearly, without the usual ifs and buts.

It now warns that the world is in many ways even more stretched today than it was in 2008, since emerging markets have been drawn into the global debt morass as well, and some have hit the limits of easy catch-up growth."


"Let me tell you something that we Israelis have against Moses. He took us 40 years through the desert in order to bring us to the one spot in the Middle East that has no oil!" - Golda Meir

Have A Great Weekend

Lance Roberts

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. 

© Streettalk Live

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The Organization of the Petroleum Exporting Countries (OPEC) meeting ended on 11/27/14, Thanksgiving Day, with the decision to leave their production quota unchanged and no clarity on when a cut might be forthcoming. The lack of any quota cut, combined with little indication that OPEC were particularly focused in the short term on quota compliance, caught the market by surprise. Crude oil prices and energy equities fell sharply.

We have reflected on the meeting outcome and its implications.

Are OPEC dysfunctional or is Al Naimi of Saudi just being savvy?

We think probably the latter, and reiterate two important criteria for Saudi:

  1. Saudi is interested in the average price of oil that they get; they have a longer investment horizon than most other market participants
  2. Saudi wants to maintain a balance between global oil supply and demand to maintain a price that is acceptable to both producers and consumers

On further analysis, Saudi’s decision to not shoulder an OPEC production cut is consistent with both of the above objectives.

We were not particularly surprised at the ‘no cut’ decision from OPEC, but we had not expected the lack of clarity in their accompanying comments nor the size of the market reaction.

The average price of Brent in 2014 will be around $100, even if it averages $70 for the rest of the year.  If it stays at $70 until April, then averages $90 until December 2015 and then $105 in 2016 and 2017, the average for 2015-17 would be just under $98 per barrel – a reduction that they would hardly notice. We believe that Saudi went to the meeting perfectly willing to cut production to put a floor under the price but were unwilling to take the responsibility alone. While Kuwait and the United Arab Emirates (UAE) would have likely supported such a move, in our opinion, agreement from other members of OPEC about the size of the cut and who within OPEC should shoulder the burden was clearly not forthcoming. With Libya suffering civil unrest, Iranian production depressed by sanctions and Iraq still recuperating, there was clearly not enough cohesion among the other countries to generate a consensus. Saudi still no doubt has a vivid memory of the 1982-1985 period when it was the only OPEC member pulling its weight and took production down to 3 million barrels per day when its capacity was around 10 million barrels per day. In the face of improving non-OPEC supply this time, Saudi clearly does not want to play the role of the lone ‘central banker’ again.

So $78/bbl Brent, as it was at the time of the meeting, was not enough to galvanize the group to make a unanimous decision about production. Crude oil fell by nearly $10 per barrel in the subsequent days; maybe that is enough to see a change of opinion? It is certainly a level which should remind high spending US shale oil companies (as well as some of their more errant OPEC colleagues and Russia) of the need for more capital discipline. If oil prices do not find a floor in relatively short order, we would expect to see an unscheduled OPEC meeting called with an emergency quota reduction and an actual physical reduction in oil supply thereafter.

In terms of informational content, we noted that there was no mention this time of OPEC supporting $100 oil as a sensible oil price for both producers and consumers. This does not change our long-held $100 per barrel long term oil price view (it is driven by economic analysis rather than OPEC commentary), nor our belief that OPEC favor $100 long term.

That said, we sense that Saudi & co. are eyeing US shale oil production growth and would prefer a shallower oil price recovery for the time being, rather than a ‘V’ shaped recovery, i.e. one that doesn’t allow US oil growth to accelerate unabated. If we are right, it is logical for Saudi to tolerate a lower oil price for months rather than weeks.

Analyzing the decision of OPEC not to cut production quotas, it may well be that they are more comfortable with current supply/demand dynamics than many commentators are. Even on current estimates (pre-this period of lower oil prices), the International Energy Agency (IEA) expected second half 2015 supply/demand to be broadly in balance after a period of oversupply in Q1 2015. Real time indicators, such as Asian refining margins and Middle East to Asia tanker rates, are moving in line with season norms and broadly in line with historic ranges – there is no data indicating particular demand weakness in the oil market currently. This does not appear to be a re-run of 2008/09.

So, in all likelihood, Saudi (together with Kuwait and the UAE who are working well together) will probably keep production unchanged (and hence prices in the $60-80 range) until they see signs of capital discipline, particularly in the US. Note their aggregate production is around 15.5 million(m) barrels(b)/day, which is 2.65 million b/day above the level of 12.85 million b/day at the end of 2010. Because many Exploration & Production (E&P) companies have a fair amount of forward oil production hedged, we would expect this stance from OPEC to last for six months or so. Only then, once discipline has been reinstated, will they likely cut production to bring the price back up. North American E&P companies, ironically, should be very grateful to them – some pain now could lead to gain in later periods as investors find their worst fears of a collapse in the oil price much reduced.

What happens to oil supply in a lower price environment?

While oil demand looks fine, and will likely be buoyed by lower prices, we note that the global oil balance has loosened in recent months due to accelerating non-OPEC supply. A key question now is the reaction of non-OPEC supply to those lower prices, should they persist.

With US shale oil, we are in new territory. What we do know is that North American E&P companies live hand to mouth, converting one year’s cash-flows into next year’s capital spending. In 2014, capital expenditure (capex) is likely to be 15% higher than initially expected as a result of oil prices being higher than expected over the year (West Texas Instrument (WTI) likely to average $95 per barrel). Our estimate of US onshore production growth in 2014, accordingly, has gone from 0.8m b/day to 1.2 m b/day. So; 15% more capex brought 400,000 barrels per day of extra peak production. This is the marginal near term investment of the global oil and gas industry and is sufficiently ‘short cycle’ in its nature that we should see a capital spending reaction come through pretty quickly.

Assessing the speed of US oil supply response is difficult, but we thought we would highlight sensitivity analysis carried out very recently by Tudor Pickering Holt which shows:

  • A flat $80 WTI oil price from here would drive a drilling rig reduction of about 200 rigs and slow growth in US oil production to 0.7m b/day in 2015 and 0.4m b/day in 2016 (vs 1.2m b/day in 2014)
  • A flat $70 WTI oil price from here would drive a drilling rig reduction of over 500 rigs and slow growth in US oil production to 0.6m b/day in 2015 and to nearly zero in 2016 (vs 1.2m b/day in 2014)

So far, we have witnessed capex budgets for 2015 that are down around 15% from Continental Resources, 25% from Apache and 50% from Denbury Resources. Moreover, Apache is expecting to cut its rig count by around 50% in 2015. These are pretty dramatic cuts, and we expect to see a lot more announcements of similar size over the next 2-3 months.

We see Russian oil production already starting to roll over, even before lower prices have had a chance to bite. The Russian situation is worsened by sanctions; we are told, for example, that it is currently close to impossible to raise financing for new seismic activity. Lukoil have already announced a 13% cut to 2015 capex.  A combination of the effect of sanctions and a lower oil price could easily result in Russian production down by 0.5m b/day over the next 12 months.

Elsewhere, Brazil is likely to be a brighter spot for production, but the rest of non-OPEC will likely start to struggle further. Recall that in the aftermath of 2008/09 downturn, even though the fall in the oil price was brief, non-OPEC supply outside North America had shifted into decline by 2011.

What does this add up to for oil and equities?

We expect oil to trade in a $60-80 range in the near term. This is an unsupported level which may fluctuate significantly. If this price range persists, we expect North American unconventional supply growth to slow rapidly. And we expect OPEC to announce production cuts by late summer 2015 at the latest, if the physical market is not rebalancing quickly enough. This points to a possible rise in oil prices in the second half of 2015.

Longer term we think oil would likely recover to $100/barrel(bbl), possibly by the end of 2016, then we predict that it would inflate with the world economy, growing at 3% in real terms.

Clearly one’s view of energy equity valuations is dictated by future oil price assumptions. Energy equities have traded off sharply in sympathy with the recent fall in the oil price, such that they appear to discount a long-term crude price of around $70/bbl.

If oil eventually settles back at around the $100 level, we now see a potential upside in the sector of around 50%.

 

Jonathan Waghorn

Portfolio Manager, Guinness Atkinson Global Energy Fund

 

 

Opinions expressed are subject to change, are not guaranteed and should not be considered investment advice.

Mutual fund investing involves risk and loss of principal is possible.  The Fund invests in foreign securities which will involve greater volatility, political, economic and currency risks and differences in accounting methods. The Fund is non-diversified meaning it concentrates its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. The Fund also invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility. The Fund’s focus on the energy sector to the exclusion of other sectors exposes the Fund to greater market risk and potential monetary losses than if the Fund’s assets were diversified among various sectors. The decline in the prices of energy (oil, gas, electricity) or alternative energy supplies would likely have a negative effect on the fund’s holdings.

 The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus and summary prospectus contains this and other important information about the investment company, and it may be obtained by calling 800.951.6566 or visiting gafunds.com. Read it carefully before investing.

Distributed by Quasar Distributors, LLC

 

© Guinness Atkinson

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We expect the policy environment in 2015 to be supportive for stocks. As discussed in our Outlook 2015: In Transit, Republican control of Congress sets up a different policy dynamic in Washington that could have a meaningful impact on broad policy measures such as the Affordable Care Act (ACA), tax reform, the federal budget, and regulations in certain sectors such as energy and financial services. President Obama’s interest in building a legacy may lead to more compromise between the White House and Congress than seen in recent years.

Key Policy Issues to Watch in the Year Ahead

Here are our thoughts on the key policy issues for the rest of 2014 and through 2015:

  • ACA. The president’s signature policy initiative, the ACA (also known as Obamacare), is unlikely to be repealed next year, although there is a strong chance that the most unpopular parts of the law will be repealed. The impending Supreme Court ruling in mid-2015 about the legality of ACA subsidies affecting more than 7 million subscribers may force the Obama administration to work with Congress to make significant changes to
    the law. We would view any ACA-driven weakness as a potential buying opportunity in the healthcare sector, and we are watching for opportunities to take advantage of attractive growth prospects and strong innovation momentum.
  • Tax reform. Broad tax reform, which would likely take the form of closing corporate, personal, and other tax loopholes while lowering the overall tax rate, would be welcomed by markets. However, the Republican majority in the Senate is not large enough to deliver more than piecemeal changes at this point. Bipartisan agreement exists to lower the corporate tax rate; however, without a filibuster-proof Republican majority in the Senate in 2015, the path to accomplishing this is murky. The Republican win in the runoff election in Louisiana this weekend brings the total Republican Senate seats to 54, short of the 60 needed for a filibuster-proof majority.
  • Federal budget. Attempts to address the country’s long-term structural budget problems in 2015 may lead to a return of some policy-induced uncertainty. The big unknown is whether President Obama and the Republican-led Congress will find common ground in 2015 and cut a long-awaited, long-term deal on the budget. Though a long-term deal is unlikely, we are confident a short-term deal to fund the government will be reached ahead of this week’s deadline on December 11, 2014, which would avoid a government shutdown. The odds of another debt ceiling debacle (such as we had in 2011), when the U.S. Treasury reaches the debt ceiling in March 2015, are very low based on the rhetoric coming from both political parties, but the possibility does exist.
  • Energy. The Republican-controlled Congress may help quicken the pace of permitting for oil and gas production, encourage petroleum exports, and could push through the approval of the controversial Keystone XL Pipeline. Progress toward crude oil exports may be slow, given current low prices, although the risk that the pipeline would drive prices higher is a key reason why the project has been delayed. The potential build-out of the Keystone Pipeline, which enjoys bipartisan support, would be positive for energy
    and industrial companies — creating construction jobs, facilitating exports, and alleviating the U.S. oil inventory glut. Transportation stocks such as
    rails should continue to chug along as they benefit from increasing U.S. energy production.
  • Financial services. Under a Republican-controlled Congress, regulatory requirements for regional banks related to the Systemically Important Financial Institution (SIFI) criteria may be eased. The breakpoint for the designation may be raised, potentially to $100 billion in assets from $50 billion, alleviating some of the regulatory burden. Community banks may benefit from a reduction in loans they must retain on their balance sheets. Insurance companies with the SIFI designation may benefit from customized and less onerous capital adequacy guidelines.
  • Defense spending. Operations in Iraq and Syria and the Republican control of Congress help firm up the defense spending outlook and may give the industrials sector a small boost.


A Systemically Important Financial Institution (SIFI) is any firm, as designated by the Federal Reserve, whose collapse would pose a serious risk to the economy.

Presidential Cycle Tailwind

Beyond specific policies, the political calendar in 2015 may also potentially hold good news for stocks. In 2015, we will enter year three of the presidential cycle, historically the best of the four years. This performance pattern, which we believe is at least partly related to pre-election posturing, is shown in Figure 1. Since 1950, during the other three years of the presidential cycle (inauguration year, year two, and the election year), stocks gained an average of about 6%. But during year three (the year prior to the presidential election), stocks have historically produced an average gain of 17%.

