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: 1363700  Threads: 1  Questions: 191949  Slow queries: 0  Opens: 62  Flush tables: 1  Open tables: 55  Queries per second avg: 0.140
                                    [sqlstate] => 00000
                                    [protocol_version] => 10
                                    [thread_id] => 17880
                                    [warning_count] => 0
                                )

                            [count:protected] => 17
                            [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
                                (
                                    [view] => commentaries
                                    [start] => 420
                                    [limitstart] => 420
                                    [option] => com_legacyinterface
                                    [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
                                                (
                                                    [view] => commentaries
                                                    [start] => 420
                                                )

                                            [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
                                                                (
                                                                    [view] => commentaries
                                                                    [start] => 420
                                                                )

                                                            [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
                                                                                (
                                                                                    [view] => commentaries
                                                                                    [start] => 420
                                                                                )

                                                                            [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
                                                                                                            [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
                                                                                                (
                                                                                                    [view] => commentaries
                                                                                                    [start] => 420
                                                                                                )

                                                                                            [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
                                                                                                (
                                                                                                    [view] => commentaries
                                                                                                    [start] => 420
                                                                                                    [limitstart] => 420
                                                                                                    [option] => com_legacyinterface
                                                                                                    [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_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8
                                                                                                    [HTTP_ACCEPT_ENCODING] => gzip
                                                                                                    [HTTP_ACCEPT_CHARSET] => ISO-8859-1,utf-8;q=0.7,*;q=0.7
                                                                                                    [HTTP_ACCEPT_LANGUAGE] => en-us,en;q=0.5
                                                                                                    [HTTP_REFERER] => http://wordpress.hubtech.tv/?view=commentaries&start=420
                                                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729)
                                                                                                    [HTTP_HOST] => wordpress.hubtech.tv
                                                                                                    [HTTP_CONNECTION] => Keep-Alive
                                                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                                                    [SERVER_SIGNATURE] => 
                                                                                                    [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31
                                                                                                    [SERVER_NAME] => wordpress.hubtech.tv
                                                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                                                    [SERVER_PORT] => 80
                                                                                                    [REMOTE_ADDR] => 46.98.11.64
                                                                                                    [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] => 62433
                                                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                                                    [REQUEST_METHOD] => GET
                                                                                                    [QUERY_STRING] => view=commentaries&start=420
                                                                                                    [REQUEST_URI] => /?view=commentaries&start=420
                                                                                                    [SCRIPT_NAME] => /index.php
                                                                                                    [PHP_SELF] => /index.php
                                                                                                    [REQUEST_TIME_FLOAT] => 1516423709.538
                                                                                                    [REQUEST_TIME] => 1516423709
                                                                                                )

                                                                                            [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] => 1516423709
                                                                                                            [session.timer.last] => 1516423709
                                                                                                            [session.timer.now] => 1516423709
                                                                                                            [session.client.browser] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729)
                                                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                                                (
                                                                                                                    [data:protected] => stdClass Object
                                                                                                                        (
                                                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                                                (
                                                                                                                                    [commentaries] => stdClass Object
                                                                                                                                        (
                                                                                                                                            [limitstart] => 420
                                                                                                                                            [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
                                                                                (
                                                                                    [view] => commentaries
                                                                                    [start] => 420
                                                                                    [limitstart] => 420
                                                                                    [option] => com_legacyinterface
                                                                                    [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_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8
                                                                                    [HTTP_ACCEPT_ENCODING] => gzip
                                                                                    [HTTP_ACCEPT_CHARSET] => ISO-8859-1,utf-8;q=0.7,*;q=0.7
                                                                                    [HTTP_ACCEPT_LANGUAGE] => en-us,en;q=0.5
                                                                                    [HTTP_REFERER] => http://wordpress.hubtech.tv/?view=commentaries&start=420
                                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729)
                                                                                    [HTTP_HOST] => wordpress.hubtech.tv
                                                                                    [HTTP_CONNECTION] => Keep-Alive
                                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                                    [SERVER_SIGNATURE] => 
                                                                                    [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31
                                                                                    [SERVER_NAME] => wordpress.hubtech.tv
                                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                                    [SERVER_PORT] => 80
                                                                                    [REMOTE_ADDR] => 46.98.11.64
                                                                                    [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] => 62433
                                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                                    [REQUEST_METHOD] => GET
                                                                                    [QUERY_STRING] => view=commentaries&start=420
                                                                                    [REQUEST_URI] => /?view=commentaries&start=420
                                                                                    [SCRIPT_NAME] => /index.php
                                                                                    [PHP_SELF] => /index.php
                                                                                    [REQUEST_TIME_FLOAT] => 1516423709.538
                                                                                    [REQUEST_TIME] => 1516423709
                                                                                )

                                                                            [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] => 1516423709
                                                                                            [session.timer.last] => 1516423709
                                                                                            [session.timer.now] => 1516423709
                                                                                            [session.client.browser] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729)
                                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                                (
                                                                                                    [data:protected] => stdClass Object
                                                                                                        (
                                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                                (
                                                                                                                    [commentaries] => stdClass Object
                                                                                                                        (
                                                                                                                            [limitstart] => 420
                                                                                                                            [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
                                                                (
                                                                    [view] => commentaries
                                                                    [start] => 420
                                                                    [limitstart] => 420
                                                                    [option] => com_legacyinterface
                                                                    [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_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8
                                                                    [HTTP_ACCEPT_ENCODING] => gzip
                                                                    [HTTP_ACCEPT_CHARSET] => ISO-8859-1,utf-8;q=0.7,*;q=0.7
                                                                    [HTTP_ACCEPT_LANGUAGE] => en-us,en;q=0.5
                                                                    [HTTP_REFERER] => http://wordpress.hubtech.tv/?view=commentaries&start=420
                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729)
                                                                    [HTTP_HOST] => wordpress.hubtech.tv
                                                                    [HTTP_CONNECTION] => Keep-Alive
                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                    [SERVER_SIGNATURE] => 
                                                                    [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31
                                                                    [SERVER_NAME] => wordpress.hubtech.tv
                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                    [SERVER_PORT] => 80
                                                                    [REMOTE_ADDR] => 46.98.11.64
                                                                    [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] => 62433
                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                    [REQUEST_METHOD] => GET
                                                                    [QUERY_STRING] => view=commentaries&start=420
                                                                    [REQUEST_URI] => /?view=commentaries&start=420
                                                                    [SCRIPT_NAME] => /index.php
                                                                    [PHP_SELF] => /index.php
                                                                    [REQUEST_TIME_FLOAT] => 1516423709.538
                                                                    [REQUEST_TIME] => 1516423709
                                                                )

                                                            [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] => 1516423709
                                                                            [session.timer.last] => 1516423709
                                                                            [session.timer.now] => 1516423709
                                                                            [session.client.browser] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729)
                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                (
                                                                                    [data:protected] => stdClass Object
                                                                                        (
                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                (
                                                                                                    [commentaries] => stdClass Object
                                                                                                        (
                                                                                                            [limitstart] => 420
                                                                                                            [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
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                                    [title] =>  Weekly Economic Commentary
                                    [slug] => nt_120614
                                    [fulltext] => 

Oil isn’t the only commodity enduring a significant correction

December 5, 2014

Television networks have started airing their libraries of holiday movies. There are timeless classics like "It’s A Wonderful Life" and "Miracle on 34th Street," and more recent, campier entries like “Home Alone” and "Scrooged." It’s interesting to see how cinematic visions of the season have evolved.

Among the films running this month is "Trading Places," the Eddie Murphy/Dan Aykroyd production of 30 years ago. At the center of the film is a commodities trading firm run by the Duke Brothers (Don Ameche and Ralph Bellamy), who are trying to make a big score in the futures market. In the end, their plot unravels, leaving unexpected winners and losers.

Commodities really are in the limelight as the 2014 holiday season enters full swing. Markets for some elements are in full retreat, creating a string of unexpected winners and losers. Central banks trying to manage inflation in this scene will be forced to account for these earthy developments.

Those who have been shorting futures contracts for certain commodities have been pleased in recent years as industrial metals endured significant corrections.



Recent trends certainly reflect reduced demand from China, which surpassed the United States as the world’s largest manufacturer in 2010. Overall industrial output in China is growing at half the rate it was four years ago. Chinese steel production, which represents more than half of the world’s output, seems poised to decline for the first time in 14 years. China mines a significant fraction of the minerals it needs, but the sheer scale of its operations requires significant imports as well.

Chinese leaders have been trying to bring better balance to their economy, with heavy industry a focus of reform. Aside from achieving better diversification across sectors, the current regime has focused on reducing the environmental consequences of mines and factories. As a result, the country has been on something of a diet when it comes to raw materials.

This is bad news for suppliers. Among advanced economies, Australia is bearing the biggest cost. Australia exports 43% of the world’s iron ore and 11% of its copper ore. Investment in the mining sector has contributed significantly to growth in recent years. With that sector now in retreat, the Australian economy grew by just 0.3% in the third quarter of the year.

Australia has not endured a recession since 1991, and analysts are not calling for one any time soon. Australia has a significant service sector; at 70% of gross domestic product (GDP), it is as large as that of the United States. Nonetheless, the Australian dollar has fallen by more than 10% in the past three months.



Emerging economies that rely on commodities may not fare as well. These countries embrace mining as a means to attract foreign investment and generate exports. The industry provides employment to citizens with more-modest levels of education and generates revenue for governments.

When prices reverse, it can create tremendous problems if development has not been properly managed. The failure to keep reserves against changes of fortune can leave significant holes in public budgets and risks unemployment and unrest. Should recent trends continue, small producers in Africa and South America will be most acutely affected.

On a larger scale, both Brazil and Russia have significant mining sectors. Both face challenging economic times; real GDP has fallen over the last 12 months in both countries. Both rely on foreign investment, which has diminished importantly.

The drop in commodities prices will have an impact on the overall price level in the developed world. This will make it more challenging for central banks to achieve targeted levels of inflation. It also raises the difficult question of how to view adjustments in commodities prices when assessing price stability. Given their historic volatility, such shifts are often viewed as transitory, and “core” measures of inflation are constructed to minimize their impacts.

Yet recent trends in certain commodities prices have been ongoing and may persist for a while longer. Reflecting the diminished outlook for global inflation, precious metals have joined their industrial cousins in decline. The price of gold has fallen by more than 10% since July, and the price of silver is off almost 25% during that interval.

Such substantial corrections have roiled the commodities futures markets caricatured in “Trading Places.” Alas, the sea of smocks once seen in the pits has thinned over the years with the onset of electronic trading. A faithful remake of the movie would have computers plotting against one another; I am not sure that would play well at the box office.