These patterns don’t always hold of course. But with year three ahead in 2015, investors have this possible tailwind to add to other potentially positive policy developments under a Republican-controlled Congress. Given the generally favorable fundamental picture we see, including an improving economy, a low probability of recession, growing corporate profits, and well-contained inflation, we expect 2015 could be rewarding for stock investors.  n

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

INDEX DESCRIPTIONS

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-334723 (Exp. 12/15)

© LPL Financial

[description] => We expect the policy environment in 2015 to be supportive for stocks. The transfer of power to Republicans may have a meaningful impact on broad policy measures. Regardless of the political party in power, the year before the presidential election has historically been a good one for stocks. [author] => Burt White [legacyinterface_firm_id] => 490 [published_on] => 2014-12-11 [digest_date] => 2014-12-11 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-11 16:08:34 [created_by] => 948 [modified_on] => 2014-12-11 16:09:40 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2125 [hits] => 0 ) [4] => stdClass Object ( [legacyinterface_commentary_id] => 2060 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15298 [apv_conversation_id] => [content_type] => market-commentary [title] => 10 Legendary Investment Rules From Legendary Investors [slug] => streettalk_121114 [fulltext] =>

I live in Houston, which has been a huge economic beneficiary of the sustained increases in oil prices, drilling, refining and related processes. As such, the amount of wealth created in energy-related investments has been enormous and, not surprisingly, a vast majority of individuals have overweighted portfolios in energy with the expectations that "oil prices can only go up."  Of course, this sentiment is certainly understandable when you look at the performance of the energy sector versus the S&P 500 since the turn of the century. (Annualized return, capital appreciation only: S&P 500 3.24% vs Energy 17.71%)

 SP500-Energy-Perf-121014

Not surprisingly, the recent plunge in oil prices, and related energy stocks, has sent investors scurrying for cover. Previous "complacency" has turned to outright "panic" as portfolios, and retirement plans, have been crushed by plunging asset prices.

Strongly rising asset prices, and in this case commodity prices, have driven investor exuberance in the sector leading many to ignore deteriorating fundamentals, excessive leverage, and other financial diseases. However, when prices deteriorate rapidly, investment mistakes are quickly revealed.

It is important to remember that we are not investors. We are speculators placing bets on the direction of the price of an electronic share. More importantly, we are speculating, more commonly known as gambling, with our "savings." We are told by Wall Street that we "must" invest into the financial markets to keep those hard-earned savings adjusted for inflation over time. Unfortunately, due to repeated investment mistakes, the average individual has failed in achieving this goal.

With this in mind, this is an excellent time to review 10 legendary investment lessons from legendary investors. These time-tested rules about "risk" are what have repeatedly separated successful investors from everyone else. (Quote Source: 25iQ)


1) Jeffrey Gundlach, DoubleLine

"The trick is to take risks and be paid for taking those risks, but to take a diversified basket of risks in a portfolio."

This is a common theme that you will see throughout this post. Great investors focus on "risk management" because "risk" is not a function of how much money you will make, but how much you will lose when you are wrong. In investing, or gambling, you can only play as long as you have capital. If you lose too much capital but taking on excessive risk, you can no longer play the game.

Be greedy when others are fearful and fearful when others are greedy. One of the best times to invest is when uncertainty is the greatest and fear is the highest.

2) Ray Dalio, Bridgewater Associates

“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”

Nothing good or bad goes on forever. The mistake that investors repeatedly make is thining "this time is different." The reality is that despite Central Bank interventions, or other artificial inputs, business and economic cycles cannot be repealed. Ultimately, what goes up, must and will come down.

WallStreet wants you to be fully invested "all the time" because that is how they generate fees. However, as an investor, it is crucially important to remember that "price is what you pay and value is what you get." Eventually, great companies will trade at an attractive price. Until then, wait. 

3) Seth Klarman, Baupost

“Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”

Investor behavior, driven by cognitive biases, is the biggest risk in investing. "Greed and fear" dominate the investment cycle of investors which leads ultimately to "buying high and selling low."

 Investor-Psychology-Cycle-082814

4) Jeremy Grantham, GMO

“You don’t get rewarded for taking risk; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it.” 

Successful investors avoid "risk" at all costs, even it means underperforming in the short-term. The reason is that while the media and WallStreet have you focused on chasing market returns in the short-term, ultimately the excess "risk" built into your portfolio will lead to extremely poor long-term returns. Like Wyle E. Coyote, chasing financial markets higher will eventually lead you over the edge of the cliff.

5) Jesse Livermore, Speculator

“The speculator’s deadly enemies are: ignorance, greed, fear and hope. All the statute books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal….”

Allowing emotions to rule your investment strategy is, and always has been, a recipe for disaster. All great investors follow a strict diet of discipline, strategy, and risk management.

6) Howard Marks, Oaktree Capital Management

“Rule No. 1:  Most things will prove to be cyclical. – Rule No. 2:  Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.”

As with Ray Dalio, the realization that nothing lasts forever is critically important to long term investing. In order to "buy low," one must have first "sold high." Understanding that all things are cyclical suggests that after long price increases, investments become more prone to declines than further advances. 

7) James Montier, GMO

"There is a simple, although not easy alternative [to forecasting]... Buy when an asset is cheap, and sell when an asset gets expensive.... Valuation is the primary determinant of long-term returns, and the closest thing we have to a law of gravity in finance."

"Cheap" is when an asset is selling for less than its intrinsic value. "Cheap" is not a low price per share. Most of the time when a stock has a very low price, it is priced there for a reason. However, a very high priced stock CAN be cheap. Price per share is only part of the valuation determination, not the measure of value itself.

8) George Soros, Soros Capital Management

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

Back to risk management, being right and making money is great when markets are rising. However, rising markets tend to mask investment risk that is quickly revealed during market declines. If you fail to manage the risk in your portfolio, and give up all of your previous gains and then some, then you lose the investment game. 

9) Jason Zweig, Wall Street Journal

“Regression to the mean is the most powerful law in financial physics:Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.”

The chart below is the 3-year average of annual inflation-adjusted returns of the S&P 500 going back to 1900. The power of regression is clearly seen. Historically, when returns have exceeded 10% it was not long before returns fell to 10% below the long-term mean which devasted much of investor's capital.

Reversion-To-The-Mean-121014

10) Howard Marks, Oaktree Capital Management

“The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” 

The biggest driver of long-term investment returns is the minimization of psychological investment mistakes. As Baron Rothschild once stated: "Buy when there is blood in the streets." This simply means that when investors are "panic selling," you want to be the one that they are selling to at deeply discounted prices. The opposite is also true. As Howard Marks opined: “The absolute best buying opportunities come when asset holders are forced to sell.”


As an investor, it is simply your job to step away from your "emotions" for a moment and look objectively at the market around you. Is it currently dominated by "greed" or"fear?"  Your long-term returns will depend greatly not only on how you answer that question, but to manage the inherent risk.

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” - Benjamin Graham

Lance Roberts

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. 

© Streettalk Live

[description] => I live in Houston, which has been a huge economic beneficiary of the sustained increases in oil prices, drilling, refining and related processes. As such, the amount of wealth created in energy-related investments has been enormous and, not surprisingly, a vast majority of individuals have overweighted portfolios in energy with the expectations that "oil prices can only go up." [author] => Lance Roberts [legacyinterface_firm_id] => 400 [published_on] => 2014-12-11 [digest_date] => 2014-12-11 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-11 16:13:51 [created_by] => 948 [modified_on] => 2014-12-11 16:15:50 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2126 [hits] => 0 ) [5] => stdClass Object ( [legacyinterface_commentary_id] => 2061 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15299 [apv_conversation_id] => [content_type] => market-commentary [title] => Global Carry Is Correcting [slug] => dynamika_121114 [fulltext] =>

Disclaimer

The information, tools and material presented herein are provided for informational purposes only and are not to be used or considered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities, investment products or other financial instruments, nor to constitute any advice or recommendation with respect to such securities, investment products or other financial instruments. This research report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments.

 

 

 

The day after Thanksgiving we noted that Global Carry has gone parabolic and needs to be watched carefully. It has been mildly correcting since and we encourage investors to stay cautious. We also review where we stand in terms of Risk On/Risk Off factor.

As we have recently explained elsewhere[1] Global Carry is of paramount importance in current financial marketplace of zero or near zero interest rate policies.

Since the Taper Tantrum the Global Carry factor has performed as follows

You can see that the recent move was somewhat parabolic[2] and we hit top on the day after Thanksgiving which was subsequently followed by disturbing ongoing correction.

 

 

Below we refresh our Global Carry proxy portfolios

- SPX E-mini future plus 10y note future:

- US dollar index (“cleanest dirty sheet”) plus DJ index future plus two (shorter duration) 5y note futures:

It is worth to be very careful with the Global Carry at the moment.
Another source of ongoing concern is the Risk On/Risk Off factor which it seems might be intended to come back off the recent Risk Off lows where it stayed for a while after its 15th of October peak:

While nothing dramatic here yet and holiday season is supposed to be Risk Off environment it is worth to be watched carefully too (it can be easily traced in equities, especially Nikkei, and Japanese yen).

 

© Dynamika Capital L.L.C.

 



[1] “Global Carry a.k.a. Risk Parity”, Dynamika Commentary, 16-Oct-2014

[2]  “Global Carry gone parabolic?”, Dynamika Commentary, 29-Nov-2014

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NEW YORK – Children, it has long been recognized, are a special group. They do not choose their parents, let alone the broader conditions into which they are born. They do not have the same abilities as adults to protect or care for themselves. That is why the League of Nations approved the Geneva Declaration on the Rights of the Child in 1924, and why the international community adopted the Convention on the Rights of the Child in 1989.

Sadly, the United States is not living up to its obligations. In fact, it has not even ratified the Convention on the Rights of the Child. The US, with its cherished image as a land of opportunity, should be an inspiring example of just and enlightened treatment of children. Instead, it is a beacon of failure – one that contributes to global sluggishness on children’s rights in the international arena.

Though an average American childhood may not be the worst in the world, the disparity between the country’s wealth and the condition of its children is unparalleled. About 14.5% of the American population as a whole is poor, but 19.9% of children – some 15 million individuals – live in poverty. Among developed countries, only Romania has a higher rate of child poverty. The US rate is two-thirds higher than that in the United Kingdom, and up to four times the rate in the Nordic countries. For some groups, the situation is much worse: more than 38% of black children, and 30% of Hispanic children, are poor.


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© Project Syndicate

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Looking ahead to 2015, the labor market is expected to play the key part in the Fed’s path to policy normalization. However, as we learned from New York Fed President Dudley last week, the Fed will also consider the reaction in financial markets.

Recall that the employment report is comprised of two separate surveys. The Establishment Survey, which covers about 144,000 businesses and about 554,000 individual worksites, yields data on nonfarm payrolls, hours, and earnings. The Household Survey, which samples about 60,000 households, provides data on the unemployment rate and labor force participation (as a rule, the Household Survey does not generate good estimates of levels, such as the size of the labor force or the number of unemployed, but you do get reasonable estimates of ratios, such as the unemployment rate).

Job growth has been relatively strong this year. In fact, in the first 11 months, nonfarm payrolls have risen more than in any year since 1999. Nonfarm payrolls were reported to have risen by 321,000 in November, the largest monthly gain in nearly three years. However, one should take this large gain with a grain of salt. There is a fair amount of noise from month to month and the data are subject to revision. Still, the underlying trend in payrolls is encouraging. Average hourly earnings rose 0.4%, but that too is subject to revision and followed a modest 0.1% rise in October – up 2.1% from a year ago, still well below what might be considered a “normal” pace (3.5% to 4%).

The Household Survey data were less impressive in November. The unemployment rate was unchanged at 5.8%. The employment/population was flat (at 59.2%), up only gradually over the last year (58.6% in November 2013). The e/p ratio for the key age cohort, those aged 25-54, was up moderately over the last year (76.9%, vs. 76.0%), suggesting that labor market slack is being taken up only gradually.

The percentage of people working involuntarily part time and the long-term unemployment rate have both been improving, but they remain relatively high by historical standards.

Monetary policy is expected to be driven by Fed officials’ interpretations of the job market data in the months ahead. How much slack remains in the job market? How rapidly is that slack being taken up? How much wage pressure are we likely to see, and will firms be able to pass higher labor costs along? These are going to be hard question to answer. As we saw in the November Employment Report, the data often send conflicting messages. Monetary policymakers will have to weigh the evidence, but also use that evidence to make projections.

Last week, New York Fed President William Dudley presented his 2015 economic outlook and the implications for monetary policy. What stood out were his comments on the Fed’s reaction to the financial markets’ reaction to monetary policy. The Fed not only has to react to what the data mean for the economic outlook. It also has to react to changing financial conditions. Consider the unhelpful taper tantrum in 2013, when the Fed didn’t really do anything, vs. this year’s drop in bond yields as the Fed gradually reduced its monthly asset purchases. The markets could overreact to Fed policy signals or move in the wrong direction. It’s enough to make your head spin. The October FOMC minutes show that officials were fearful that financial market participants could misinterpret a decision to abandon the “considerable time” phrase. What might the markets do when the Fed signals that a rate hike is imminent?

Ultimately, investors should not fear the Fed. The first hike in short-term interest rates should be viewed as a natural consequence of the improvement seen in the overall economy. There is some danger that the markets might overreact, but the Fed is likely to take that overreaction into account as it considers possible further action – 2015 is going to be fun!

© Raymond James

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“Think of it this way. Lower oil prices are to America what low labor prices were to the BRICs!”... Sara Eisen, CNBC

As most of you know I was in New York City most of last week seeing institutional accounts, doing media and speaking at various events. One of the media appearances was to co-host CNBC’s “Closing Bell” on Tuesday, with the sagacious Sara Eisen, who unsurprisingly gave me the quote of the week. The quote was, “Think of it this way, lower oil prices are to America what lower labor costs were to the BRICs!” For the most part, the balance of the week was spent seeing institutional accounts where I was repeatedly asked about the declining oil prices and if that was going to kill the capital expenditure cycle along with the recent employment gains. My response was, “I don’t believe it!” Our energy team, which I consider to be one of the best on the Street, came out with a MAJOR “call” a few weeks ago stating, “We think crude oil prices are in a bottoming phase.” Plainly I agree, although oil prices have subsequently gone lower than I have been expecting. To this point, I spent a few nights last week at Bobby Van’s across from the entrance to the New York Stock Exchange, where I tipped copious glasses of wine with the good folks of Friends of Fermentation (FOF). In attendance were CNBC’s Bob Pisani and his new producer Jill, the always brilliant Arthur Cashin, a number of portfolio managers (PMs), prime/floor brokers, analysts, etc. I actually promised to send my friend Stan Salvigsen’s treatise titled “The Inflation Handbook,” written when Stan was at Cyrus Lawrence in the early 1980s, to Arthur. Nevertheless, the consensus of the good folks at FOF was that oil prices are indeed in a bottoming phase. If correct, this implies buying the Energy complex into year’s end could prove to be the trade of the year for 2015.

In attendance at FOF was charter member Eric Kaufman, founder and portfolio manager of VE Capital, who knows more about the Master Limited Partnership space (MLPs) than anyone I know. Eric has been telling me for years to avoid the “upstream MLPs,” and to invest in the “midstreams,” and that advice has been spot on! Eric thinks that during tax-loss selling season we are going to get a sentinel chance to buy the high yielding “midstream MLPs” at bargain prices; and, I agree. Also in attendance at Thursday’s FOF was the eagle-eyed economist Joe Brusuelas, who recently joined McGladrey as their Chief Economist after years at Bloomberg. I actually had a conversation with Michael Bloomberg when I was at Bloomberg last week to do some media, and as I understand it, the question du jour was, “Who is responsible for the departure of the best economist we have ever had?” Best economist indeed for at Thursday’s FOF confab Joe told me his number for Friday’s employment number was 320,000. To be sure, Friday’s figures were hard to argue with regarding their strength. Such strong figures were not anticipated by me, although I continue to think the economy is stronger than the surface figures suggest.

Speaking to the employment numbers, the headline figure showed November payrolls increased by an eye-popping 321K versus the expectation of a +230K “print.” Even considering the government’s tweaking of the seasonal adjustments, it is hard to argue Friday’s report was not strong. Moreover, the previous two months were revised upward by 44K. Also encouraging was that average hourly earnings rose by +0.4% (vs. the +0.2%E), and are now up +2.4% YoY, while the average work week expanded to 34.6 hours for the best reading since May 2008. There were some negative discussions from the talking heads about the continuing low workforce participation rate of 62.8%, but as I have said in past missives, I think this is a structural event and thereby nothing to worry about. To wit, there are somewhere between 10,000 and 15,000 baby boomers retiring daily, depending on whose figures you want to use, and that impacts the participation rate. There is also a continuing surge in the folks joining the disability rolls, and many of the millennials are self-employed, both of which negatively affect the participation rate. Further, 10 years ago if you committed a felony 30 years prior, nobody could find out about it. Well, they can find out about it now given the much more stringent background checks, and this too is negatively impacting the participation rate by keeping people off of the employment rolls. The bottom line is the slack in the workforce is dissipating and wage growth is likely to rise in the years ahead.

While I met with numerous institutional accounts, there were two that really stood out. The hour and a half I spent with my friend Phil Orlando at Federated was one of them. The Federated gang from Pittsburg and Boston were also dialed in for a two-way discussion that drew remarkably the same conclusions. Profits should strengthen in 2015, as should the capex cycle, and I believe Phil’s boss (Stephen Auth) targeted 2350 for the S&P 500 (SPX/2075.37) for 2015, which would be consistent with my “up” 10% - 12% in 2015. Every year Mr. Auth’s year-end target price for the SPX is higher than most and every year he seems to be right. It will be interesting to see if he uses that 2350 target in this year’s “roundtable.”

The other interesting meeting was with the folks at Prudential who manage their real estate assets. David Hunt is the CEO of Prudential Investment Management and Marc Halle is one of the portfolio managers. As readers know, our fundamental real estate team is fairly sanguine on the homebuilders currently, believing they have out-run their fundamentals. We are, however, continuing to play that space with the second derivative name Weyerhaeuser (WY/$35.53/Strong Buy). The REITs are another story. Pru’s Marc Halle began by noting the REITs are probably in a sweet spot with commercial properties already contracted for years to come. He likened it to a bond where you look at duration. In a REIT, hotels, since they rent on a night-to-night basis, have a duration that is very short and can re-price quickly. Obviously office space, malls, etc. have a longer duration. He thinks REITs on average yield 4%, will get ~4% internal growth and achieve somewhere between 2% - 3% external growth. That implies a 10% - 12% total return, which is what I forecasted for the SPX this year and what I am looking for in 2015. Marc believes European real estate is expensive with “cap rates” below 5% and that there is no turnaround for France any time soon. He likes the East and West Coast properties in the U.S. and said that Middle America is his favorite Emerging Market (EM). Speaking to EMs, Marc favors Hong Kong and Japan with potential returns of 30% to 35%. Some of the names from our REIT Priority List that have Strong Buy ratings from our fundamental analysts are: American Residential Properties (ARPI/$17.59), Kite Realty (KRG/$27.34) and Sovran Self Storage (SSS/$85.54). Or, you can just buy Marc’s mutual fund, the Prudential Global Real Estate Fund (PURAX/$24.76).

The call for this week: So far the early month weakness has failed to show up, which typically sets the stage for the Santa Clause rally. I have repeatedly stated that it is tough to sell stocks off in the ebullient time-frame between Thanksgiving and the New Year. It can happen, but it is pretty rare! As Joe Slavin, another FOF member, writes, “We have a large number of stocks breaking above past tops to new all-time highs. All-time highs leave just two types of sellers, shorts and profit takers [meaning] stocks can accelerate [on the upside]. These breakouts, and neutral trending bullish [trends] are not necessarily at buy junctures, however both patterns can drive the [equity] markets higher quickly. Add to this the number of bullish names versus bearish [names], and the odds favor we trade to the upside.” Plainly, I agree! This morning, however, there is price weakness with the SPX preopening futures off 6 points at 6:00 a.m. as oil falls again, Italy is downgraded, China’s November imports shrink, German industrial output falls short of expectations, Japan’s economy softens, and the U.S. dollar trades higher. All of this caused one savvy seer to exclaim, “If Santa fails to call, the bear will roam on Broad and Wall.”

© Raymond James

[description] => As most of you know I was in New York City most of last week seeing institutional accounts, doing media and speaking at various events. One of the media appearances was to co-host CNBC’s “Closing Bell” on Tuesday, with the sagacious Sara Eisen, who unsurprisingly gave me the quote of the week. The quote was, “Think of it this way, lower oil prices are to America what lower labor costs were to the BRICs!” [author] => Jeffrey Saut [legacyinterface_firm_id] => 356 [published_on] => 2014-12-11 [digest_date] => 2014-12-11 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-11 16:28:45 [created_by] => 948 [modified_on] => 2014-12-11 16:28:56 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2130 [hits] => 0 ) [9] => stdClass Object ( [legacyinterface_commentary_id] => 2065 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15303 [apv_conversation_id] => [content_type] => market-commentary [title] => Three Winning Arguments for Japan [slug] => blackrock_121114 [fulltext] =>

I travel to Japan every year, normally around early December. The more time I spend there, the more I come to realize what a uniquely distinct country it is. On my trip last week, one of my Japanese colleagues pointed out that Tokyo was starting to allow taller office buildings. I assumed the previous limitation was a function of Japan’s location in a geologically active part of the Pacific. My friend politely laughed. The injunction was due to the fact that no building was supposed to look down on the Imperial Palace.

Whereas city ordinances kept Japanese office buildings relatively shorter, up until recently economic stagnation, deflation and sclerosis had kept Japanese stocks from soaring.

This has obviously changed in recent years. Japanese stocks have been among the best global performers over the past couple of years. I have been positive on this market for some time now, and despite a shaky start to the year and the current recessionary environment, I maintain that view. I would highlight three arguments:

Value. Japanese stocks remain some of the cheapest in the developed world. While Japanese equities rallied sharply in 2013, unlike the United States the gains came from earnings growth rather than multiple expansion. This has left Japan’s stock market a relative bargain in a world where few asset classes are cheap.

Multiple Catalysts. Undervaluation without a catalyst may just be a value trap, but there are several potential catalysts for further gains in Japanese equities: ultra-loose monetary policy, which should continue in 2015, aggressive buying of domestic shares by Japanese pension funds, and rising profitability thanks to share buybacks.

Reforms. Although I would agree that Prime Minister Shinzo Abe has under-delivered on the so-called ‘Third Arrow’ of structural reforms, there have been a few, notable accomplishments. Corporate governance has improved with more outside directors, and female workforce participation is on the rise. Another potential positive development: A Republican Senate makes the Trans-Pacific Partnership, a regional free-trade agreement, marginally more likely to pass. Should it pass, this would be a major victory for Japanese consumers and the economy.

One final point. One of the risks to my view on Japan is that the early election on December 14 could produce a nasty surprise for Prime Minister Abe and the ruling Liberal Democratic Party (LDP) coalition. While market participants see the LDP losing a few seats in the lower house of the Parliament, they are not expecting the ruling party to give away its majority, something that could be a risk factor.

But on the contrary, based on my conversations with Japanese investors and a recent article in a local newspaper, a seemingly lack of viable candidates from the rival Democratic Party of Japan (DPJ) suggests that the LDP may actually increase its majority. To the extent that a bigger majority emerges and the prime minister uses the mandate to push forward more aggressively on structural reforms, I believe Japanese stocks may continue to rise.

Source: Bloomberg

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

 This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

 ©2014 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

iS-14184

[description] => I travel to Japan every year, normally around early December. The more time I spend there, the more I come to realize what a uniquely distinct country it is. On my trip last week, one of my Japanese colleagues pointed out that Tokyo was starting to allow taller office buildings. I assumed the previous limitation was a function of Japan’s location in a geologically active part of the Pacific. My friend politely laughed. The injunction was due to the fact that no building was supposed to look down on the Imperial Palace. [author] => Russ Koesterich [legacyinterface_firm_id] => 50 [published_on] => 2014-12-11 [digest_date] => 2014-12-11 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-11 16:33:53 [created_by] => 948 [modified_on] => 2014-12-11 16:34:11 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2131 [hits] => 0 ) [10] => stdClass Object ( [legacyinterface_commentary_id] => 2066 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15304 [apv_conversation_id] => [content_type] => market-commentary [title] => European Small-Caps: Focus on Companies, Not Countries [slug] => bernstein_121114 [fulltext] =>

Growth in the euro area has slowed sharply, but that’s not true for all companies in the region. We think worries about Europe’s recovery may offer investors the chance to buy quality, small-cap stocks for less than they would pay for similar-caliber companies elsewhere.

Investors are right to be concerned about Europe’s combination of low growth and low inflation. But here’s something to keep in mind: Even when the economy is struggling, some companies will continue to deliver sustainable and profitable growth. And if fundamentally attractive stocks can be had at a discount simply because of where they’re listed, that may represent an opportunity.

The key is figuring out where the best value lies. In our view, there is a compelling opportunity in the European small-cap segment, especially among what we define as “quality growth” names. The best of the bunch offer growth and quality at a discount.

Quality Companies for Less
We recently analyzed a cross-section of nonfinancial companies from various regions, with market capitalizations below $7 billion. To identify a basket of “quality growth” stocks from each region, we used the extensive Credit Suisse Holt database to rank all companies based on EPS growth and excess returns, measured as return on invested capital over cost of capital. Only those companies that landed in the top 40% for both returns and growth made it into the regional baskets. To compare valuations, we relied on the economic P/E ratio, which measures a firm’s value relative to the cash flow it generates.

Here’s what we found: European “quality growth” companies, which include euro-area and non-euro-area firms, are trading at a significant discount to their smaller-cap peers in other regions. This doesn’t appear to be justified by the vast regional differences in quality or growth (Display 1).

In fact, expected earnings growth among “quality growth” small-cap European companies was second only to quality-growth small-caps in North America. It was in line with those in emerging markets and ahead of those in Japan and other developed Asian markets.