Mario Draghi Sets the Stage for More QE

Mario Draghi, president of the European Central Bank (ECB), sent a strong signal that additional monetary accommodation may be necessary in early 2015 in light of weak economic data and low inflation. The underlying implication is that broad-based quantitative easing (QE) would be effective in lifting inflation toward the central bank’s inflation target of 2.0%. However, this outcome is not assured.

The ECB’s updated forecast places eurozone inflation in 2014 at 0.5%, followed by 0.7% and 1.3% in 2015 and 2016, respectively. Eurozone real GDP is currently estimated to grow by 0.8%, 1.0%, and 1.5% during 2014-16, respectively. Updated forecasts of both inflation and GDP in the eurozone are materially lower than the ECB’s September prediction and this raises expectations of QE in 2015.

There are several roadblocks to overcome for these expectations to become reality and for QE to be effective.



First, the initial round of the ECB’s longer-term refinance operations (which offered low-cost funding to banks) expires in 2015 and will reduce the ECB’s balance sheet. To replace the runoff, the new targeted longer-term refinance operations (TLTRO) must be sizeable. The first offering of TLTRO was not well-received; the second one is scheduled for December 11.

In light of this, reaching the ECB’s goal of increasing its balance sheet by €1 trillion will require large-scale purchases of assets. Recent additions of covered bonds and asset-backed securities total just over €21 billion to date, a very modest sum. Clearly, new asset classes will be needed to generate additional volume.

Mr. Draghi mentioned that his governing council considered a range of alternatives for future QE. Previous statements have noted consideration of corporate and sovereign bonds, and Draghi hinted strongly that one or both of them might be approved for purchase early next year. Without them, the ECB will struggle to meet its balance sheet target.

There is ample dissent within the Governing Council of the ECB, particularly from Germany, about purchases of sovereign bonds. However, Draghi noted that he is determined to honor the price stability mandate even at the expense of losing support of some members of the Governing Council.

Assuming that these procedural hurdles can be overcome and QE expands in Europe, attention will turn to its effectiveness.

Credit easing is one of the channels through which QE operates; purchases of long-term securities lower long-term interest rates. Credit extension in the eurozone is largely done through the banking system, particularly for small- and medium-sized enterprises. Unfortunately, lending to the private sector in the eurozone has declined for 10 quarters in a row. European banks have been conservative with their capital, and firms have been reluctant to borrow amid a soft economic outlook. It will be a challenging task to revive credit in an environment where regulators are strict about strengthening weak bank balance sheets.

QE can be beneficial through another channel. Central bank purchases of securities make available cash that can then be invested in risky assets. This, in turn, increases prices of risky assets and raises wealth. The wealth effect from QE in the United States has helped lift consumer spending. Unfortunately, the percentage of eurozone households with risky assets in their portfolios is smaller than in the United States, which implies that the impact through the wealth effect will most likely be modest.

Despite these potential impediments, the ECB must press forward. European inflation and inflation expectations are both in decline. This implies higher real interest rates and an unintended tightening of monetary policy. It may not be clear that QE will work, but the consequences of doing nothing seem quite clear.

U.S. Employment Gains: Solid But Not Sufficient to Prompt Tightening

The November U.S. employment report was another strong one. But while we continue to make progress in the labor market, the inflation outlook has become the more-important driver of Federal Reserve policy.

The American unemployment rate was unchanged at 5.8% in November, but this is a notable improvement from a year ago when the jobless rate was 7.0%. The broad measure of unemployment (which includes discouraged workers, part-time employees and marginally attached workers) stands at 11.4%, down from 12.1% in May. Long-term unemployment (30.7% versus 34.6% in May) shows a steady downward trend.

There has also been a noticeable reduction in part-time employment (6.8 million versus 7.5 million in May). These improvements have occurred during a period when the participation rate has held steady. Putting these numbers together, several of the indicators on Janet Yellen’s dashboard are turning green and signify labor market conditions are improving.



The establishment survey results were stronger than the household survey data. Payroll employment increased 321,000 in November, and revisions added 44,000 new jobs. The three-month moving average has held above 200,000 for eight straight months.

The strength of the report is not likely to result in the Fed considering an early date for tightening monetary policy. Although the economy is approaching full employment, inflation remains well below the targeted level of 2.0%. The personal consumption expenditure price index is up only 1.4% over the past year, and “core” inflation is up only 1.6%.

The recent views of two members of the Federal Open Market Committee are worth noting. Federal Reserve Vice Chairman Stanley Fischer indicated that the inflation part of the Fed’s dual mandate also needs to be met in order to consider tightening monetary policy. New York Fed President William Dudley pointed out that the experience of the Great Depression and Japan in the last two decades “illustrates the risks of raising interest rates too soon, especially when inflation is running below the central bank’s objective.” He added that allowing hiring to proceed at a solid pace for a while when long-term unemployment is elevated will not “jeopardize” the price stability objective.

The bottom line is that as long as inflation is below the Fed’s target and is not showing signs of moving closer to it, the Fed is unlikely to bring forward normalization of interest rates.

© Northern Trust

www.northerntrust.com

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Based on insights from our team’s recent trip to China, we noted that the country is likely headed for a long economic landing. What does that mean for its infrastructure and commodity sectors?

Infrastructure: High Growth, but Some Challenges

Infrastructure, particularly railways and subways, remains a high-growth sector because of a shortage of cargo and passenger capacity. A key issue from our perspective: state-owned enterprises in the sector need to improve their net profit margins and returns on equity, which can be as low as 2% and the low teens, respectively.

Another challenge the sector faces is delays in payments from local government clients. This is actually old news, and the prevailing sentiment is that payments will eventually be made. We haven’t yet heard of any cases of nonpayment, and we don’t expect to. If this happened, though, it would be a serious issue—and not just for construction companies.

The company managers we spoke with—including those at a railway construction company involved in railway-related property development to boost profitability—are broadly positive about the property industry. From their perspective, the sector is in a short-term structural downturn and correction, with a positive medium- to long-term outlook based on China’s continuing urbanization. Railway builders enjoy an advantage when it comes to land acquisition; nevertheless, we think that the strategy of growing their property businesses carries high execution risk.

Commodities: Feeling the Squeeze

For the coal sector, the challenge is to cut capacity and costs; coal prices may have bottomed but there appears to be little upside, as shown in the Display below. High fixed costs make shutting down mines uneconomical, unless it’s done permanently; the alternative is to maintain production but sell at a loss, including “dumping” into overseas markets.

In the cement industry, the overall tone was less negative but still cautious. One company described the pickup in infrastructure as weaker than expected, while the property sector remained sluggish. Sales volume year to date was flat, and managers didn’t expect improvement in the fourth quarter—usually the peak period for cement producers. Oversupply isn’t considered severe, given current inventory levels and the highly regionalized nature of the industry. Firms also reported no problems in rolling over bank loans. Like construction companies, however, cement companies were experiencing longer payment cycles as a result of their exposure to the infrastructure sector.

Our view on the aluminum sector is mixed. One company we spoke with was increasing capacity while its competitors were cutting theirs. The privately owned company had a positive outlook on sales volume and average sales price in light of steady demand for smartphones and tablets, social housing and autos. We expect corporate earnings in the sector to diverge over the next 12–18 months due to a wide range of cost curves, reflecting such factors as access to bauxite, power costs and distance from customers.

Selective Investments Still Rewarding

These assessments—combined with our already published views on banks and property—support our view that China is in for a long economic landing rather than a hard or soft one. We expect the prospects for this to firm up over the next 12–18 months as a number of developments play out:

  • Defaults in stressed commodity-related industries, such as the steel sector, in which banks (the lifeblood of the Chinese economy) are reducing their exposures
  • Banks remaining in reasonable shape, taking advantage of the targeted flexibility provided by the government to help them avoid a liquidity crisis
  • An acceleration in infrastructure spending next year as the initial shock of the anti-corruption campaign subsides
  • The property sector muddling through its challenges

This is all predicated, of course, on the government continuing to pursue its reform agenda with only limited and targeted support for economic growth. But we think that path is highly likely. While the short- to medium-term outlook for China is mixed and involves risks, we believe select investments in China can be rewarding for investors.

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.

Hayden Briscoe is Director of Asia-Pacific Fixed Income, Shamaila Khan is a Portfolio Manager in Emerging Markets Corporate Bonds and Jenny Zeng is a Research Analyst in Corporate Credit, all at AllianceBernstein (NYSE:AB).

© AllianceBernstein

http://blog.alliancebernstein.com

[description] => Based on insights from our team’s recent trip to China, we noted that the country is likely headed for a long economic landing. What does that mean for its infrastructure and commodity sectors? [author] => Hayden Briscoe [legacyinterface_firm_id] => 20 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 03:40:31 [created_by] => 945 [modified_on] => 2014-12-06 03:41:25 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2085 [hits] => 0 ) [2] => stdClass Object ( [legacyinterface_commentary_id] => 2020 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15258 [apv_conversation_id] => 2855 [content_type] => market-commentary [title] => Five Ways to Tackle Risk in Emerging Equities [slug] => bernstein_120614a [fulltext] =>

Emerging-market (EM) equities are far more turbulent than their developed-world peers. But there are several things investors can do to capture the attractive return potential while reducing volatility. Staying active is the lynchpin for success.

Economic progress and structural reforms over the past 20 years have reduced some volatility in many EM countries. However, EM stock markets are still more volatile than their developed-market (DM) counterparts. And single-stock EM volatility tends to spike more sharply in times of crisis. Our research shows that since 1996, the chance of losing more than 30% of an investment in a single stock was far more common in EM than in DM. In declines of 30% or more, the average loss was also higher for EM than for DM.

The Problem with Indexing

Buying the index might seem like a low-risk approach. However, the four riskiest emerging-market countries over the past 20 years—Russia, Indonesia, South Korea and Brazil (Display)—represented over 35% of the EM Index’s market capitalization at the beginning of this year. By being concentrated in the most volatile set of countries, a passive index will take on substantial excess risk. We believe investors can proactively mitigate the risks with these five active principles in mind.

 

Don’t Be Too Quick to Reload into Losers—In emerging markets, price momentum is very powerful. Winning stocks typically stay winners for longer than in DM, and losers keep on losing for longer too. So when a money-losing stock faces significant headwinds, we think investors should think twice before reloading—and should be quicker to consider selling a position.