European small-caps also score higher on quality than small-caps from emerging markets and Japan. They were about on par with those in North America, but available at a cheaper price (Display 2).

Furthermore, our analysis suggests that European companies have the most potential to improve returns. Corporate profit margins and revenues relative to company assets are depressed everywhere, thanks to tepid global growth. But they are most depressed in Europe. That means returns should improve as a more sustainable European recovery takes hold.

More Monetary Stimulus on the Way
To be sure, Europe’s economic health could get worse before it gets better—a risk that even the best-managed regional companies face. Fortunately, the European Central Bank seems to recognize this risk and has signaled its intentions to expand monetary stimulus. There are certainly execution risks, but also ample room for economic stimulus, which could steer the euro area away from deflation.

And we believe that a gradual recovery in Europe may provide further upside for the cyclical industrial and consumer-discretionary stocks that comprise more than half of the top-quality European SMID-cap companies in our analysis.

In our view, investors looking to add diversification and growth potential to their equity portfolios shouldn’t be frightened by Europe’s macroeconomic malaise. With the proper fundamental analysis, investors can still find value in European small-cap stocks. The trick is to remember that, when it comes to stocks, you’re buying companies, not countries.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.AllianceBernstein Limited is authorized and regulated by the Financial Conduct Authority in the United Kingdom.

Liliana Castillo Dearth is Team Leader and Portfolio Manager for the International Discovery Equity Portfolio, and Alan Connery is a Portfolio Manager for the International Discovery Equity Portfolio, both at AllianceBernstein (NYSE:AB).

© AllianceBernstein

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Stock market leadership virtually always changes when volatility significantly spikes, and the 2008 bear market was no exception. Credit-related asset classes led the markets for the decade prior to 2008 as the global credit bubble inflated.

Since 2008’s bear market, however, leadership has significantly changed and credit-related asset classes have generally underperformed plain, old-fashioned stocks.

Chart 1 below shows the relative performance of credit-related asset classes versus the S&P 500® from 1998 to 2008 and from 2008 to present. The deflation of the global credit bubble has clearly hurt the performance of credit-related asset classes.

The deflation of the global credit bubble remains the prime driver of our positioning for 2015. We continue to underweight or fully avoid credit-related asset classes.

Chart 1:

*Private Equity Performance available through 6/30/14

Source: Richard Bernstein Advisors LLC, MSCI, Standard & Poors, BofA Merrill Lynch, Bloomberg, Cambridge Associates. For Index descriptors, see "Index Descriptions" at end of document

1.  ECB causes Europe to flounder

The European Central Bank (ECB) seems to be trying very hard to be among the worst central banks in history. The ECB actually tightened monetary policy over the past couple of years despite mounting evidence of budding deflation. One does not need a Ph.D. in Economics to know that tightening monetary policy in the face of deflation and contracting private sector credit growth is not a sound monetary policy. The ECB’s continuous missteps have resulted in significantly subpar growth.

The ECB is now claiming they will significantly expand their balance sheet, and such actions might be bullish for European equities. However, recent data suggests they have so far only stopped tightening, and have yet to start easing. If they alter that policy, then European stocks might again be attractive, however, the ECB’s sclerotic policy reaction to building deflation warrants an underweight of European equities. Our portfolios remain underweight Europe, with exposure limited to large cap and defensive stocks.

2.  Japan grows market share

Early in my career at EF Hutton in 1986, our auto analyst stated in our morning meeting that Toyota felt they could gain market share from GM at 120 ¥/$. ¥/$ was 160 at the time, and the entire meeting broke up in laughter. No one could believe that the dollar would depreciate 25% versus the Yen and, if it ever did, Toyota would never gain market share. The Yen eventually traded to 80¥/$, and Toyota nearly put GM out of business.

The point to the story is that Japan at the time had a significant competitive advantage versus the United States. The fact that the Yen might appreciate was a minor hindrance to Japanese companies gaining market share versus US companies. Today, however, Japan’s competitive advantage has been whittled away by the combination of Japanese demographics, Japan’s lack of domestic investment in productive resources, and the improvement in productivity in other parts of the world (including the US).

In the absence of a competitive advantage, companies or countries are forced to compete on price in order to gain market share, and we believe depreciating the Yen is the only route for the Japanese economy to re-emerge within the time frame of most investors. We began this theme when ¥/$ was roughly 85, and we think the Yen may weaken significantly even from today’s depressed levels (roughly 120).

We remain overweight Japan with an emphasis on large cap exporters of finished goods.

3.  Treasuries for diversification…yes, still.

We have become somewhat notorious for our liking of treasuries as a portfolio diversifier. Although not as extreme as it was several years ago, Chart 2 shows the correlation of various asset classes to the S&P 500® and there are relatively few asset classes that have negative correlation to stocks. By including treasuries, we can take stronger risk positions within our multi-asset portfolios, but not increase overall portfolio volatility.

Chart 2:

Source: Richard Bernstein Advisors LLC, MSCI, Standard & Poors, HFRI, BofA Merrill Lynch, Bloomberg.

For Index descriptors, see "Index Descriptions" at end of document.

4.  High Yield Munis remain attractive

High yield municipal bonds are a sizeable portion of most of our multi-asset portfolios because we view them as the most attractive sector of the global fixed-income markets. It seems ironic to us that investors are taking all sorts of risks in sectors like emerging market debt, but refuse to look at US high yield munis.

Chart 3 shows the spread between high yield munis and Iraq government bonds. The spread implies that US high yield municipal bonds are riskier than Iraqi bonds. Isn’t there a brutal civil war taking place in Iraq? One might question fiscal responsibility in Illinois or Michigan, but they’re certainly not Iraq!

Chart 3:

5. Cheap High Beta

Whereas high-beta social media stocks and other “disruptor” stocks (as CNBC calls them) are extraordinarily expensive, other more traditional high-beta stocks appear historically undervalued.  Chart 4 shows the relative PE of low beta and high beta stocks within the S&P 500®.  This chart clearly suggests that investors remain very scared of traditional high beta stocks, but we have significant exposure to this traditional high-beta group which is historically undervalued.

Chart 4:

Our overall positioning of avoiding credit-related asset classes remains largely out-of-favor, and remains the cornerstone of our portfolios.  We will watch these themes closely and reposition accordingly should a more favorable cyclical backdrop potentially outweigh this secular trend.

INDEX DESCRIPTIONS:

The following descriptions, while believed to be accurate, are in some cases abbreviated versions of more detailed or comprehensive definitions available from the sponsors or originators of the respective indices. Anyone interested in such further details is free to consult each such sponsor’s or originator’s website.

The past performance of an index is not a guarantee of future results.

Each index reflects an unmanaged universe of securities without any deduction for advisory fees or other expenses that would reduce actual returns, as well as the reinvestment of all income and dividends.  An actual investment in the securities included in the index would require an investor to incur transaction costs, which would lower the performance results.  Indices are not actively managed and investors cannot invest directly in the indices.

World:  MSCI All Country World Index (ACWI®).  The MSCI ACWI® is a free-float-adjusted, market-capitalization-weighted index designed to measure the equity-market performance of global developed and emerging markets. 

S&P 500®:  Standard & Poor’s (S&P) 500® Index.  The S&P 500® Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad US economy through changes in the aggregate market value of 500 stocks representing all major industries.

S&P 500® High Beta: Standard & Poor’s (S&P) 500®  High Beta Index : The S&P 500® High Beta Index is designed to measure the performance of the 100 constituents in the S&P 500® that are most sensitive to changes in market returns. For this index, the market is represented by the performance of the S&P 500®.

Europe: MSCI Europe Index.  The MSCI Europe Index is a free-float-adjusted, market-capitalization-weighted index designed to measure the equity-market performance of the developed markets in Europe. The MSCI Europe Index consists of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom

Japan: MSCI Japan Index: The MSCI Japan Index is a free-float-adjusted, market-capitalization-weighted index designed to measure the equity-market performance of Japan. 

EM Equity:  MSCI Emerging Markets (EM) Index. The MSCI EM Index is a free-float-adjusted, market-capitalization-weighted index designed to measure the equity-market performance of emerging markets.

U.S. Small Caps:  Russell 2000 Index.  The Russell 2000 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the small-cap segment of the US equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index.  

Gold:  Gold Spot USD/oz Bloomberg GOLDS Commodity.  The Gold Spot price is quoted as US Dollars per Troy Ounce.

US Dollar: : InterContinentalExchange (ICE) US Dollar Index (DXY).  The ICE US Dollar Index, indicating the general international value of the USD, averages the exchange rates between the USD and six major world currencies, using rates supplied by some 500 banks. 

Commodities:  S&P GSCI® Index.  The S&P GSCI® seeks to provide investors with a reliable and publicly available benchmark for investment performance in the commodity markets, and is designed to be a “tradable” index. The index is calculated primarily on a world production-weighted basis and is comprised of the principal physical commodities that are the subject of active, liquid futures markets. 

REITS:  THE FTSE NAREIT Composite Index.  The FTSE NAREIT Composite Index is a free-float-adjusted, market-capitalization-weighted index that includes all tax qualified REITs listed in the NYSE, AMEX, and NASDAQ National Market.

Hedge Fund Index:  HFRI Fund Weighted Composite Index.  The HFRI Fund Weighted Composite Index is a global, equal-weighted index of over 2,000 single-manager funds that report to the HFR (Hedge Fund Research) database.  Constituent funds report monthly net-of-all-fees performance in USD and have a minimum of $50 million under management or a twelve (12)-month track record of active performance.  The Index includes both domestic (US) and offshore funds, and does not include any funds of funds. 

3-Mo T-Bills:  BofA Merrill Lynch 3-Month US Treasury Bill Index.  The BofA Merrill Lynch 3-Month US Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month.  The Index is rebalanced monthly and the issue selected is the outstanding Treasury Bill that matures closest to, but not beyond, three months from the rebalancing date.

Intermediate Treasuries (5-7 Yrs):  The BofA Merrill Lynch 5-7 Year US Treasury Index

The BofA Merrill Lynch 5-7 Year US Treasury Index is a subset of The BofA Merrill Lynch US Treasury Index (an unmanaged Index  which tracks the performance of US dollar denominated sovereign debt publicly issued by the US government in its domestic market).  Qualifying securities must have at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $1 billion. including all securities with a remaining term to final maturity greater than or equal to 5 years and less than 7 years.

Long-term Treasury Index:  BofA Merrill Lynch 15+ Year US Treasury Index.  The BofA Merrill Lynch 15+ Year US Treasury Index is an unmanaged index comprised of US Treasury securities, other than inflation-protected securities and STRIPS, with at least $1 billion in outstanding face value and a remaining term to final maturity of at least 15 years. 

Municipals:  BofA Merrill Lynch US Municipal Securities Index.  The BofA Merrill Lynch US Municipal Securities Index tracks the performance of USD-denominated, investment-grade rated, tax-exempt debt publicly issued by US states and territories (and their political subdivisions) in the US domestic market.  Qualifying securities must have at least one year remaining term to final maturity, a fixed coupon schedule, and an investment-grade rating (based on an average of Moody’s, S&P and Fitch).  Minimum size requirements vary based on the initial term to final maturity at the time of issuance.

High Yield Municipals: Barclays Municipal Custom High Yield Municipals Composite. The Barclays Municipal Custom High Yield Municipals Composite is calculated using a market value weighting methodology and it tracks the high-yield municipal bond market with a 75% weight in non-investment grade municipal bonds and a 25% weight in Baa/BBB-rated investment grade municipal bonds for liquidity and balance.

 High Grade Corporates:  BofA Merrill Lynch 15+ Year AAA-AA US Corporate Index.  The BofA Merrill Lynch 15+ Year AAA-AA US Corporate Index is a subset of the BofA Merrill Lynch US Corporate Index (an unmanaged index comprised of USD-denominated, investment-grade, fixed-rate corporate debt securities publicly issued in the US domestic market with at least one year remaining term to final maturity and at least $250 million outstanding) including all securities with a remaining term to final maturity of at least15 years and rated AAA through AA3, inclusive.  

Private Equity: The Cambridge Associates LLC U.S. Private Equity Index®.  The Cambridge Associates LLC U.S. Private Equity Index® is an end-to-end calculation based on data compiled from 986 U.S. private equity funds (buyout, growth equity, private equity energy and mezzanine funds), including fully liquidated partnerships, formed between 1986 and 2012. Pooled end-to-end return, net of fees, expenses, and carried interest.Historic quarterly returns are updated in each year-end report to adjust for changes in the index sample.

EM Sovereign (USD): The BofA Merrill Lynch US Dollar Emerging Markets Sovereign Plus Index. The BofA Merrill Lynch US Dollar Emerging Markets Sovereign Plus Index tracks the performance of US dollar denominated emerging market and cross-over sovereign debt publicly issued in the Eurobond or US domestic market. Qualifying countries must have a BBB1 or lower foreign currency long-term sovereign debt rating (based on an average of Moody’s, S&P and Fitch). Countries that are not rated, or that are rated “D” or “SD” by one or several rating agencies qualify for inclusion in the index but individual non-performing securities are removed. Qualifying securities must have at least one year remaining term to final maturity, a fixed or floating coupon and a minimum amount outstanding of $250 million. Local currency debt is excluded from the Index.

EM Sovereign (Local): The BofA Merrill Lynch Local Debt Markets Plus Index: The BofA Merrill Lynch Local Debt Markets Plus Index is designed to track the performance of sovereign debt publicly issued and denominated in the issuer's own domestic market and currency other than the more established top-tier sovereign markets. In order to be included in the Index, a country (i) must have at least $10 billion (USD equivalent) outstanding face value of Index qualifying debt (i.e., after imposing constituent level filters on amount outstanding, remaining term to maturity, etc.); and (ii) must have at least one readily available, transparent price source for its securities. In addition, the following countries are specifically excluded from the index: G10 countries, Euro members; all countries with a foreign currency long-term sovereign debt rating of AA3 or higher (based on an average of Moody’s,S&P and Fitch).

Iraqi Bonds: Republic of Iraq Sovereign, Unsecured, Maturity 01/15/2028, id number EF2306852

© Copyright 2014 Richard Bernstein Advisors LLC. All rights reserved.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS

Nothing contained herein constitutes tax, legal, insurance or investment advice, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument. Such an offer or solicitation may only be made by delivery to a prospective investor of formal offering materials, including subscription or account documents or forms, which include detailed discussions of the terms of the respective product, vehicle, service or instrument, including the principal risk factors that might impact such a purchase or investment, and which should be reviewed carefully by any such investor before making the decision to invest. Links to appearances and articles by Richard Bernstein, whether in the press, on television or otherwise, are provided for informational purposes only and in no way should be considered a recommendation of any particular investment product, vehicle, service or instrument or the rendering of investment advice, which must always be evaluated by a prospective investor in consultation with his or her own financial adviser and in light of his or her own circumstances, including the investor's investment horizon, appetite for risk, and ability to withstand a potential loss of some or all of an investment's value. Investing is  subject to market risks. Investors  acknowledge and accept the potential loss of some or all of an investment's value. Past performance is, of course, no guarantee of future results. Views represented are subject to change at the sole discretion of Richard Bernstein Advisors LLC. Richard Bernstein Advisors LLC does not undertake to advise you of any changes in the views expressed herein. 

About Richard Bernstein Advisors:

Richard Bernstein Advisors LLC is an independent investment adviser.  RBA partners with several firms including Eaton Vance Corporation and First Trust Portfolios LP, and currently has $3.4 billion collectively under management and advisement as of November 30, 2014.  RBA acts as sub‐advisor for the Eaton Vance Richard Bernstein Equity Strategy Fund, the Eaton Vance Richard Bernstein All‐Asset Strategy Fund and the Eaton Vance Richard Bernstein Market Opportunities Strategy Fund and also offers income and unique theme‐oriented unit trusts through First Trust. RBA is also the index provider for the First Trust RBA American Industrial RenaissanceTM ETF and the First Trust RBA Quality Income ETF. Additionally, RBA runs ETF asset allocation SMA portfolios at UBS and Merrill Lynch and on select RIA platforms.  RBA's investment insights as well as further information about the firm and products can be found at www.RBAdvisors.com.

[description] => Stock market leadership virtually always changes when volatility significantly spikes, and the 2008 bear market was no exception. Credit-related asset classes led the markets for the decade prior to 2008 as the global credit bubble inflated. Since 2008’s bear market, however, leadership has significantly changed and credit-related asset classes have generally underperformed plain, old-fashioned stocks. [author] => Richard Bernstein [legacyinterface_firm_id] => 370 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 16:35:27 [created_by] => 948 [modified_on] => 2014-12-10 16:35:45 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2116 [hits] => 0 ) [12] => stdClass Object ( [legacyinterface_commentary_id] => 2051 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15289 [apv_conversation_id] => [content_type] => market-commentary [title] => Interest Rates Have Nowhere To Go But Up? [slug] => streettalk_121014 [fulltext] =>

Earlier this week Daniel Druger and Liz McCormick wrote an article for Bloomberg entitled: "One Hundred Years Of Bond History Means Bears Destined To Lose." The crux of the article is contained within the following paragraph:

"With the longest-dated Treasuries now yielding less than half the 6.8 percent average over the past five decades, it’s not hard to see why forecasters say they’re bound to rise as the Federal Reserve prepares to raise interest rates following the most aggressive stimulus measures in its 100-year history."

The premise here is simple. With interest rates near their lowest levels on record, they have nowhere to go from here "but up." This is the consensus of virtually all of the analysts and economists on Wall Street which currently suggests that rates will rise to 3.88% next year on the 30-year treasury.

That was also the belief in June of 2013 when rates did spike on an emerging market bond rout. The majority of the mainstream media, and guru's like Bill Gross, claimed that the "bond bull market" was dead. At that time I wrote an article suggesting they would be quite wrong stating:

"For all of these reasons I am bullish on the bond market through the end of this year. Furthermore, with market volatility rising, economic weakness creeping in and plenty of catalysts to send stocks lower - bonds will continue to hedge long only portfolios against meaningful market declines while providing an income stream."

Since then rates have continued to be in a steady decline as real economic strength has remained close to 2% annually, deflationary pressures have risen and monetary velocity has fallen. The chart below is a history of long-term interest rates going back to 1857. The dashed black line is the median interest rate during the entire period.

Interest-Rate-LongTerm-30yr-120914-2

Interest rates are a function of strong, organic, economic growth that leads to a rising demand for capital over time. There have been two previous periods in history that have had the necessary ingredients to support rising interest rates. The first was during the turn of the previous century as the country became more accessible via railroads and automobiles, production ramped up for World War I and America began the shift from an agricultural to industrial economy.

The second period occurred post-World War II as America became the "last man standing" as France, England, Russia, Germany, Poland, Japan and others were left devastated. It was here that America found its strongest run of economic growth in it history as the "boys of war" returned home to start rebuilding the countries that they had just destroyed. But that was just the start of it.

Beginning in the late 50's, America embarked upon its greatest quest in history as man took the first steps into space. The space race that lasted nearly twenty years led to leaps in innovation and technology that paved the wave for the future of America. Combined with the industrial and manufacturing backdrop, America experienced high levels of economic growth and increased savings rates which fostered the required backdrop for higher interest rates.

Currently, the U.S. is no longer the manufacturing powerhouse it once was and globalization has sent jobs to the cheapest sources of labor. Technological advances continue to reduce the need for human labor and suppress wages as productivity increases. Today, the number of workers between the ages of 16 and 54 is at the lowest level relative to that age group since 1976. As discussed recently, this is a structural problem that continues to drag on economic growth as nearly 1/4th of the American population is now dependent on some form of governmental assistance.

Is Everyone Still Wrong?

This structural employment problem remains the primary driver as to why "everybody" is still wrong in expecting rates to rise.  As I addressed previously in "Interest Rate Predictions Meet Rule #9:"

Interest-Rates-GDP-Inflation-120914

"As you can see there is a very high correlation, not surprisingly, between these three components (inflation, economic and wage growth) and the level of interest rates. Interest rates are not just a function of the investment market, but rather the level of "demand" for capital in the economy. When the economy is expanding organically, the demand for capital rises as businesses expand production to meet rising demand. Increased production leads to higher wages which in turn fosters more aggregate demand. As consumption increases, so does the ability for producers to charge higher prices (inflation) and for lenders to increase borrowing costs.

However, in the current economic environment this is not the case. The need for capital remains low, outside of what is needed to absorb incremental demand increases caused by population growth, as demand remains weak. While employment has increased since the recessionary lows, much of that increase has been the absorption of increased population levels. Many of those jobs remain centered in lower wage paying and temporary jobs which does not foster higher levels of consumption."

Currently, there are few economic tailwinds prevalent that could sustain a move higher in interest rates. The reason is the higher interest reduces the flow of capital within the economy. For an economy that remains dependent on the generosity of Central Bankers, rising rates are not the outcome that "stock market bulls" want. 

The chart and table below show what happens to the financial markets, and the economy, when interest rates increase.

Interest-Rates-SP500-043014

Interest-Rates-SP500-Table-043014

The problem with most of the forecasts for the end of the bond bubble is the assumption that we are only talking about the isolated case of a shifting of asset classes between stocks and bonds.  However, the issue of rising borrowing costs spreads through the entire financial ecosystem like a virus. The rise and fall of stock prices has very little to do with the average American and their participation in the domestic economy. Interest rates, however, are an entirely different matter.

While there is not much downside left for interest rates to fall in the current environment, there is also not a tremendous amount of room for increases. Since interest rates affects "payments," increases in rates quickly have negative impacts on consumption, housing and investment.

This idea suggests is that there is one other possibility that the majority of analysts and economists ignore which I call the "Japan Syndrome." 

Japan-InterestRates-120914

Japan is has been fighting many of the same issues for the past two decades. The"Japan Syndrome" suggests that while interest rates are near lows it is more likely a reflection of the real levels of economic growth, inflation and wages. If that is true, then rates are most likely "fairly valued" which implies that the U.S. couldremain trapped within the current trading range for years as the economy continues to"muddle" along.

Will the "bond bull" market eventually come to an end?  Yes, eventually. However, the catalysts needed to create the type of economic growth required to drive interest rates substantially higher, as we saw previous to the 1960-70's, are simply not available today. This will likely be the case for many years to come as the Fed, and the administration, come to the inevitable conclusion that we are now caught within a"liquidity trap" along with the bulk of developed countries.

Lance Roberts

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management.

© Streettalk Live

[description] => Earlier this week Daniel Druger and Liz McCormick wrote an article for Bloomberg entitled: "One Hundred Years Of Bond History Means Bears Destined To Lose." The premise here is simple. With interest rates near their lowest levels on record, they have nowhere to go from here "but up." This is the consensus of virtually all of the analysts and economists on Wall Street which currently suggests that rates will rise to 3.88% next year on the 30-year treasury. [author] => Lance Roberts [legacyinterface_firm_id] => 400 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 16:38:04 [created_by] => 948 [modified_on] => 2014-12-10 16:39:15 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2117 [hits] => 0 ) [13] => stdClass Object ( [legacyinterface_commentary_id] => 2052 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15290 [apv_conversation_id] => [content_type] => market-commentary [title] => Dealing with Divergence [slug] => blackrock_121014 [fulltext] =>

Central bank and economic divergence have been the underlying themes in my recent writings, and these are having, and will continue to have, significant influence on financial market direction. Going into 2015, how does that impact your investments, and where should you focus your attention? This is the focus of BlackRock’s 2015 Market Outlook, released today.

First, some background. These last few post-crisis years could be called the Age of Recovery: The Federal Reserve and other central banks have kept interest rates extraordinarily low to try to revive their economies. In doing so, they’ve helped stocks, but the low rates have made it much more difficult for investors in need of income. In addition, a period of unusually low rates has had the predictable effect of pushing up valuations in several asset classes as investors stretch for yield.

Now we are entering what we at BlackRock are calling the Age of Divergence: The U.S., U.K. and select emerging markets are getting stronger while other regions—including much of Europe—are still struggling. The result is that central banks are beginning to take different paths, with the Fed setting a course for higher interest rates and the European Central Bank and Bank of Japan doing the opposite.

What does this mean for you and your investment portfolio in the New Year?

One of the consequences of the diverging central bank actions is that it should lead to a stronger dollar. That has implications for the markets, such as downward pressure on both commodities and inflation.

With equities, it is hard to find bargains, but we believe stocks are still the best place to be. But you’ll have to be even pickier about the stocks you select and consider expanding your investment horizons beyond the U.S. We prefer U.S. cyclical stocks, Japanese equities, and emerging markets in Asia, but are keeping an eye out for opportunities in Europe, where the looser monetary policy could help stocks, particularly cyclical companies.

As for fixed income, we would still tread lightly in the bond market. Short-term bonds will bear the brunt of a Fed rate hike. Indeed, as a write in in my weekly commentary, this is already starting to happen; the yield on the two-year U.S. Treasury rose last week to over 0.65%, the highest level since the spring of 2011. Longer-term rates, on the other hand, should inch up at a gentler pace and are likely to remain low relative to their history. But all of this means finding a steady income stream will continue to be a challenge.

This is the world as my BlackRock colleagues and I see it. Of course, as is always the case in financial markets, uncertainty is one of the few certainties. In particular, we believe that most of the geopolitical trouble spots throughout the world are ‘frozen conflicts’; few are likely to be reconciled over the next year. Here at home, the big risk would be a quicker tightening campaign by the Fed that takes investors by surprise.

Overall, however, investors should avoid the temptation to cash out all their gains. Stocks may not march upward in a straight line, but we believe they should continue to do relatively well in 2015—and better than bonds and cash.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.