Invest in Less Volatile Companies—Companies with stable cash flows, good capital stewardship and/or lower sensitivity to the business cycle are good targets in emerging markets. Our research shows that the lowest-beta quintile of EM stocks was three percentage points less likely to decline by more than 30% than was the EM market as a whole. This resulted in a meaningful pickup in long-term returns.

Stocks of such companies might not do as well when markets are exuberant. However, they have tended to outperform the market over full market cycles. We call this gaining more by losing less.

Hedge Currency Risk for Times of Stress—Currency is an important component of equity returns for nondomestic investors. Our research found a negligible relationship between the strongest-performing EM equity markets and their currencies since 1997, during typical market conditions. However, in extreme market volatility, the linkage between a country’s currency as measured by the real effective exchange rate (REER) and its equity returns tends to increase significantly (Display). So managing the risk of sharp swings in currency should always be considered by emerging-market equity managers.

 

Diversification Matters More in EM—Unexpected—and often unpredictable—events happen far more frequently in the developing world. In developed markets, we generally believe you need at least 40 stocks to diversify away 95% of the risk of individual stocks. However, because of the higher levels of single-stock volatility and higher correlations between those stocks in EM, we need nearly twice as many to provide the same level of risk reduction.

Following the largest names in the index can lead to unintended concentrations in specific countries, sectors, or styles. For example, if we just bought the 75 largest stocks in emerging markets, over 65% of the portfolio would be allocated to just four countries, with nearly 70% to financials, technology and energy. Don’t shy away from taking high active risk, but combine it with prudent diversification.

Holistically Combine Stocks and Bonds—Think beyond equities when considering diversification. Combining EM stocks, bonds and currencies, managed in an active, unconstrained and integrated strategy can generate returns that are similar to those of an EM stock-only strategy, but with much less volatility. It also provides more flexibility than a stand-alone equity or debt portfolio to seek higher risk-adjusted returns.

Risk control is a critical component in managing an EM equity portfolio. Because of the higher possibility of loss, we believe that EM investors should deploy a systematic approach, which could also enable them to potentially compound more of their gains over the long term.

© Alliance Bernstein

http://blog.alliancebernstein.com

[description] => Emerging-market (EM) equities are far more turbulent than their developed-world peers. But there are several things investors can do to capture the attractive return potential while reducing volatility. Staying active is the lynchpin for success. [author] => Nelson Yu and Morgan C. Harting [legacyinterface_firm_id] => 20 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 03:43:51 [created_by] => 945 [modified_on] => 2014-12-06 03:44:45 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2086 [hits] => 0 ) [3] => stdClass Object ( [legacyinterface_commentary_id] => 2021 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15259 [apv_conversation_id] => 2856 [content_type] => market-commentary [title] => China’s Economy Gliding into “Long” Landing [slug] => bernstein_120614b [fulltext] =>

China’s economy isn’t headed for a hard or soft landing—instead, it’s more likely to be a long landing. That’s our perspective, based on our team’s recent visit to China to get an up-close look at the economic landscape.

The country’s economy clearly faces another few years of uncertainty and negative headlines, but we think the risks will be contained as long as the government sticks to its reform agenda. On our China trip, we assessed conditions in important cyclical sectors such as banking, basic industries and property.

Our takeaway: Investors who think the government’s recent stimulus tweaks are a prelude to a more general nationwide stimulus—global financial crisis–style—are wide of the mark. In our view, the Chinese economy is actually in store for a long landing lasting two or three years. Commodity-related industries will face a painful readjustment, and some companies will default and may even collapse.

This scenario assumes that Chinese Premier Li Keqiang will stick to his structural reform agenda. We’ve said that policy risk is one of the biggest risks China faces: if the government were to abandon its reforms and revert to a broad stimulus, our view would turn negative. But we’re still convinced—strengthened by the announced formation of a new anti-corruption body at last month’s National People’s Congress—that reforms remain on track.

Among the sectors we looked at in detail were banks and the property sector; the Display below provides a quick summary of our views.

Banks: Getting Tough on Steel Mills

There are signs that China’s large banks were more inclined to increase their property exposures in the first half of the year, as other sectors are facing headwinds that carry higher risks for them. Still, we regard short-term liquidity, not oversupply, as one of the two key risks for the property industry (government policy is the other). Banks said they were cautious about lending to developers; some have tightened their lending practices or are being selective, including concentrating on residential loans.

Banks are reducing their exposure to sectors burdened by overcapacity. For the first time, we heard that they weren’t renewing loans to weak steel mills. This should lead to faster defaults and more consolidation, which would be positive for the sector in the medium term. We doubt, however, that smaller banks are reducing their lending to sectors with overcapacity. Doing this would create problems for the banks’ own cash flows and balance sheets.

We saw differences in the way banks are managing their exposure to the shadow banking sector. One bank we spoke to had increased its exposure; in its view, recent announcements from the China Banking Regulatory Commission signaled an intent to regulate the sector, not slow it down. Another bank kept its exposure the same during the first half of the year compared with the previous corresponding period.

Property: Muddling Through

When we visited residential projects in the luxury and mass-market sectors, as well as some commercial projects, all in Changsha and Shanghai, we saw some distinctions. Overall sentiment is much more bearish in lower-tier cities than in “Tier 1” cities, even though Tier 1 cities have seen a bigger correction in sales volumes so far this year.

The companies we spoke to believe that underlying demand remains strong, and that supply and demand are much more balanced in Tier 1 cities, as shown in the Display below, while inventories in lower-tier cities have been increasing, and destocking has been slow.

Most property developers remain reluctant to cut prices. They’re hoping the government will eventually provide significant support for the market, despite the fact that developers who have cut prices by 10% in Tier 1 cities and 20% elsewhere have enjoyed good sales.

We believe the sector is unlikely to collapse, given the long-term prospects from trends such as continuing urbanization. We agree that the sector just needs time to consolidate and absorb the building surplus. Managers told us they expected the correction to last 18–24 months; sales should remain flat during 2015, but new construction should start rebounding year over year, helped by a low base in 2014.

These insights largely confirmed our view of the property sector. The only new information was that the government has started to allow certain developers to issue onshore medium-term notes. We consider the diversification of funding sources a positive for large developers.
In the second part of this blog, to be published soon, we’ll look at prospects for the infrastructure and commodity sectors.

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.

Hayden Briscoe is Director of Asia-Pacific Fixed Income, Shamaila Khan is a Portfolio Manager in Emerging Markets Corporate Bonds and Jenny Zeng is a Research Analyst in Corporate Credit, all at AllianceBernstein (NYSE:AB).

© AllianceBernstein

http://blog.alliancebernstein.com

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Key Points

  • Some attitudinal measures of investor sentiment show troublingly high levels of optimism.
  • Longer-term sentiment surveys that separate individuals from institutions show something much, much different.
  • These longer-term surveys suggest there’s little risk that the “wall of worry” the market likes to climb is crumbling.

I write and talk about investor sentiment quite often, particularly when it becomes extreme- at either the optimistic or pessimistic end of the spectrum. There are myriad indexes I review regularly, several of which are incorporated into the Crowd Sentiment Poll, put together by Ned Davis Research (NDR), as seen below.

Crowd Sentiment Spiked With Rally

Crowd Sentiment Spiked With Rally

Source: FactSet, Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2014© Ned Davis Research, Inc. All rights reserved.), as of November 25, 2014.

It should not be surprising to see optimism having spiked in light of the ferocious rally in the stock market off the October lows. This index is now back into the zone in which the stock market has historically had a bit of trouble, at least short-term.  Remember, this is a contrarian indicator.

Wall of worry

But there are a few other interesting sentiment surveys that suggest the so-called “wall of worry” the stock market likes to climb remains intact. My thanks to Bespoke Investment Group (BIG)  for highlighting a couple about which I was less familiar—and one I’ve discussed on these pages in the past.

Robert Shiller at Yale is well-known for his “cyclically-adjusted price/earnings” ratio (CAPE). But via the Yale International Center for Finance he has been conducting a few interesting sentiment surveys since 1989—posing questions to both individual and institutional investors.

The first chart below shows the results for a question asking investors about their confidence in the market not suffering a crash. I’ve highlighted this one several times in the past. It’s a bit convoluted in terms of how the question is posed and how the data is charted; but the way to read it is if the reading is low (and falling), it means there is increasing confidence there will be a market crash.

Low Confidence Crash Will Be Avoided

Low Confidence Crash Will Be Avoided

Source: Yale School of Management, International Center for Finance, as of October 31, 2014.

It should come as no surprise that the all-time low in this survey was near the crescendo of the financial crisis in late-2008. At that time, confidence among individuals and institutions was nearly equally low that there would be no market crash. Earlier this year, the reading ticked up to its highest level of the current bull market, meaning investors were less worried about a crash. But what’s most interesting lately is that alongside a very strong market rally since October, this survey has dropped noticeably, meaning investors’ worries about a crash have gone up alongside the market’s rally.

The next chart below shows the results for a question asking investors about their confidence in the market going up over the next year. Interestingly, individual investors’ confidence has generally been in a weakening cycle over the past 14 years, and today’s confidence (or lack thereof) is even lower than it was during the heat of the financial crisis. Institutional confidence has been a bit steadier, albeit with more short-term volatility.

Confidence in Market Sinking

Confidence in Market Sinking

Source: Yale School of Management, International Center for Finance, as of October 31, 2014.

As you can see above, there was a very large gap between individuals’ and institutions’ confidence earlier this year; with institutions well more bullish. Both cohorts have recently become much more bearish, although the spread remains quite wide. Notable is the fact that individuals have a record low level of confidence in the history of this survey.

The final chart below shows the results to a question asking investors about their confidence in market valuation. Much like with the prior two surveys, individual investor confidence has plunged. Individual investors today believe the market is more highly-valued than any time since 2001, just after the bursting of the tech stock bubble.

Confidence in Valuation Sinking

Confidence in Valuation Sinking

Source: Yale School of Management, International Center for Finance, as of October 31, 2014.

These Yale surveys are longer-term in nature and highlight the persistence of skepticism during the bull market underway since March 2009. So, although I and other sentiment-watchers may fret about data like that seen in NDR’s Crowd Sentiment Poll (and/or among its component indexes), there is little to worry about from a longer-term sentiment perspective. This has been the “most hated bull market in history” as noted by BIG, and reinforces the “wall of worry” the stock market is likely to continue to climb.

© Charles Schwab

www.schwab.com

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Back in the summer of 2011, a short animated film was built using a website called XtraNormal. The site allows anyone to create a film and chose animated characters and voices. This one particular film sought to educate (with the creator’s strong opinions included) the audience on the Federal Reserve’s Quantitative Easing (QE) program, which then was in its middle stages. And boy, did it find an audience, with over 5 million people viewing it!