This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

©2014 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

iS-14206

[description] => From the Age of Recovery to the Age of Divergence, we look forward to 2015 with an overview of the investment world and explore the different themes that will matter in the New Year. [author] => Russ Koesterich [legacyinterface_firm_id] => 50 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 16:42:02 [created_by] => 948 [modified_on] => 2014-12-10 16:42:18 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2118 [hits] => 0 ) [14] => stdClass Object ( [legacyinterface_commentary_id] => 2053 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15291 [apv_conversation_id] => [content_type] => market-commentary [title] => Who’s Really in The Kingdom’s Gun Sights? [slug] => advisorshares_121014 [fulltext] =>

By: Doug Holt, Energy Analyst for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (HYLD)

According to the EIA, U.S. crude oil imports averaged about 7.3 million barrels per day last week with Canadian barrels making up 3.2 million barrels of the total.1 U.S. commercial reserves increased by 1.9 million barrels week over week where total inventories fell 3.7 million barrels2 versus expectations of a build of 950,000.3 Are we at the beginnings of a rebalancing of the market? Possibly. New well permits across the top three fields in the U.S. have reportedly fallen off dramatically in November, and given the dynamics of shale production, this may quickly impair U.S. production growth forecasts.

It’s no secret that oil’s plummet from above $100/bbl to current levels has hit the North American oil industry hard. Both stocks and bond prices of E&P (exploration and production) and service companies in Canada and the U.S. have dropped markedly over the last couple of months. That said, the medium-term impacts of this price decline will likely not be felt quite so equally across the North American or, indeed, the global market due to fundamental differences in business models, existing leverage and currency arbitrages that certain producers enjoy.

We have discussed the challenges we see with the shale oil business model many times, specifically that the exceptionally high decline rates and the production costs lead to an expensive treadmill that we believe many of these companies can never get off of. Declines in U.S. shale are as high as 90-95% in the first two years.4 A sustainable production model in our view is not one that requires a company to race like mad to punch more holes in the ground just to maintain existing production.  That said, we acknowledge that there is definitely money to be made in tight oil and we like these plays at the project level, where payouts are quick and the wells are financed with the right term of debt (short-term, commensurate with the life of the project). But we do not support them as businesses that we can lend money to over the long term due to excessive capex requirements that lead to chronic negative free cash flow.

Numerous theories exist about why the Saudis elected not to cut production at the November 27th meeting. Ours quite simply is that the rapidly growing U.S. shale production in recent years, coupled with the return of missing barrels from the likes of Iraq and Libya, threw the market out of whack and resulted in a crude oversupply. The production adds from these regions have had the follow on consequence of creating an increasingly competitive market in Asia, where the Saudis have the vast majority of their market share. In an effort to protect market share and rebalance the market, the Kingdom has taken very deliberate action to target high cost shale producers at the margin who have used leverage to finance their operations. Do we think that the Russians, the rest of OPEC and the majors around the globe are involved in this? Yes we do.

The main opposition to this concept comes from the other main conspiracy theory that is floating around these days that is centered on Russia and goes like this: the Saudis and the U.S. are in collusion to punish Putin for his actions in the Ukraine. The Saudis support the U.S. in this because the quid pro quo here is that the Saudi’s get U.S. support in Middle East affairs, where ISIS is running amuck, and the U.S. gets to teach Putin a lesson. It’s not a bad theory, it just fails to recognize some economic realities that we have long known and have been exploiting, such as the currency differentials impacting the actual realized prices in various geographies.

The fate of resource based economies like Canada rest in the strength of commodity prices. The Canadian dollar tends to rise and fall with oil as a result of this.  As a consequence, Canadian producers have been partially insulated by the decline in the price of oil because of the fact they sell oil in US dollars (USD) but incur costs in Canadian dollars (CAD). Thus at a USD/CAD exchange of $1.135, which is where it approximately stands today, a Canadian producer is realizing a price of C$75.52 on WTI of $67.43 (in US$).6

Russia is also highly dependent on oil revenues for its economy. Much has been written and said about Russia’s need of $100 oil to balance its budget. Indeed, recent reports peg the impact of oil’s price decline as costing Russia about $100 billion per year. However, like Canada’s loonie, the ruble has devalued to the dollar along with the fall in the price of oil. The chart below represents the ruble’s decline over recent months in relation to the USD.7

When one considers the impact of the price decline on regional Russian crudes such as the East Siberian Pacific Ocean oil8, when coupled with the currency arbitrage of a falling ruble, it is clear the Russians aren’t the intended victim in this Saudi murder mystery. In fact, at the quoted exchange rates and a price of $69.32 for this type of crude at the time of writing, Russian producers are actually realizing a ruble price today that is only 4.5-5% less than what they were receiving in early June of this year.9 Yes, over the longer term a falling ruble will have far wider reaching impacts on the Russian economy and purchasing power, but one still has to ask the question of whether it is logical to think that making the whole world suffer just to show Putin he can’t misbehave is realistic?

Marginal production out of high cost sources like shale are clearly the easiest and most logical target of the Kingdom’s recent decision not to cut production. By killing off some of the shale production it’s a win for nearly everyone but the U.S. Eventually, we’d expect formerly displaced light oil imports will return to the U.S. and market share competition in places such as Asia will ease up.

At Peritus we have long been of the opinion that many shale producer business models are flawed and unsustainable, and now that oil has fallen so precipitously, cracks in already stretched balance sheets are starting to appear. Energy represents 18% of the U.S. high yield market.10 Capital expenditures commonly exceeded cash flows of many shale producers at $100/bbl. How do you think they will they fare at $70 with wells that decline by 90-95% every two years?

While calm waters are a ways off for the oil markets and along the way there will undoubtedly continue to be unexpected supply disruptions out of the Middle East and Africa that will add volatility to prices, we expect the medium to longer term supply and demand dynamics will lead to a rebound in oil prices, benefiting those that are able to withstand these shorter-term price dynamics.

1 Source: U.S. Energy Information Administration, Weekly Petroleum Status Report, week ending 11/28/14 (November 2008).

2 Source: U.S. Energy Information Administration, Weekly Petroleum Status Report, week ending 11/28/14 (November 2008).

3 Data based on expectations from Bloomberg.

4 Determination based on Peritus’ research.

5 Prices and exchange rates as of 12/3/14.

6 Prices and exchange rates as of 12/3/14.

7 Data sourced from Bloomberg, covers the period 3/31/14 to 12/3/14.

8 Data sourced from Bloomberg, covers the period 3/31/14 to 12/4/14.

9  Prices and currency rate as of 12/3/14.

10 This statistic for the J.P. Morgan High Yield Index, constrained. Acciavatti, Peter, Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update,” J.P. Morgan North American High Yield and Leveraged Loan Research, November 21, 2014, p. 6

© AdvisorShares

[description] => According to the EIA, U.S. crude oil imports averaged about 7.3 million barrels per day last week with Canadian barrels making up 3.2 million barrels of the total. U.S. commercial reserves increased by 1.9 million barrels week over week where total inventories fell 3.7 million barrels versus expectations of a build of 950,000.3 Are we at the beginnings of a rebalancing of the market? Possibly. [author] => Doug Holt [legacyinterface_firm_id] => 14 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 16:48:10 [created_by] => 948 [modified_on] => 2014-12-10 16:48:20 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2119 [hits] => 0 ) [15] => stdClass Object ( [legacyinterface_commentary_id] => 2054 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15292 [apv_conversation_id] => [content_type] => market-commentary [title] => Follow the ECB Compass [slug] => pimco_121014 [fulltext] =>
  • As the European Central Bank continues to expand its balance sheet to counter low growth and ​low inflation, we believe European duration should remain relatively well-anchored and European assets should be well supported. 
  • Looking ahead, in a world of low yielding European core rates, we believe credit will continue to attract investors. We continue to see spread compression opportunities in peripheral sovereign, fundamentally improving banks and high yield. 

In the midst of market volatility, macroeconomic uncertainty and geopolitical risks, we believe the European Central Bank’s (ECB) recent policy actions provide investors with a relative certainty: The ECB will remain accommodative. In turn, we believe European duration may be relatively well-anchored and European assets may be supported via the ECB’s expanded stimulus measures.

ECB tool kit
Short of large scale sovereign bond purchases, as we have seen in the U.S. and the UK, the ECB has taken a number of steps to date to ease liquidity conditions in the eurozone and assure investors of its continued pledge to do “whatever it takes”:

  • Forward expectations. The ECB is committed to keeping its policy rate “at present levels for an extended period of time in view of the current outlook for inflation”. (ECB, 7 August 2014)

  • Targeted longer-term refinancing operations (TLTRO). The ECB is providing European banks with up to €1 trillion in the form of four-year loans at 15 basis points (bps) via its TLTRO programme. Financing will be provided in eight quarterly tranches. We believe this will have several effects: It will add liquidity, reduce the supply of European banks’ short-dated bonds to the market and likely improve banks’ profitability by significantly reducing their cost of funding. The first tranche of €82.6 billion was provided in September this year, with the next tranche due to take place on 11 December 2014.

  • Asset purchase programmes. The ECB is committed to purchasing asset-backed securities (ABS) and covered bonds for “at least” the next two years as the central bank looks to expand its balance sheet by approximately €1 trillion to further ease financial conditions in the eurozone and support its goal to anchor inflation expectations. By removing ABS and covered bonds from the market in exchange for cash, the ECB is injecting further liquidity in the market in the hope that investors will use this cash to purchase other risk assets (ultimately lending to individuals and companies). This will support European ABS and covered bond markets, which have already tightened this year in anticipation of the ECB’s purchases. And it may percolate through to other risk assets via the portfolio channel effect described above.

We do not think the ECB will stop here: After all, its objective, often stated by ECB President Mario Draghi, is to “maintain inflation rates below but close to 2%”. And so far, the ECB is not meeting its objective. With current headline inflation in the eurozone running at close to 0%, Mr. Draghi is rightly concerned that if ]inflation runs too low for too long, the ECB risks de-anchoring long-term inflation expectations (see Figure 1).

The risk of de-anchoring long-term inflation expectations is that this could trigger – similar to what Japan experienced – a negative spiral of self-fulfilling prophecy: If individuals expect low inflation, if they believe their wages will not increase and prices will fall, they will delay consumption, slowing economic activity and, ultimately, depressing prices further into a deflationary spiral. Mr. Draghi has stated, “Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate.” (ECB, 6 November 2014). However, policy rates are already near zero and Mr. Draghi has exhausted nearly all of the ECB’s tools, except one: a broad asset purchase programme, often known as quantitative easing.

More recently, Mr. Draghi indicated in his speech on 21 November 2014 that the ECB is already engaged in quantitative easing, and ready to do more ”without delay”. He stated, ”If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases”.

With that in mind, which asset class will be next on the ECB’s asset purchase list? Corporate bonds, European agencies, government bonds? Regardless of the specifics, additional asset purchases would be broadly supportive for European assets.

Sovereign bonds
We believe peripheral sovereign bonds remain an attractive carry trade, such as Italian 10-year government bonds at 2.02%, which are trading 130 bps wider than 10-year German Bunds at 0.7% (Bloomberg, 1 December 2014). Should the ECB commit to purchasing sovereign bonds, they could potentially provide attractive carry and further spread compression.

Improving financials
We also like financials. Since 2011, while corporates have been gradually releveraging from a very low base, banks are forced to deleverage as European regulators require ever higher capital ratios, better liquidity and lower total leverage. The ongoing de-risking and deleveraging trend is great news for bank creditors, and current market valuations present attractive opportunities to invest in this improving credit trend. We currently express our high conviction view in financials in two ways: For stronger banks, we invest in the subordinated part of the capital structure offering yields of around 4%–6% (see Figure 2), while for second tier banks, we invest in senior bonds. We find peripheral senior bank bonds particularly attractive at current yields (100 bps to 200 bps over Libor for three- to four-year maturities) given the ECB’s available four-year financing at 15 bps, which we expect will tighten peripheral bank credit spreads over the next 12 months.

High yield: supportive fundamentals
Finally, after four months of spread widening, global high yield is relatively attractive, with yields north of 6%. While we need to be very careful in an environment where eurozone growth is very weak, fundamentals are largely intact: There is very little high yield debt maturing over the next two to three years (see Figure 3). In the absence of a growth shock, default rates will remain low. With government yields (particularly in Europe) and default rates remaining low, investors will continue to search for carry; and high yield should remain well supported.

Within the high yield market, we favour higher-quality, BB-rated credits, secured first lien bonds as well as “rising stars” (credits that we expect will be upgraded to investment grade over the next one to two years).

We find a number of potential rising stars among financial services companies in the U.S., as well as in the North American energy sector, which is benefitting from the shale revolution and experiencing very fast growth, which allows for quick deleveraging and further investments.

In Europe, where the recovery is more fragile, we see a greater focus on industry consolidation. Positioning in potential acquisition targets may provide attractive total return opportunities, as we saw with GE’s acquisition of Alstom’s energy business, buildings material group Holcim’s acquisition of Lafarge and home appliance company Whirlpool’s acquisition of Indesit. We expect further consolidation to take place in the telecommunications sector going forward.

Conclusion
In a world of relatively low government yield, European (and global) credit markets offer some attractive opportunities for higher returns. Investors may favour flexible, diversified credit strategies, which can take advantage of market opportunities and deliver attractive return potential in the range of 4%–6%, with similar levels of volatility.