With QE ending recently in the U.S. but accelerating elsewhere in the world, we thought it was the right time to revisit this now-iconic piece of modern economic commentary. And while some of the things noted in the film have changed (gas prices now falling instead of rising, Janet Yellen replacing Bernanke as Fed-head, and the U.S. QE ended), much of what was discussed has stayed the same (QE has not yet staved off deflation, Yellen thinks like Bernanke, stock and bond prices still rising). And of course, the Fed is now holding enough U.S. Treasury Bonds on its balance sheet to build a city full of skyscrapers.

 

https://www.youtube.com/watch?feature=player_embedded&v=PTUY16CkS-k

As we have said before, we don’t know when the negative impact of QE will be felt, and we position our portfolios based on a combination of factors.  But when it hits the fan, we expect an “Xtra Normal” sized problem for investors who choose to carry on as if this market condition is not relevant.

 

© Sungarden Investment Research

http://www.sungardeninvestment.com

 

 

[description] => Back in the summer of 2011, a short animated film was built using a website called XtraNormal. The site allows anyone to create a film and chose animated characters and voices. This one particular film sought to educate (with the creator’s strong opinions included) the audience on the Federal Reserve’s Quantitative Easing (QE) program, which then was in its middle stages. And boy, did it find an audience, with over 5 million people viewing it! [author] => Robert Isbitts [legacyinterface_firm_id] => 402 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 03:59:01 [created_by] => 945 [modified_on] => 2014-12-06 04:01:57 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2089 [hits] => 0 ) [6] => stdClass Object ( [legacyinterface_commentary_id] => 2024 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15262 [apv_conversation_id] => 2859 [content_type] => market-commentary [title] => Five Things To Ponder: Unstoppable Force Paradox [slug] => streettalk_120614 [fulltext] =>

As we enter the final month of the year, the markets advance got me thinking about something known as the "Unstoppable Force Paradox." While you may not be familiar with the name, you will certainly know the definition which questions "What happens when an unstoppable force meets an immovable object?"

Even Frank Sinatra sang about it in "Something's Gotta Give:"

The paradox arises because it rests on two premises—that there exist such things as irresistible forces and immovable objects. The paradox is that both cannot both be true at same time. If there exists an irresistible force, it follows logically that there cannot be any such thing as an immovable object and vice versa.

However, that has become the general view of the financial markets currently. As discussed in yesterday's missive on excessive exuberance, investors have been lulled into a state of complacency due to a seemingly "unstoppable" rise in the financial markets. Bad news remains good news, and even small drawdowns are quickly reversed sending stocks surging higher.

AAII-INVI-BullBear-Ratio-120414

Eventually, the paradox of what happens when a seemingly unstoppable force collides with an immovable will be answered. Historically, such realizations have not been kind to investors. 

This weekend's reading list takes a look at the reasons why stocks could rise higher, and the potential they won't. The question to be answered is "What will you do when the immovable object is met."


1) Stocks Set For A Santa Rally If No Bad News by Adam Shell via USA Today

December-Market-Stats-120414"The combination of seasonal strength, strong business fundamentals and valuations at or below long-term averages increases the odds that stocks can continue to rise into the year's end, perhaps as much as 2%, says Sam Stovall, U.S. equity strategist at S&P Capital IQ.

"In support of history, we think the S&P 500 should do well in December," Stovall says. "Our projection for solid November employment gains (when the results are released Dec. 5), our forecasts for improving holiday retail sales and the prospects for better-than-expected fourth-quarter profit growth should help maintain the market's upward momentum."

2) Sorry, Santa Won't Deliver Year-End Gains by Mark Hulbert via MarketWatch

"For this column I surveyed the several hundred advisers monitored by the Hulbert Financial Digest in search of a precise definition for the Santa Claus Rally. I came up with three more or less distinct possibilities, and I subjected each to statistical scrutiny."

1) The Stock Market Rallies At Some Point During December

2) December Tends To Be A Good Month For Stocks

3) Stock Market Tends To Perform Well Between Christmas And New Year's

"The bottom line? For this definition, as well as the first two, the statistical basis of the Santa Claus Rally is too weak to make it worth the bother."

3) The Fed's Economic Coup - Why Every Asset Price Is Manipulated by David Stockman via ContraCorner

"Now in a recent forked-tongue effort to deny the existence of a Fed “put” under the stock market, Goldman’s plenipotentiary at the Fed, perhaps better referred to as B-Dud, has told us exactly that. If the monetary politburo deems that the nation’s economic bathtub is not full to the brim and therefore requires 'extremely accommodative' policy, the central bank will indeed deliberately pump-up the S&P 500 to achieve its misguided ends."

4) James Montier: "Stocks Are Hideously Expensive" via ZeroHedge

"Four words seem to define the current mood in financial markets: There Is No Alternative. Yes, equity markets might be somewhat expensive, but considering the alternatives – bonds and cash –, they are still the best investment. The correction in October turned out to be a mere hiccup in a solid bull market.

But James Montier remains skeptical. The value investor and member of the asset allocation team at Boston-based asset manager GMO sees the stock market in a near-bubble and warns investors from being complacent. 'To think that central banks will always be there to bail out equity investors is incredibly dangerous,' says the outspoken Brit. His source of wisdom in current markets comes from none other than Winnie the Pooh: 'Never underestimate the value of doing nothing.'"

Read Also: It's Painful Waiting For The Bubble To Burst via Comstock Partners

5) A Rising Aversion To Risk by Michael Kahn via Barron's

"Interpretation of the economic implications of the changing relationships of asset classes is beyond the realm of technical analysis. Still, action in the global bond market is hard to ignore right now with U.S. and many European government bond prices rising while riskier junk-bond prices are falling.

This suggests rising risk aversion. Despite climbing U.S. stock prices, the credit market's action—with yields on government obligations falling to unprecedented lows while riskier credits' yields are rising—implies nervousness about the global economy. Perhaps—though drawing big conclusions about the global economy is well beyond the scope of this column.

In my view, the bond market is telling us two things. First, low yields across the globe point to economic weakness, which is being met by ultralow rates set by central banks that are likely to persist. Second, risk aversion is growing even as the Dow Jones Industrial Average notches new records. Taking it easy with your money is probably a good idea."

Read Also: A Stock Market Correction Is Imminent by Lawrence McMillan via MarketWatch

Chart Of The Day: "Something's Gotta Give"

Somthings-Gotta-Give-120414


"In 1979, an unstoppable force met an immovable object. Chuck Norris kicked Mr. T in the jaw. The result was the '80s." — Chuck Norris Facts

Have A Great Weekend

© Streettalk Live

http://streettalklive.com

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Last year’s decision to relax the one-child policy was an important political step by the Chinese government but it will have little impact on the country’s demographic and economic trends. Chinese leaders have effectively ended “one of the most draconian examples of government social engineering ever seen.”

Historical Background


Rapid population growth after World War II led to a global focus on birth control. One extreme response was India’s forced sterilization campaign between 1975 and 1976 when more than 8 million sterilizations were performed. In 1980, China began enforcing its “one-child policy,” which three prominent Chinese demographers, writing recently in a U.S. academic journal, called “the most extreme example of state intervention in human reproduction in the modern era. . .that has forcefully altered family and kinship for many Chinese.”

Last Year’s Policy Change


Last November, China’s Communist Party announced that the one-child policy would be relaxed by implementation of a policy in which families are permitted to have two children if either a husband or a wife is an only child. This marks a change from the previous rules which required both the husband and wife to be only children in order to qualify to have a second child.

Because this relaxation was accompanied by a decision to dismantle the one-child enforcement bureaucracy, in my view it spells the rapid end of the one-child policy.

The most significant aspect of this move is political, as it represents the Party’s decision to withdraw from its citizens’ bedrooms. Restoring this element of personal freedom should help rebuild people’s trust in the Party.

But, contrary to conventional wisdom, ending the one-child policy is unlikely to change the longer-term trend toward a lower fertility rate. China’s current fertility rate of about 1.5 could drop even lower in the future, closer to South Korea’s 1.3, as the pressures of modern life lead Chinese couples to have smaller families. 

Smaller Families Before One-Child


It is important to recognize that the steepest fall in China’s total fertility rate (the average number of live births per woman) actually came before enforcement of the one-child policy began in 1980. The fertility rate dropped by more than half, from 5.5 to 2.7, between 1970 and 1980, influenced by rising urbanization and falling infant mortality rates. Today, China’s fertility rate is about 1.5.



Although 11 million couples are now eligible to apply for permission to have a second child under the new policy, only 700,000 couples (6% of total) applied through August of this year.

Long-Term Impact


Last year, before the policy change was announced, I spoke with one of China’s leading demographers, Wang Feng, about the prospects for change. Wang is a professor of sociology at the University of California, Irvine, and is on the faculty of Fudan University in Shanghai. He is also a nonresident senior fellow at the Brookings-Tsinghua Center in Beijing, and he recently wrote that the one-child policy “will go down in history as a textbook example of bad science combined with bad politics.” 

Following are excerpts from my interview with him. I began by asking him about the long-term impact of ending the one-child policy. Professor Wang said expectations for a rebound in the fertility rate have been exaggerated:

Professor Wang: The reason I say it’s exaggerated is because in most of China’s rural areas, couples who want to have two children have already had two. There are certainly some couples who would want to have two children, which would be good for them, but we have all indications showing that many urban couples are happy to stay with one. And then there are couples who are actually choosing not to have any children, given the larger financial ramifications—the cost of having them.

For instance, in Shanghai, fertility is even below the one-child-per-couple level. This is despite the fact that, because of the early implementation of the one-child policy, many Shanghai couples are in the only-child cohort and are thus eligible, under the current rules to have a second; but they are often choosing not to have a second and many are not even having one.

Q: What will be the longer-term impact on demographic trends of ending the one-child policy?


A: In terms of individual families, we will have more stable, and I would say happier, families because couples would have the option of having a second child, or even more. More children will have siblings and there will be more children to care for older parents. So there will be happier, safer families.

Even at the aggregate level, if there’s a rebound in births, it would be short-lived and of moderate magnitude. There’s no indication whatsoever that the fertility level in China could return to what we call a replacement level, even after the one-child policy ends.

This means that China will continue to have a very low fertility rate: from today’s 1.5, it could go as high as 1.6, so the aging scenario we’ve been talking about will not be affected by this policy.

Q: So right now the fertility rate is about 1.5?


A: Right.

Q: And 10 years from now, which will be a decade after the one-child policy is lifted, do you think it will only rise to 1.6?


A: That is possible; but I would not be surprised if the fertility rate was to drop even lower, to 1.3 for instance, to what we see in Japan and South Korea. This is because the larger context of the financial pressure on a parent is unlikely to change in the short term and could actually become more stressful.

Q: What conclusions can we draw by looking at other countries in the region that have gone through China’s development cycle? Is China’s fertility rate following a similar trajectory and, based on this comparison, is it likely to go lower?


A: Absolutely. If you look at the whole world, the region that has the lowest fertility levels is East Asia. Regardless of political system or policy, they all share the same feature of very low fertility. Even when governments in this region have adopted pro-birth policies, those have had little effect.

Q: Do you think that ending the one-child policy will have an impact on the imbalance in China’s male-to-female ratio?


A: I think it will. There are two things that are happening right now that are resulting in the abnormal sex ratio. One is the effect of policy, because policy suppresses people’s behavior or choices. The other is something that is actually not talked about much: it’s not because of the policy; it is because when fertility is going down to a very low level, and when people still have a preference for boys, the sex ratio becomes abnormal. This was what happened in South Korea in the mid-1990s. Eventually, the preference for boys will decline and, as the policy is changed, both factors will lead to an improvement in the sex ratio.

Q: How large is the sex ratio imbalance today?


A: We estimate there are between 20 to 40 million excess males in China. Such a number, though spread over time, could have a number of social consequences. Primarily, poor rural men will struggle to find a spouse in the coming years. Further down the road, these will be lonely elderly men who will need the society’s support during their old age. The threat they pose to society is highly exaggerated, as these are most likely immobile poor men at the bottom of society, without the resources to organize or harm others.

Q: Let us now talk about some of the longer-term demographic trends in China. People often say that China is going to get old before it gets rich and that the dependency ratio of the elderly in particular is going to rise to a high level in the not-too-distant future. Can you talk about that?


A: China has become a lot richer in the past couple of decades, especially the last one, but China is already getting older and the question is how much richer it will get down the road. In China, about 9% of the population was aged 65 and over in 2010. When Japan reached that age level, its per-capita income was almost twice the level of China’s in 2010. When South Korea reached that point, its income was almost three times higher than China’s. So in that sense, China has already grown old and yet is not as rich as the other societies.



What is important is not just individual wealth, but that China’s social infrastructure is inadequate, in terms of an equitable and sustainable health care system and a national social security system. This social infrastructure is not yet in place, so China does face a very, very serious situation.

Q: China’s growing population has meant that its economy has benefited greatly over the past few decades from a demographic dividend. Now that the working age population has begun to shrink, is that dividend exhausted? Will that be changed as a result of the termination of the one-child policy?


A: Using sophisticated methods to calculate the demographic dividend, which would include not only population age structure, but also productivity and consumption by age, China reached the end of its demographic dividend period last year. Economists have estimated anywhere between 15% to 25% of China’s economic growth in the past couple of decades was due to a favorable demographic profile - the demographic dividend - but that dividend has now become zero. In the coming years, China will experience a so-called negative demographic dividend, which will take its toll on China’s economic growth rate, assuming everything else stays the same. 

Q: Will ending the one-child policy have any impact on this process?


A: No.  As we discussed earlier, the magnitude and duration of the birth rebound is not going to be very big, and in any event, over the next couple of decades most new births will increase the size of the younger dependent population rather than increase the size of the workforce.

Q: When you look at other countries that have gone through this demographic shift, what conclusions do you draw about the impact of this shift on China’s economic growth?


A: China’s economic growth faces many constraints. One of them is the change in population age structure and, in China’s case, the change is much more rapid than other countries that have gone through this. There are two broad areas we could look at in terms of economic impact. One is better understood, which is the changing support ratio, or the dependency ratio. China now has a five-to-one ratio of working- (or taxpaying-age) to pensioner-age population (60 and over). But within 20 years, that ratio will be two-to-one. 



People point to Japan as an example, with the malaise in its economy in the past two decades; many people increasingly argue that Japan’s aging population is dragging down its economic growth. China of course is different from Japan in terms of where its economy is, and how the economy is organized. Demographically, however, China does share similar features with Japan, though change is coming even faster. So I would say that Japan does serve as a cautionary example. 

Andy Rothman 
Investment Strategist 
Matthews Asia

© Matthews Asia

http://us.matthewsasia.com

[description] => Last November, China’s Communist Party announced that it would relax its famed one-child policy—“one of the most draconian examples of government social engineering ever seen.” This is a significant political move, as it represents the Party’s decision to withdraw from its citizens’ bedrooms, restoring a key element of personal freedom that should help rebuild people’s trust in the Party. But what some observers may not realize is that the steepest fall in China’s total fertility rate (the average number of live births per woman) actually came before enforcement of the one-child policy began in 1980. The fertility rate dropped by more than half, from 5.5 to 2.7, between 1970 and 1980, influenced by rising urbanization and falling infant mortality rates. So, will China’s new family planning policies actually have an impact on the country’s demographic and economic trends? Sinology explores. [author] => Andy Rothman [legacyinterface_firm_id] => 286 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 04:09:51 [created_by] => 945 [modified_on] => 2014-12-06 04:10:33 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2091 [hits] => 0 ) [8] => stdClass Object ( [legacyinterface_commentary_id] => 2026 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15264 [apv_conversation_id] => 2861 [content_type] => market-commentary [title] => Draghi Crosses the Rubicon while Juncker Peddles "Europhemisms" [slug] => franklin_120614 [fulltext] =>

The announcement by newly installed European Commission President Jean-Claude Juncker of a package designed to secure €315 billion of investment for the eurozone garnered a lot of press interest in late November. However, John Beck, director of Fixed Income, London, and portfolio manager, Franklin Templeton Fixed Income Group®, believes a speech by European Central Bank (ECB) President Mario Draghi at a bankers’ conference in Frankfurt earlier in the month offers more practical insight for investors. Here he outlines lessons to take from Draghi’s speech in the lion’s den.

John Beck
Director of Fixed Income, London
Senior Vice President, Portfolio Manager,
Franklin Global Government Bond Fund
Franklin Templeton Fixed Income Group®

On the face of it, the €315 billion investment plan unveiled on the 26th of November by European Commission President Jean-Claude Juncker1 may look impressive, but when you consider that it represents less than 3% of the eurozone GDP, it’s perhaps not that exciting. Equally when you look at the specifics, the European authorities, through the European Investment Bank (EIB), are putting up just €16 billion, and they are hoping that the private sector is going to come in and supply the rest. That’s not going to transform the world, in my view.

Even considering that these EIB-sponsored funds may be eligible for the European Central Bank (ECB) to buy as part of its asset-buying project that it hopes will drive increased liquidity across the eurozone, I don’t think this is anything close to a revolutionary approach. I think it shows how hesistant different parts of the eurozone are in terms of trying something different.

Juncker’s announcement was packed with what I call “europhemisms”—meaningless euphemisms expressly designed not to offend any constituent of the European Union—such as “adding a third point to the virtuous circle,” “applying the jump cables” and “turning the page.”2 But if Juncker is “turning the page,” a few days earlier, right in the seat of monetary rectitude—the European Banking Congress in Frankfurt—ECB President Mario Draghi crossed the Rubicon and admitted the ECB has opened the door to quantitative easing. He told the audience of European bankers: “We resorted to asset purchase. Faced with continuously weak inflation, we reached the effective lower bound on our policy interest rates, and we resorted to asset purchases as a means to expand further our monetary policy stance.”3 This is a pretty powerful place for Draghi to be opening this conversation, in my view.

Addressing Inflation

Draghi went on to say that inflation has been too low and was affecting the future inflation outlook. As a result, he insisted it was essential the ECB has acted to bring inflation back toward 2% and ensure the firm underpinning of inflation expectations.4 Some observers would say he has been slow to make these decisions. There has been an internal debate within the ECB on whether to buy sovereign bonds, when to buy them, and what the break-down of the bonds they might buy should be. I think now we’re beginning to get some answers.

Japan is also attempting to counter what it sees as low inflation. Its central bank, the Bank of Japan, has an explicit inflation target: it is now trying to generate 2% inflation.5 In his recent speech, it seems to me that Draghi is reiterating, implicitly rather than explicitly, the fact that the ECB has a similar target. And in effect he is saying that, if the European authorities can’t get inflation up to that level quickly, they are going to have to do more—basically, they seem to be opening the door to formal sovereign buying in the secondary markets.

On the one hand, I think Draghi is careful to say all the right things about not letting inflation get out of control, but on the other hand, he concludes—and this is incredibly powerful: “If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialize, 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.”6

So I think what the ECB is proposing in terms of monetary policy should be a great deal more effective than the European Commission essentially providing €16 billion worth of capital and hoping that someone else is going to borrow the rest. In my view, that’s far from the application of jump cables that Juncker promised.

When you talk about “jump cables”—or when you defibrillate a patient—you deliberately stand away because you’re giving a real shock. I don’t think €16 billion is a real shock. I think what Mario Draghi is proposing has the potential to be much more transformative in terms of what the outcome could be from a European growth perspective.

Portfolio Balance Effect

The ECB is now talking about portfolio balance effect—the concept that, if a central bank buys up lower risk sovereign instruments, investors will likely move into riskier assets. This concept, to me, is very important.

In his speech on November 21, Draghi explained:

“As we buy assets, investors are likely to substitute the lower-risk assets we buy with riskier assets such as longer-term assets, equities and possibly real estate. This type of move has well-known effects on interest rates across the curve, on the cost of capital, on wealth—through higher equity and real estate prices—and therefore on balance sheets more generally.

“There are certainly question marks as how strong these effects are in the euro area. We do not have precedents and therefore empirical data for an economy such as ours, which has a different financial structure from the United States or Japan. But there is no question as to the sign of the effects—it is clearly positive.”7 

In so many words, I think this shows Draghi is likely telling us that the ECB is planning to do what the Bank of Japan and what the US Federal Reserve have done, in terms of quantitative easing.

And by acknowledging that substitution of assets can also take place across jurisdictions, “which would take the form of investors rebalancing portfolios away from euro-denominated assets towards other jurisdictions and currencies providing higher yields,”8 Draghi appears to be saying that, if the euro weakens, which is the likely effect of portfolio rebalancing, he’s happy with that outcome. A weak currency is generally good for growth because a country can export more.

The slight concern, in my view, has to be whether the ECB will achieve the weakening of the euro because the eurozone still has a very large current account surplus.

I do think the euro has the capacity to weaken further, but the flip side is the United States’ tolerance to shoulder the burden of global economic recovery, and it remains a question mark.