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Convertible securities may be called before intended, which may have an adverse effect on investment objectives. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.

References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold such securities. PIMCO products and strategies may or may not include the securities referenced and, if such securities are included, no representation is being made that such securities will continue to be included. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. It is not possible to invest direct in an unmanaged index.

This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world.

©2014, PIMCO.

[description] => As the European Central Bank continues to expand its balance sheet to counter low growth and ​low inflation, we believe European duration should remain relatively well-anchored and European assets should be well supported. Looking ahead, in a world of low yielding European core rates, we believe credit will continue to attract investors. We continue to see spread compression opportunities in peripheral sovereign, fundamentally improving banks and high yield. [author] => Eve Tournier [legacyinterface_firm_id] => 335 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 16:51:51 [created_by] => 948 [modified_on] => 2014-12-10 16:52:13 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2120 [hits] => 0 ) [16] => stdClass Object ( [legacyinterface_commentary_id] => 2055 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15293 [apv_conversation_id] => [content_type] => market-commentary [title] => November Jobs Report Wasn't So Great After All [slug] => halbert_121014 [fulltext] =>

1.  November Unemployment Report Was a Surprise

2.  November Jobs Report Was Not All Good News

3.  America Still a Long Way From Full Employment

4.  Conclusions on the November Jobs Report

5.  Could Relief For Businesses be on the Way Next Year?

6.  President Obama Considering Sanctions Against Israel?

November Unemployment Report Was a Surprise

Last Friday’s unemployment report for November was a stunner, at least on the surface. US businesses ramped-up hiring across the board in November, putting 2014 on pace to be the best year for job growth since 1999.

Non-farm employers added a seasonally-adjusted 321,000 jobs in November, the most in one month since January 2012, according to the Bureau of Labor Statistics (BLS). That number was substantially higher than the pre-report consensus of just 230,000.

Only 7,000 of the 321,000 new jobs came from government. Nearly all parts of the private sector contributed, including 28,000 new jobs in manufacturing. With total upward job revisions of 44,000 for September and October, the economy has added 2.65 million jobs in the last 12 months.

Change in jobs

Also encouraging is that wages rose at a faster clip in November, with average hourly earnings rising nine cents to $24.66. Wage increases year-over-year were 2.1%, which remains historically low, but the November gains are a glimmer that rising job prospects are beginning to flow to workers via bigger paychecks.

Those paychecks and prospects lured another 119,000 Americans back into the workforce in November, which is the main reason the unemployment rate held at 5.8% despite the healthy jobs gains. The labor participation rate didn’t budge from a sickly 62.8%, but if job creation continues at this pace more people will likely return to work.

One hopeful sign: Those saying they were working part-time but wanted full-time employment fell by 177,000. About 6.9 million Americans are working part-time because they cannot find full-time positions. The broadest measure of unemployment, which includes these workers, dropped to 11.3%, down 0.1% from October. Those out of work for 27 weeks or more fell by 101,000. A rising tide lifts even the long-term unemployed.

The best news would be that this jobs trend signals renewed confidence by employers in the prospects for economic growth. The last two quarters were robust at 4.6% and 3.9%, respectively, in annual GDP and would represent the strongest growth since the mid-2000s, if the pace continues. The declines in oil prices, and thus gasoline, are giving consumers a boost in spending power that will further encourage business investment and hiring.

President Obama said on Friday that the United States has added more jobs over the last four years than Europe, Japan, and all other advanced countries combined (I have no idea if that is true). Other US officials noted that job growth in November was driven by better paying blue-collar and higher-skill sectors, a contrast to the low-wage boom earlier in the recovery.

November Jobs Report Was Not All Good News

As is the case with most government reports, last week’s turbocharged jobs headline came in-part thanks to “seasonal adjustments” and other wizardry at the Bureau of Labor Statistics, which reported that US job growth hit 321,000 in November.

Those numbers – from the “establishment survey” (employer payroll numbers) which counts the number of jobs – sound nice on the surface, and they certainly present reasons for confidence that the job market continues to mend.  However, the “household survey,” which is a head-count of those actually working, shows a very different picture.

According to the household survey, that big headline number of 321,000 new jobs translated into only 4,000 more Americans working in November than in October. For example, a person working two or three jobs is only counted once in the household survey – versus two or three times in the establishment survey. Yet that difference in counting can’t account for the big discrepancy between the two surveys in November, and suggests some major revisions to one or both surveys in January.

In November, 119,000 new people entered the labor force, according to the BLS, but another 115,000 filed for first-time unemployment benefits – again, a net of only 4,000 more Americans working. As a result of this relatively small number of net new workers, the unemployment rate remained at 5.8%. And the labor force participation rate remained at 62.8%, which is just off the year’s worst level and around a 36-year low.

And there’s more: Full-time jobs declined by 150,000, while lower-paying part-time positions increased by 77,000 – that’s not good. There were 110,000 fewer married men at work, while married women saw their ranks shrink by 59,000.

As for the nine cent per hour wage increase, supervisors and managers got most of the pay raises and the benefit of extra hours worked in November. For production and non-supervisory workers who make up the vast majority of the work force, average hourly pay rose by only four cents, to $20.74, and the average workweek was unchanged, at 33.8 hours.

Even that overstates the day-to-day reality and prospects for many workers. Fully a quarter of the jobs created in November were in retail and in leisure and hospitality, fields that in general do not offer enough pay or hours to make a decent living.

Finally, let’s not forget that 9.1 million remain unemployed, which is 1.9 million more than there were in November 2007 before the financial crisis and the Great Recession began.

America Still a Long Way From Full Employment

Philadelphia Fed President Charles Plosser proclaimed on Wednesday of last week that “the economy is near full employment.” While that’s what you might expect a hawkish central banker who’s anxious to raise the Fed Funds rate to say, he is simply wrong. With the unemployment rate at 5.8%, the economy is still a good way from full employment.

No matter your economic perspective, there is no arguing that this recovery from the crisis of 2008 has been extremely lame, at best. Historically, full employment in the US rests somewhere below a 5% unemployment rate and coincides with an increase in the labor-force participation rate, along with a healthy, meaningful increase in wages.

participation rate

As illustrated at left, the labor force participation rate is trending down and remains near a 36-year low. The last time the economy was at full employment was in 2000 when unemployment averaged 4% for the year.

While President Obama touts this economic “recovery,” there are still over 3 million Americans mired in the long-term unemployed camp. And many of those who were hired are in temporary or part-time slots, or full-time positions that pay less than their previous salaries.

These are the people who have either taken part-time work because they can’t find a full-time job, have been jobless for 27 weeks or more, or are considered “marginally attached to the labor force,” meaning they have looked for work in the past 12 months, but not in the most recent four weeks.

This does not include the 770,000 “discouraged workers.” These are the folks who have stopped looking altogether because they believe that no jobs are available for them – a true American tragedy.

Conclusions on the November Jobs Report

Clearly the November employment report was a positive surprise.  The 321,000 new jobs added last month was the highest reading since January 2012 and was substantially above the pre-report consensus of 230,000.

The fact that 119,000 more workers re-entered the workforce in November, in excess of those leaving it, was another positive surprise. The rise in average hourly earnings by nine cents to $24.66 was also better than expected.

The question is, will such job growth continue? Or was this a one-month, seasonal anomaly?

Keep in mind that not all of the news in the November jobs report was positive. While the headline new jobs number was 321,000, a deeper dive into the data reveals that there were only 4,000 more Americans working at the end of November. Full-time jobs declined by 150,000, while part-time positions increased by 77,000 – that’s not good.

And finally, despite comments from Philly Fed President Charles Plosser last week, the US economy is not close to full employment. We’ll have to monitor the jobs data over the next few months to see if the November breakout was for real. Let’s hope it is!

Could Relief For Businesses be on the Way Next Year?

With the mid-term elections delivering the Senate to the Republicans, many feel there may be some tax relief on the way next year. For years the economy has had to face a policy bias toward imposing ever-higher costs on private business. You know the litany: the 2007 energy bill, Obamacare, Dodd-Frank, burdens on fossil fuels, higher taxes, and so much more.

The GOP House that was elected in 2010 delayed a tax increase but President Obama’s re-election imposed it in 2013. His Administration’s rule-by-regulation continues, but at least Congress will do no more harm with the GOP in charge.

The key point is that for the first time in years, Washington may even have a “growth bias.” Hopefully Congress will attempt to reform the business tax code, ease or repeal regulations, reduce the burdens of Obamacare, and otherwise remove barriers to job creation. It’s impossible to know how much will pass while Mr. Obama is still president, but some pro-growth measures will hopefully make it through.

The psychological effect of this change shouldn’t be underrated. American businesses have been hunkered down for years, even with a rising stock market and near-zero interest rates, because CEOs haven’t known what damage Washington might do next. Now the main question is what good might happen now that the Republicans are in charge of both houses of Congress.

With Congress mostly checking Mr. Obama, the biggest remaining policy uncertainty is when and how quickly the Federal Reserve will continue its march back to monetary policy normalcy. The Fed ended its massive QE bond-buying program in October, and the economy survived. Now the question is, what will happen when the Fed begins to hike the Fed Funds rate next year?

President Obama Considering Sanctions Against Israel?

Rumors are swirling in Washington that President Obama is seriously considering new sanctions against Israel. Sanctions against Israel, our strongest ally in the Middle East? You’ve got to be kidding, right? Maybe not.

Dozens of House Republicans on Friday demanded that President Barack Obama explain and clarify the latest reports that say his administration is considering new sanctions against Israel.

The Obama administration has repeatedly said it disapproves of Israel’s decision to build new homes in East Jerusalem, and that this construction “undermines the peace process.” But officials on Friday refused to confirm or deny reports that they are considering sanctions against Israel.

A letter sent Friday to Obama by Rep. Mark Meadows (R-NC) and 44 other House Republicans demanded more clarity than what’s been offered so far. Reportedly, the letter included the following:

“Recent reports suggest that your administration has held classified meetings over the past several weeks to discuss the possibility of imposing sanctions against Israel for its decision to construct homes in East Jerusalem. We urge you and your administration to clarify these reports immediately.

Israel is one of our strongest allies, and the mere notion that the administration would unilaterally impose sanctions against Israel is not only unwise, but is extremely worrisome. Such reports send a clear message to our friends and enemies alike that such alliances with the United States government can no longer be unquestionably trusted.”

The letter also said Congress has not given the White House any authority to sanction Israel, and in fact just passed legislation last week – by a unanimous vote – to boost US-Israel security ties.

“While it is our hope that these reports are untrue, the fact that your administration has failed to denounce or clarify them is deeply troubling. We urge you to quickly and sharply address these concerns, as well as take the steps necessary to demonstrate America’s unwavering support for Israel.”

White House Press Secretary Josh Earnest admitted on Friday that he is aware of news reports that the United States is considering sanctions against Israel, but wouldn’t say if they are true. Fox News reporter Ed Henry asked Earnest about the reports and said, “I wondered if you could say true or false.” Ernest responded:

“I’ve been informed of some of these reports. What I can tell you is that I’m not going to talk about any internal deliberations inside the administration and certainly not inside the White House.”

The point is, he did not deny it.

The Israel sanctions discussions are said to have begun after Prime Minister Benjamin Netanyahu visited the White House in October and clashed with President Obama over the construction of a new housing development in East Jerusalem.

The administration warned Israel that the project would raise questions about Israel’s commitment to peace with the Palestinians. Netanyahu reportedly replied that Israel does not accept restrictions on where Jews can live, and that Arabs and Jews in the Israeli capital should be allowed to purchase homes wherever they choose.

The decision to even consider sanctions against Israel is, in my view, a part of Obama’s “Temper-Tantrum” (as I called it last week), since the shellacking he and the Democrats suffered in the mid-term elections on November 4.

I’ve said it before and will say it again: This man will stop at nothing to advance his ultra-liberal agenda, no matter if doing so would be damaging for America. If anyone doubted me, this latest threat of sanctions against Israel should convince you.

While I have no doubt that Obama would love to levy sanctions on Israel, my bet is that he will back off due to heavy objections – and it won’t surprise me if his press secretary denies that it was ever a serious consideration. We’ll see.

Warmest holiday regards,

Gary D. Halbert

Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

© Halbert Wealth Management

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Faithful followers will already know that we do not rely on meetings with management or analyst reports in our methodology for finding the world's best knowledge leaders.  And, while we have developed a more objective, data-driven process, it is always interesting to at least take a look at how our various tools compare with the consensus from the street.  Some of the most striking differences arise when we compare companies' rating changes with a quick look at our point-and-figure charts.

 
For instance, Vestas Wind Systems has been upgraded nine times in the last 100 days-- the most of any company in the MSCI AC World Index, comprised of nearly 2500 names from both the developed and emerging world.
 
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Based on this metric alone, one might imagine that the picture looks bright for this Danish Industrial.  The stock has clearly enjoyed a decent period of relative outperformance over the last couple of years, following a significant low in 2012:
 
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What might concern us, however, is that the uptrend seems to be struggling at a point of long-term resistance (between row I and row J).  This is not to say that resistance can't be overcome-- it simply prompts us to question the consensus that this security can live up to the index-leading analyst optimism.
 