Key Takeaways

The lesson from Draghi’s speech, I believe, is “listen to what you’re being told.”

And what I interpret from his remarks is that investors might continue to be overweight periphery, continue to expect the yield curve to flatten, and anticipate sovereign buying in the first quarter of next year. My expectation is that sovereign buying will likely be based on the percentage allocations of capital paid into the ECB, which could mean that countries like France, Spain and Italy could very likely be large beneficiaries of that buying.

In summary I feel that when the head of the ECB makes a speech in Frankfurt—the “temple” of central banking—it’s incumbent on those of us who work in the markets to listen to his sermon and draw our own conclusions. Others might draw different conclusions, and that’s the power of active management.

The comments, opinions and analyses are the personal views expressed by the investment manager and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding any country, region, market or investment.

©Franklin Templeton

http://us.beyondbullsandbears.com

[description] => The announcement by newly installed European Commission President Jean-Claude Juncker of a package designed to secure €315 billion of investment for the eurozone garnered a lot of press interest in late November. However, John Beck, director of Fixed Income, London, and portfolio manager, Franklin Templeton Fixed Income Group®, believes a speech by European Central Bank (ECB) President Mario Draghi at a bankers’ conference in Frankfurt earlier in the month offers more practical insight for investors. Here he outlines lessons to take from Draghi’s speech in the lion’s den. [author] => John Beck [legacyinterface_firm_id] => 163 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 04:13:43 [created_by] => 945 [modified_on] => 2014-12-06 04:14:28 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2092 [hits] => 0 ) [9] => stdClass Object ( [legacyinterface_commentary_id] => 2027 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15265 [apv_conversation_id] => 0 [content_type] => market-commentary [title] => Weekly Market Summary [slug] => fatpitch_120614 [fulltext] =>

Coming into this week, SPY had been above its 5-dma for 30 days in a row. This was a new record, unlike any streak the index has ever seen. We reviewed prior examples of these streaks earlier; our conclusion was that the streak rarely marked the top in the market, meaning there were higher highs immediately ahead after the streak ended. But the index also struggled in the following weeks, often trading lower (the full post is here).

The set up we had been looking for after the streak ended was the first touch of SPY's 13-ema. That has been a reliable buy point which we have highlighted many times in the past. That occurred on Monday, with SPY at 205.5. By Wednesday, SPY had already gained $2.50.

That may not seem like much of a gain, but consider the context. In the past 4 weeks (since November 10), SPY has gained $4, but more than $2 of that gain occurred overnight on November 21 following announcements from both the PBOC and ECB to provide greater stimulus. Without that one gap, SPY is up less 1% in the past month.

Overall, the trend remains higher for both the main US indices and well as for a majority of the individual sectors. All of the US indices except RUT made new highs in the past week; all of the sectors except energy have made new uptrend highs in the past two weeks.



New highs imply limited resistance. After all, there are no prior buyers holding unprofitable shares at a higher price. So the main risk to trend is whether it is overextended. NDX may be the clearest example that it perhaps is. As the leader, NDX has the highest rate of appreciation; last week, it met its 2014 trend line, and this week, while SPX and DJIA closed higher, NDX closed lower.



NDX, by the way, still has not touched it's 13-ema since coming out of the October low. That's a set up worth watching into next week.

The Dow is also up against it's trend line;  moreover, it normally has resistance at its upper Bollinger, which is now just 0.1% higher. The trend is clearly up, but note the loss of momentum in RSI and MACD.



The same set up in the Dow also exists in SPY. The trend is higher; moreover, note how the index hugged the top trend line in June and July and again in late August and into September. With strong seasonality into year end, it would not be surprising to see SPY hug the top trend line for several more weeks.



The trend line shown above extends back 9 months. Interestingly, SPY is also up against a trend line extending back nearly 5 years. Again, there are no unprofitable buyers at current levels, but the rate of appreciation may be reaching its multi-month as well as its multi-year limit.



The chart above is on a weekly timeframe. Note that SPY is now up 7 weeks in a row. This is rare. In the past 10 years, this has only happened 4 other times. What happens next? In the past 4 cases, 3 closed lower the following week; the one positive case gained just 0.06% and then lost 1.6% two weeks later (data from Chad Gassaway).

Let's look at more examples, starting most recently. The vertical lines denote a 7 week up streak. Since 2004, the index has mostly struggled after the streak ended. Perhaps not immediately, but over the next weeks and sometimes longer. There is one exception where the index closed only slightly lower for two weeks and then zoomed higher (February 2013). Some of these streaks occurred before very long chop (2004) or major market tops (2007 and 2011).



There were only two examples of 7 week streaks in the late 1990s. In 1997, the index closed down one week and then went higher, but it was still trading at the same level 6 months later (green line). In 1998, the index moved higher in week 8 and then settled into a 13-week long choppy trading range (yellow highlight).



Since 1980, there have only been three other cases; in two, SPY generally struggled for many months and in the other it did not (this was 1985, early in a new bull market).



Overall, in 8 of these 10 examples, SPY struggled to retain any gains over the next two months or longer, and in two SPY basically continued higher. We should stress that in all 10 cases, the end of the 7 week streak did not mark an exact top; the index always made a higher high in the weeks ahead. That means that investors should be looking to accumulate on near term weakness, at least for a trade.

One more technical set up related to SPY is that it is again within 1% of a "round number" (e.g., 1900, 2000. 2100). In the past, these milestones have provided psychological resistance. There has been a minimum drawdown of 3%, but often much more. We often look for a retrace to the middle of the Bollinger, in this case about 4% lower (1980 on SPX). About half of these have started before the round number was formerly hit.



These technical patterns are arriving just as sentiment is once again becoming heated. This is to be expected when the index is up 12% in 7 weeks. The weighted put/call ratio for equities is now at an extreme where SPY often turns (chart from McMillan).



Moreover, inflows into equity ETFs and mutual funds reached $44b over the past 6 weeks. Inflows have been positive all 6 weeks; in the past 20 months, inflows extended into week 7 only three times: mid-August 2013, mid-July 2014 and mid-September 2014. Those occurrences are shown below with the subsequent drawdown.



Combining inflows and equity put/call ratios, among other indicators, is the basis for Sentimentrader's "dumb money" indicator. That indicator hit a fresh 2014 high this week. There is reason to suspect that bullish sentiment is reaching an extreme where the index either makes little progress or retraces.

We are now into December and the end of the year is near. This time period is particularly strong from a seasonality standpoint. The index might suffer a drawdown (the average since 2000 is 3.6%) but closes higher more than 80% of the time. When the index is in an uptrend, SPY has only closed more than 1% lower twice since 1980 and both times it regained all those losses and then some in January (a full post on this is here).



The only week in December that is not seasonally strong is coming up now (chart from Sentimentrader).



The week after last month's NFP release was uncharacteristically strong. However, over the last two years, the week following the release of NFP (which was this week) has been weak; two days later, SPY has been higher than Friday's close just 27% of the time (chart from Chad Gassaway).



Finally, an excellent post from Brett Steenbarger, discussing both breadth and sentiment, is worth reading closely (link). It highlights, using different metrics, some of the same issues discussed in this post.

Our weekly summary table follows.

© The Fat Pitch

http://fat-pitch.blogspot.com

[description] => Coming into this week, SPY had been above its 5-dma for 30 days in a row. This was a new record, unlike any streak the index has ever seen. We reviewed prior examples of these streaks earlier; our conclusion was that the streak rarely marked the top in the market, meaning there were higher highs immediately ahead after the streak ended. But the index also struggled in the following weeks, often trading lower. [author] => Urban Carmel [legacyinterface_firm_id] => 514 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 16:20:21 [created_by] => 945 [modified_on] => 2014-12-06 16:25:19 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2093 [hits] => 0 ) [10] => stdClass Object ( [legacyinterface_commentary_id] => 2028 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15266 [apv_conversation_id] => 2866 [content_type] => market-commentary [title] => Sources of Investment Power: Why Expertise Matters and What it Looks Like [slug] => arete_120614 [fulltext] =>

Despite the ever increasing array of accreditations in the investment business, there simply aren't any that match those of law or medicine for being reliable marks for high levels of expertise. The Chartered Financial Analyst (CFA) certification comes closest in terms of analytical rigor and practical experience, but falls far short in public awareness. As a result, investors must contend with an almost unbelievably wide dispersion of ability from the universe of investment "professionals".

Also complicating the search for expertise is a wide array of jobs in the investment industry upon which expertise is often unjustifiably conferred. Bankers, traders, brokers, financial planners, wealth managers, portfolio managers, and analysts are all referred to as investment "professionals" with the connotation being that these people are also experts. Sometimes the association with expertise is well-deserved, but often it is not. What’s worse is that each of these job titles can mean vastly different things and have vastly different qualifications whether in reference to a bank, a brokerage firm, or an asset manager. If you don’t always completely understand what someone does or how much they might know, don’t feel bad; it’s incredibly confusing. 

For many years this confusion didn't really matter very much. Declining interest rates and strong economic growth ensured that most investments did well regardless of who was "managing" them. In a humorous commentary on the times, Jim Ware, author of High Performing Investment Teams, flippantly remarked in a presentation to a group of CFAs that, "During the '90s, Forrest Gump could have managed a successful investment firm." Not missing a beat, an audience member shot back, "He did!"

In the absence of the prominent tailwinds to equity returns of the ‘80s and ‘90s and with the prospect of a much wider array of possible investment outcomes, investors are faced with increasingly difficult decisions. In such an environment, good results don’t just happen on their own. Doing the wrong thing can be costly, but doing nothing can be even worse.

Given the importance of decision making, it is also somewhat odd that there is so little formal attention given to the endeavor. It is not taught at schools and only rarely studied.

Fortunately, Gary Klein goes a long way to filling this important knowledge gap with his book, Sources of Power. By weaving lessons learned from high-stress jobs such as firefighting, aviation, and military conflict with academic research, Klein identifies many useful insights. For example, he finds that neither biases nor stress play a significant role in poor decisions. Rather, what matters most is adequate knowledge and expertise. As he says, "Most poor decisions may result from having inadequate knowledge and expertise."

This is a hugely important finding. When all you need to do is to hoist a sail in order to harvest great investment returns, almost everyone makes nice progress. Exposure is the only decision and often that happens by default. When conditions get a lot choppier, though, the quality of decisions becomes much more important. Expertise matters because it enables quality decisions in difficult circumstances — which often leads to significantly differentiated outcomes.