Taking a look at some more examples of upgrade leaders in the last 100 days, we find that quite a few of them have relative strength charts (and, therefore, relative momentum) that could be interpreted to contradict the improvements in consensus:
 
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[description] => Faithful followers will already know that we do not rely on meetings with management or analyst reports in our methodology for finding the world's best knowledge leaders. And, while we have developed a more objective, data-driven process, it is always interesting to at least take a look at how our various tools compare with the consensus from the street. [author] => Team [legacyinterface_firm_id] => 173 [published_on] => 2014-12-10 [digest_date] => 2014-12-10 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-10 17:03:33 [created_by] => 948 [modified_on] => 2014-12-10 17:03:45 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2122 [hits] => 0 ) [18] => stdClass Object ( [legacyinterface_commentary_id] => 2057 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15295 [apv_conversation_id] => [content_type] => market-commentary [title] => Lessons Learned in 2014 [slug] => bernstein_121014 [fulltext] =>

In 2014, US stocks forged ahead, international developed and emerging-market stocks lagged, bonds did better than expected, and the IRS took a bigger bite. Here are some lessons for US investors to carry forward into 2015.

Lesson 1: The US Market Keeps on Ticking

Geopolitical crises were in the headlines throughout 2014: the threat from ISIS in Syria and Iraq, tensions between Russia and Ukraine, fighting in Gaza, the Ebola epidemic in West Africa, slower growth in China, and economic stagnation in both the Eurozone and Japan. Yet the US equity market still motored ahead.

We are living in a global economy. If the rest of the world is struggling, can US companies continue to prosper?

In the medium term, the answer could be yes. The US is still in the early stages of a cyclical expansion, and we think the overall growth rate will be supported by key trends among consumers, governments, and companies. US consumers paid down debt after the financial crisis and are now beginning to spend again—cautiously. Similarly, US federal and local governments pared back during the immediate post-crisis years, and they are now able to increase their budgets. Finally, US companies are gaining market share globally, and US manufacturing is now undergoing something of a renaissance. We think that these trends could continue for a while and that they are positive for US stockholders.

It would be a serious mistake to think that the US market is invulnerable, but it would be just as erroneous to underestimate its resiliency.

Lesson 2:  Diversification Means Owning Laggards

After leading globally in 2013, in 2014 through November the US stock market beat developed international developed stock markets by 15.5 percentage points in US dollar terms; it beat emerging markets by 11.5 percentage points, as shown in the first Display, below. This outperformance by US stocks has some investors ready to throw in the towel on global investing.

Why Be Global/ No Market Always Wins

We think selling an asset after a stretch of lagging performance is a bad decision. Often, the lagging asset may be more attractive looking ahead. And that’s what we’re seeing in developed international stocks markets, where valuations are more attractive than in the US stock market.

Since 1990, non-US stock markets have outperformed the US market more than half the time. Since no one can be certain just when this will occur, we think it’s wise to own stocks in all regions.

A similar argument can be made for diversification by size. Large-cap US stocks trounced small- and mid-caps by 8.4 percentage points so far in 2014, but large-caps trailed smaller stocks by 11.7 percentage points annualized from 2001 through 2003. The key is to hold stocks across the size spectrum.

Diversification remains a fundamental tenet of smart investing—both as a way to manage risk and as a way to maximize return.

Lesson 3: Eat Your Bonds—They’re Good for You!

High-quality intermediate bonds in a portfolio serve, above all, as a counterweight to stocks. When stock values tumble, bond values typically rise and help to offset the declines. As the second Display, below, shows, when the stock market dipped from mid-September to mid-October, a 60% stock/40% bond portfolio gave investors a smoother ride than an all-stock portfolio—smooth enough that some might have stayed in the market rather than fleeing in fear.

The Stabilizing Effect of Bonds

Of course, investors also like the income bonds provide. And through November 2014, core bond strategies delivered about 4% in total return—less than bonds have returned over the past 30 years, but a bit above the 3.5% we project for them over the next 30 years.

Don’t neglect bonds. Even with today’s lower yields, they can help you sleep at night. Investors should have enough bonds on their plate to be confident they will be able to withstand the next market downturn—whenever it happens.

Lesson 4: If You’re Afraid to Invest, Dollar-Cost Average

In 2014, too many investors sat on the sidelines in cash, convinced that they’d missed the bull run and afraid that if they invested now, the market would soon tumble and afflict them with buyer’s remorse.

Dollar-cost averaging can reduce the odds of experiencing these painful regrets. Our research shows that investing all at once has historically been the more effective approach, as shown in the third Display,below. But if the market turns volatile, dollar-cost averaging can help to dampen the effects. If stocks fall right after your first purchase, you’ll take a hit, but you’ll also be able to buy your next installment at a lower price. If you average into the market within a limited period of time—say six months or a year—you’ll likely be better off than if you’d stayed on the sidelines.

Historically, Investing Immediately Has Maximized ReturnsYou can think of dollar-cost averaging as a kind of regret insurance. Beyond this emotional benefit, the key advantage is that it gets you to your strategic asset allocation target, albeit after a delay. Like all insurance, dollar-cost averaging has a price—lower returns, typically, during the period of averaging in. But the longer-term benefits of being fully invested can outweigh this cost.

Lesson 5: Be Tax Savvy

In April 2014, taxpayers in the top bracket saw their final 2013 tax bills at new, higher rates. There may be further unpleasant surprises ahead for the 2014 tax year. The rising stock market has left investors with few or no remaining capital loss carryforwards, so to rebalance or spend from their portfolios, they have to realize capital gains. Smart strategies can help minimize the resulting tax bills that will arrive next year.

There are two ways to reduce taxes: avoidance and deferral. Avoidance permanently eliminates or reduces a tax, while deferral puts off payment into a later tax year. Avoidance is worth more to your bottom line. 

By diligently tracking and timing trades, you can ensure that capital gains will be long-term and dividends will be qualified. This permanently reduces the rates at which they are taxed.  

Another way to avoid taxes in the current year is through charitable contributions. Cash gifts avoid taxes by creating a tax deduction, but savvy taxpayers can further avoid tax by giving appreciated securities, thereby also eliminating an embedded capital gain. Additional techniques, such as converting a traditional IRA to a Roth IRA and contributing to a 529 plan, can provide tax benefits further into the future.

While not as valuable, tax deferral can also help reduce the current year tax bill. First, to the extent you can defer taking gains until after January 1, you can delay the tax hit. Next, volatility could create an opportunity. If the price of a stock falls below your basis in it, you can harvest the loss to reduce your tax bill in the current year. Some investors seized this opportunity in mid-October, but rising stock markets since then have limited loss harvesting opportunities for the remainder of 2014.

You also can defer taxes by making larger contributions to retirement vehicles such as 401(k), IRA, and Keogh plans. Timing is important: In a rising market, making contributions early next year can help you shelter more growth over the course of 2015.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

The views expressed herein do not constitute and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation. 

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein.

Seth J. Masters is Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.

© AllianceBernstein

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There can be little doubt that data releases rather than experience or intuition are driving the economic conversation. This is perhaps a function of the disconnection that many people feel about an economy that they no longer understand. Rather than trusting their own eyes or their own gut to form an opinion, it's much easier to grab a set of convenient numbers. The big question then becomes what numbers you choose to look at and which you choose to ignore. 

While there are a great many types of economic data releases, issued by a myriad of public and private sources, two reports have risen above the rest in importance: the Quarterly GDP estimates issued by the Bureau of Economic Analysis, and the monthly jobs report issued by the Bureau of Labor Statistics. And those two reports have been recently coming up roses. The 3rd quarter GDP growth report, released on November 25th, revised growth upwards to an annualized rate of 3.9%, and the November Jobs report, released on December 5th, showed the creation of 321,000 new jobs in November, the highest monthly total in nearly three years. These reports have solidified the views of the mass of analysts that the U.S. economy is currently firing on all cylinders.

But to make this conclusion, almost all the other data sets, which used to be considered significant, have been either ignored or, when that proves impossible, rationalized away to make the figures unimportant. This never happens with strong data, which is typically accepted at face value.

In the weeks leading up to, and the days after, the recent GDP and jobs reports, a torrent of data releases came in that were almost universally awful. However, in our current era of journalistic lethargy, these reports have received almost no attention at all.

While it would be too long and boring to list all of these moribund statistics, here is a brief overview, in chronological order, of what you are likely not hearing:

November 24 - The Chicago Fed National Activity Index, which weighs 85 different economic indicators to gauge the national economy, fell to 0.14 in October from 0.29 in September. The three-month average declined to negative 0.01 from positive 0.12. The index is designed so that readings above zero indicate above-trend growth.


November 24 - Markit's Flash PMI, which measures service sector health, came in at 56.3 for November, missing expectations of 57.3. This is the lowest reading for the index since April, and the fifth consecutive month of declines.

November 25 - The Richmond Fed Manufacturing Index came in at a very weak 4 for November, which is down sharply from the 20 posted in October, and far below economist expectations. Consensus expectations were for 16, with survey respondents ranging from 12 to 24.

November 25 - The Commerce Department reported that growth in corporate profits (adjusted for depreciation and the value of inventories) slowed sharply in the third quarter to a 2.1% annual rate, down from an 8.4% annualized rate in the second quarter.

November 25 - The Case Shiller 20-City Index showed year over year price gains of only 4.9%, the lowest reading since October 2012. This continues a trend of a decreasing rate of home price appreciation.

November 25 - The Conference Board reported that U.S. Consumer Confidence dropped to 88.7 in November from a revised 94.1 in October. The November drop was unexpected and puts the index at its lowest reading since June. Economists surveyed by The Wall Street Journal had forecast November to come in at 96.5.

November 26 - U.S. durable-goods orders rebounded 0.4 percent in October after September's decline of 0.9 percent. However, the rise largely reflected a 45.3% surge in demand for defense aircraft and parts, which masked weak demand elsewhere. Excluding transportation, orders fell 0.9%, the biggest drop since December 2013. Excluding defense-related products, orders fell 0.6%.


November 26 - Personal income rose by only .2% in October, half of the .4% expected by economists.Personal spending also increased by .2%, but this was 33% less than the .3% consensus expectations.

November 26 - Manufacturing activity in the Chicago-area expanded 60.8 in November, which represents a significant drop from 66.2 in October. The decline was larger than the consensus expectations for a decline to 63.


December 3 - Mortgage applications decreased 7.3% from the week earlier, the second straight week of declines.


December 3 - The National Retail Federation reported that Thanksgiving weekend retail sales came in at a disappointing $51 billion, down 11% from 2013. This data includes the entire four day weekend, in which many retailers operated under longer hours than they have in years past.

December 5 - Although the Trade Deficit narrowed slightly to $43.4 billion in October, the figure was actually higher than the consensus estimates and only came down because the September numbers were revised higher. In addition, the trade deficit in manufactured products hit $71.2 billion, the highest on record.


December 5 - Factory orders fell for the third consecutive month, shrinking 0.7% (more than double the .0.3% rate that had been expected) in October after declining 0.5% in September.


December 5 - Consumer credit rose $13.2 billion in October but the increase was far less than the $16.8 billion expected by a Bloomberg survey of economists (September's rate that had also come in well below the consensus estimate was revised even lower). The gain was largely centered on a $12.3 billion increase in non-revolving credit that includes auto financing and the government's acquisition of student loans from private lenders. Revolving credit rose only $0.9 billion, down from an already disappointing $1.4 billion in September.

Although the national elections are generally not counted as an economic indicator, the November mid-term elections reflected overwhelming economic dissatisfaction among voters, which resulted in a drubbing at the polls for Democrats associated with the President's agenda.

So if the majority of the granular reports of weak economic activity persist and the public remains unaware or unconvinced that the economy is improving, how could it be that the two most followed reports could be so strong?

There is much in both the GDP and the Jobs Report that is dependent on forward-looking expectations. I believe that both reports are showing improvement because businesses are building inventory and hiring staff in anticipation of an economy that they believe will continue to improve. It's like the Field of Dreams recovery, prepare for it and it will come. But I think businesses are following the false narrative, and ignoring, or rationalizing, the bad data as thoroughly as does the media.  When they realize they were fooled by the hype, jobs will be lost, and GDP will fall.

Furthermore, the GDP and jobs data would certainly be far weaker if the Federal Reserve were not providing so much monetary support. Sure, they have discontinued the vast majority of the QE, but interest rates are still at zero percent. What would GDP or job growth look like if consumers, businesses, and the federal government were forced to pay anything that approaches the historically normal interest rates on our much greater than normal level of debt? My guess is that it will be awhile before we find out, as I believe that as the bloom comes off the recovery rose, the Fed will launch another round of QE before it gets around to raising interest rates.

Best Selling author Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital.

© Euro Pacific Capital

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object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [cookie] => JInputCookie Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [files] => JInputFiles Object ( [decodedData:protected] => Array ( ) [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( )