Although expertise may be hard to identify in the investment industry for various reasons, most of us have some notion of what it looks like in general. Klein gives us a taste: "Experts know how the official records are compiled, whether they are maps, computer manuals, diagnostic tests, or air crew checklists. They know when steps have to be followed and when to make exceptions." This is a useful start.

Klein further captures the nature of expertise through the title of his chapter on the subject, "The Power to See the Invisible.” In that chapter, he provides a useful list of the types of things experts see that novices do not:

  • Patterns that novices do not notice
  • Anomalies -- events that did not happen and other violations of expectancies
  • The big picture (situation awareness)
  • The way things work
  • Opportunities and improvisations
  • Events that either already happened (the past) or are going to happen (the future)
  • Differences that are too small for novices to detect
  • Their own limitations.

All of these examples are relevant to the realm of investing. Anomalies may be one of the most important at this point in time. Non-experts may look at equity returns and believe, based upon their personal experiences of the last thirty years, that equity returns are likely to remain quite strong for the next thirty years. Experts, on the other hand, look at equity returns over many decades and across many countries and see the exceptionally high returns to US stocks over the last thirty years as an anomaly in the greater context of history. That doesn't make high returns impossible, just extremely unlikely. As Klein notes, “We can learn the wrong lessons from experience."

Situational awareness is also an extremely important manifestation of expertise. Non-experts may look at things like debt levels and feel comforted by the fact that increases don't seem especially large or that because interest rates are low, there is little sign of danger. Experts, in contrast, know that debt is an especially pernicious problem because the relationship between debt and outcomes is non-linear. In other words, beyond a certain level of debt, relatively small catalysts can cause disproportionately negative outcomes. By analyzing debt in relation to both assets and income, and by comparing these relationships across time, experts gain a much greater perspective on the risks inherent to a given investment situation.

Often too, there are patterns in the market that novices don't notice. Non-expert investors, for instance, often tend to view prices of stocks just as they would prices of consumer goods. While fundamental underlying value is certainly a component of stock prices just like of consumer goods, stock prices are different because they are traded actively in a market -- which is very different than being set by a retailer. Experts realize stock prices can fluctuate rapidly and wildly from their fundamental underlying values based upon patterns in trading volume, market structure, and market sentiment. Most of these patterns are invisible if one only looks at prices and the magnitude of deviation between prices and fundamental values is invisible without valuation expertise.

Pulling these ideas together, we can see that expertise is a hugely important factor in successful investing (as in many endeavors). As Klein describes, "In aviation, there is a term to describe people who are so wrapped up in what they are doing that they are insensitive to what lies ahead: flying behind the plane. It describes people who are either so novice or so overworked or have such poor situation awareness that they are not generating expectancies; they are not preparing themselves properly.” This provides an informative and hopeful message for investors: There is nothing magical about preparing properly for your financial goals; you just need to find access to investment expertise to help inform important decisions. Picture

© Arete Asset Management

www.areteam.com


[description] => There is a wide dispersion of ability in the investment services industry which makes it difficult to identify expertise. This is a shame because expertise is a critical factor in making good decisions and in avoiding bad ones. As the investment landscape becomes more difficult, it will become progressively more important to identify and access expertise. [author] => David Robertson [legacyinterface_firm_id] => 526 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 16:28:26 [created_by] => 945 [modified_on] => 2014-12-06 16:29:35 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2094 [hits] => 0 ) [11] => stdClass Object ( [legacyinterface_commentary_id] => 2029 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15267 [apv_conversation_id] => 2870 [content_type] => market-commentary [title] => Weighing the Week Ahead: Time for a Santa Claus Rally? [slug] => newarc_120614 [fulltext] =>

The schedule for data releases is lighter than usual. The calendar year is about to end. The market continues to set records. The stage is set for the annual question:

Will there be a Santa Claus rally in stocks?

Prior Theme Recap

In my last WTWA I predicted a three-part week – some post-holiday digestion of the news, a mid-week focus on the Fed, and a shift to the jobs story. That was pretty accurate, although the continuing decline in oil prices was a constant subject.

Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.

This Week’s Theme

This is the time of year when the calendar seems to command extra attention. Having escaped the seasonal scare of October and with an eye to year-end price targets, the punditry considers the prospects for a year-end rally. The combination of the calendar, record market highs, and relatively light news brings this question to the fore:

Will there be a Santa Claus Rally in Stocks?

Here are the basic viewpoints:

  • Annual seasonal factors are strong. These include the year of the Presidential election cycle, years ending in “5” and similar historical factors. Myles Udland of BI has this story.
  • Monthly seasonals are supportive. (USA Today). This speaks to the information highlighted for average investors.
  • December is not that special. Mark Hulbert runs the numbers and compares to other periods.
  • Any effect will happen in the last few days. (Pension Partners)
  • Oil prices might rebound. Urban Carmel analyzes some correlations. (But see my final thoughts below).
  • A flattening yield curve and high yield spreads signal possible deflation.
  • Economic strength signals potential inflation, sparking faster Fed action.

I have some thoughts about Santa. More about that in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

The news last week was very good, once again even better than stock prices suggested.

  • ISM surveys were strong. The ISM manufacturing survey came in at 58.7 and services at 59.3 ISM research shows that this level corresponds to economic growth of 5.1%. The comments were also strong. See the official source for a good description and a discussion of the internals, which show continuing growth but a mixed story in the rate of growth.

ISM Manufacturing

  • Declining oil prices – providing benefits to consumers and a long-term boost to stock prices. (NYT) (Also Washington Post). Last but not least, the Fed (via Reuters).
  • Investor sentiment has turned more negative (bullish on a contrarian basis). Bespoke has continuing helpful coverage of this subject. I also appreciate AAII’s official coverage of this topic, which notes that optimism is still above the long-term average.

AAII Bullish Sentiment 120414

  • Chinese stocks get stronger. Josh Brown highlights the move in the ETFs featuring “A Shares” and also notes the implied economic strength for China. This seems counter to current trader expectations. Morgan Stanley agrees.
  • Employment gains are stronger. This is true whether you look at the number of jobs, the hours worked (gain equivalent to a 400K net job change) revisions, wages, or other elements of the survey of establishments. Here are two great sources:

BN-FW769_jobs2_G_20141205085301

Data spinners have plenty of opportunity on the employment report. One game is to cite whichever survey is weaker – household or establishment. Each has a wide error band and a different method. The conclusions often deviate in the short run. Eventually they converge. Those citing the household survey this month did not do so last month when it was strong. To keep perspective, here is a chart from Bob Dieli’s excellent monthly employment report analysis:

Dieli Household Survey

The Bad
There was not very much bad news. There were some very small misses in the data, but nothing really important. Readers are invited to nominate ideas in the comments, but remember that we are focusing on recent developments, not a list of continuing macro concerns.

  • Lower oil prices threaten US fracking. The effects might not occur right away, but there is plenty of attention on how profitable the new producers can be and at what price levels. Matthew Philips (Bloomberg Businessweek) has a good analysis.
  • F-150 Sales. Despite overall strong auto sales, some subgroups deserve extra attention. The Ford F-150 is often cited as an indicator for the strength of construction and small business. Bespoke covers this closely and notes the recent decline. They also observe that it is a time of transition to a new model, which has only recently hit the dealers. It bears watching. Here is the chart.

Ford f150 November

  • Factory orders declined 0.7%, MoM. Steven Hansen at GEI does a complete analysis, looking at unadjusted as well as seasonally adjusted data. He concludes:

    The data has been soft for three months in a row. Consider that this data is noisy – but the rolling averages (which include transport) are decelerating.

Noteworthy

Income inequality commands increasing attention. Here is an interesting analysis on which cities have the biggest gaps.

inequality

The Ugly

Congress is back in session, and back in the limelight! Investors basically want to avoid a government shutdown. Meaningful tax reform would be a plus, but seems unlikely. The daily stories feature failed compromises, unlikely proposals, and underhanded deals. It is difficult to forecast accurately, but the results could be very important. I am watching closely.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts.  Think of The Lone Ranger. This week’s award goes to Georg Vrba, for an outstanding response to last week’s challenge. Here was the original chart, which was widely circulated and reposted:

tumblr_nfel6euWDb1smq3o4o1_r1_1280

One important problem is that the chart does not take into account the inclusion and compounding of dividends. The dramatic effect of this change is obvious.

Real Price of S&Pcomp 1870-2014

It is too bad that Georg’s work, explained further here, does not get as much attention as the original culprit. His method and more analysis is available here. He raised this point more than two years ago. (Honorable mention to several readers who made great comments, including some who cited the dividend issue and others who questioned the long time frame).

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.

Recent Expert Commentary on Recession Odds and Market Trends

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (three years after their recession call), you should be reading this carefully. This week there is (yet another) change in the ECRI story. See also his regular updates to the “Big Four” economic indicators important for official recession dating. We missed Doug’s updates this week, and hope he is back with us soon!

Georg Vrba: has developed an array of interesting systems. Check out his site for the full story. We especially like his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. Georg continues to develop new tools for market analysis and timing. Some investors will be interested in his recommendations for dynamic asset allocation of Vanguard funds. Georg has a new method for TIAA-CREF asset allocation. I am following his results and methods with great interest.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.”

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting market indicators.

Dwaine has a new post on valuation, refuting some of the arguments about “nosebleed levels.” Check it out. Dwaine concludes:

We have a far better stock market valuation model to manage investment risk, one which can forecast forward two-year returns with a correlation coefficient of 0.65 (amazing for this short span of time), and which is surprisingly adept at warning of bear markets and recessions. This we will cover for subscribers in our December research note in the Research main menu.

A replacement for Dr. Copper? Andrew Thrasher nominates semiconductors.

semi-vs-copper

The Week Ahead

There is a lot of data packed into three days of a holiday-shortened week.

The “A List” includes the following:

  • Initial jobless claims (Th). The best concurrent news on employment trends, with emphasis on job losses.
  • Michigan sentiment (F). A new high in prospect? Good concurrent indicator for spending and employment.
  • Retail sales (Th). Some are looking for big gains to match same-store sales.

The “B List” includes the following:

  • JOLTS report (T). When USA Today headlines the quit rate, the world is finally catching on to the importance of this report.
  • PPI (F). Inflation at the wholesale level. It matters little until it shows a real pop for a few months and starts to bleed into CPI and PCE.
  • Business inventories (Th). October data that will influence perceptions (and ultimately reality) of Q4 GDP.
  • Wholesale inventories (T). Early implications for Q4 GDP.

The speech schedule is pretty light on the Fed front.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix continued the profitable bullish posture for another week. There is reasonable breadth among the strongest sectors. Ratings have continued to drift lower, but are still quite solid in about half of the sectors. Felix does not anticipate tops and bottoms, but responds pretty quickly when there is evidence of a change. The penalty box can be triggered by extremely high volatility and volume. It is similar to a trading stop, but not based only on price. There has been quite a bit of shifting at the top, so we have done some trading.

Felix got interested in China A-Shares this week and still recommends FXI.

You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The recent “actionable investment advice” is summarized here.

Last week brought a rush of scare stories aimed at both the long and short term. I took a closer look at the most recent themes Keeping Investors Scared Witless. If you missed it, please take a look.

Other Advice

Here is our collection of great investor advice for this week:

Stock Ideas

Companies that have the most to lose in the energy space (MarketWatch).

SocGen says it is time to buy Europe. I wonder if they will ever recommend the US.

The most-shorted stocks. (Akin Oyedele at BI).

Investor Psychology

Individual investors remain very worried (via Schwab). They fear market declines and a possible crash. They are much more bearish than institutional investors, as shown by the chart below. This is why so many stocks, especially cyclicals and financials, are currently inexpensive.

file

Similar results from Yale – lots of good data in their Stock Market Confidence Indices.

Tactical Considerations

Do stock buybacks work? This interview with Todd Sullivan will help you find the winners.

Behavioral biases limit investment performance in many ways. Josh Brown highlights one for each letter of the alphabet from the Psy-Fi Blog.

Market Outlook

Tim Duy – the top Fed watcher – is optimistic about the projected policy course. He has been very accurate (and contrarian).

Former Value Line market expert Sam Eisenstadt has a model based upon his 63 years of experience. He sees 11% stock gains in six months. (Mark Hulbert)

Bill McBride has an excellent update of a post from two years ago: The Future’s so Bright… See the whole post for the charts you would expect, but here is the key conclusion:

Over two years ago I said that looking forward I was the most optimistic since the ’90s. And things are only getting better. The future’s so bright, I gotta wear shades.

I always try to provide a wide range of interesting links. If you only follow one of them this week, check out the most recent strong entry from Morgan Housel. He has a list of predictions that he feels strongly about – all worth considering. Here is my favorite:

Pessimism will overshadow progress. Twenty years from now,someone will be sitting in his or her self-driving car on the way home from a doctor’s appointment that miraculously cured a disease that’s currently a death sentence, and will be complaining about how awful the world is. It’s always this way. The odds are incredibly high that the average American will have a higher standard of living 20 years from now; yet, we’ll look back at untold numbers of books and articles lamenting that everything sucks. Few will notice how much progress we’ve made because it happens slowly; but they’ll pay attention to the doom forecasts because they are repeated day in, day out.

Second place would be his 16 rules for investors to live by. My favorite here?

Don’t check your brokerage account once a day and your blood pressure only once a year.

Constant updates make investing more emotional than it needs to be. Check your brokerage account as infrequently as necessary to prevent you from becoming emotional about market moves.

Final Thought

I avoid making short-term market forecasts, leaving that to Felix!

I also generally eschew the “seasonal” forecasts. The underlying rationale is often weak and/or not applicable. The end of the Presidential cycle, for example is supposed to reflect efforts to support the party in the next election. The current situation – Obama legacy at stake, GOP Congress, possible compromises – do not really fit that pattern. Years ending in “5” seems like data mining.

I prefer to ignore the calendar and follow a process of constantly upgrading price targets on individual holdings. This is consistent with a key precept:

Do not follow the market. Instead take advantage of what the market is giving you.

To do this you need a method for finding underpriced stocks and confidence to stick to your methods, even when the market disagrees. If you think the markets are efficient, you should just buy index funds.

Most people lack confidence and therefore drift from theme to theme, chasing what worked last month or last year. They have a fixation on what they read in the financial news, forgetting that their business model is selling advertising and yours is making money.

Here are three themes that have my attention:

  1. The correlation between oil price declines and economic weakness. Quite a few observers are doing a simple correlation between lower oil prices and (for example) lower consumer spending. While everyone parrots the “correlation does not imply causation” meme, it is often forgotten in practice. What is happening here is that commodity price declines are usually correlated with weak economic growth, so many other data series seem to be correlated as well. In this case oil prices reflect supply as well as worldwide demand. A true statistical test would have a control for situations where the US economy is strong while oil prices declined, perhaps using a variable like employment growth. Failure to do so leads to a spurious relationship.
  2. Oil prices and oil stocks. There are a wide range of forecasts on oil prices (low and high), but many of the stocks already seem to reflect a very bearish case. I am working on a more detailed analysis, especially parts of the energy complex that benefit from lower oil prices.
  3. Russia and the Ukraine. Part of the drag on worldwide growth is the reciprocal sanctions related to the Ukraine. The benefits of decades of trade deals are being lost. A fundamental concept of the linking of nations in the global economy was to reduce “antisocial” behavior. My sense is that progress on the Ukraine situation would provide an immediate spark to the Russian and European economies, improving markets for China and the US. It is in the interest of everyone, suggesting that eventually it will happen. Joe Weisenthal, operating from his new base at Bloomberg Politics, summarizes the pain of Putin in a series of charts. “It is not a good time to be Vladimir Putin.” Picking just one of his excellent charts, here is the value of the Ruble.

Weisenthal Ruble

The economic data provide a good guide for the long-term investor, but the reward might not come from this year’s Santa.

© New Arc Investments

http://dashofinsight.com/

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Investors need to prepare for lower returns in the next few years, with a focus on capital preservation appearing prudent in the current environment.

We end 2014 with almost every asset class offering investors scant potential return for their risk. Five years into a period of unprecedented interest rate suppression, this should come as no surprise. The returns generated from every mainstream asset since 2009 have been striking. Those returns are now in the past. We believe the next few years will be characterised by lower returns, more volatility and greater risk.

The backdrop

We're going to cop out here and leave politics to one side for the purposes of this outlook. The economic backdrop is foggy enough! Suffice to say we will comment throughout the year on this particular risk factor.

To try and summarize consensus expectations for growth in 2015, we would say that investors are very optimistic about the US (yet still don’t believe the Federal Reserve (Fed) will raise rates) and to a lesser extent the UK, are willing to give Japan and much of Asia the benefit of the doubt for now (but are skeptical of China), and hate Europe full-stop.

Starting as we often do at the bottom, for our sins, we think the combination of an expanding European Central Bank balance sheet, a gradual pick-up in credit growth due to record low funding costs for corporates and consumers, and the disposable income boost from lower oil prices has the potential to confound very low expectations for Europe next year.  

Momentum in the US looks sustainable at least into 2015, meaning the Fed should follow through and begin raising rates. We’ll defer to our 2016 outlook for a judgment of how the economy absorbs what will likely be baby steps towards a tighter policy backdrop.  

If US rate hikes don’t occur next year, the likely scapegoat will be a deflationary impulse emanating from China – the elephant that never leaves the room. The risks to China and other emerging markets will correlate highly with the strength of the US dollar in our view. Dollar bulls need to be careful what they wish for. A strong US currency, all else being equal, is not bullish for emerging market liquidity.

Not banking on bonds

Almost irrespective of one’s economic outlook, the margin of safety in fixed income markets is wafer thin. Aggregate yields globally are as low as they have ever been. Spreads are also closing in on their all-time tights. As a result, correlations within fixed income have picked up worryingly. Traditionally fixed income does not do well in a rising rate environment. If US rates do rise in 2015 as the Fed is telling us they are likely to, every fixed income asset class will take a hit.  In spite of this, judging by the scale of continued inflows, the majority of investors appear comfortable with the risk/reward set-up. We’re not, and therefore have only limited exposure. By definition, prospective returns today are pretty much as low as they have ever been, risks are high and liquidity is terrible. Investors need to tread carefully here.  

We have a healthy cash balance across our portfolios at present, with some diversification into US dollars. Cash is currently considered an inferior asset as it generates a zero return. We believe it will become more desirable as the market sets about discounting higher US interest rates.

Expensive equities 

Assuming global aggregate demand can continue to expand in 2015, we would have sympathy with the view that equities offer a greater short-term prospective return than fixed income. Nevertheless, we judge equity valuations from a longer-term perspective, particularly in the US, to be on the expensive side at present. This tells you next to nothing about their potential for 2015, but does indicate their vulnerability to disappointment. Like fixed income, from a positioning standpoint, investors appear very comfortable with the risk/reward trade-off in US equities.  Once again, we’re less sanguine.  What equity risk we are taking is predominantly outside of the US, favoring Europe and Japan particularly. Both markets have relative value on their side and the potential for a catch-up in profitability. In contrast, US equities trade at historically high multiples of historically high earnings. The emerging market complex also strikes us as vulnerable to disappointment and we have next to no exposure there.

Fertile ground for alternatives

Fortunately, we believe the environment is becoming ever more fertile for short-selling, allowing us to generate uncorrelated returns in what may otherwise prove a difficult backdrop for investors.  This opportunity set extends beyond equities, to bonds and foreign exchange markets also. The faith investors have placed in the Fed this cycle has made shorting a largely unprofitable exercise.  We expect this to change.

Raging bull market enters new phase

The bull market that began in March 2009 has been one of the most rewarding in history, yet the economic recovery to date has been one of the weakest.  With the US economy now on a firmer footing, the Fed should intervene less in asset markets in 2015.

Not for the first time we have been premature in moving to emphasize capital preservation within the portfolios (will we ever learn?!) while this new investment environment unfolds. However, such is the unbalanced set-up within markets in our view, when (not if) investors decide to become temporarily more risk-averse, the likely re-pricing will be swift.

We remain very optimistic about future investment opportunities, just not present ones. For the time being we consider capital preservation the most prudent strategy for the portfolios. This will change as the opportunity set evolves.

© Schroders Investment Management

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​​​Benchmarks have long served as a starting point, or ‘anchor’, for investors, representing the neutral point for an investment decision. They serve as the basic ingredients that combine to form an investor’s asset allocation and result in a desired risk/return profile.

A market-capitalization approach to benchmark construction has been the norm for decades – for both equity and fixed income markets. In the equity markets, this means an investor’s neutral allocation will have the most exposure to the companies with the highest market capitalization and the least exposure to companies with the smallest market capitalization. In the debt markets, a similar approach prevails; investors allocate more capital to the countries and companies that have the most debt outstanding.

But is this the best way to think about investing? At PIMCO, we believe investors may be better served by adopting a slightly different approach to benchmarking – using a ‘smarter beta’ – one that disentangles price or debt levels from the index construction process.

Market capitalization weighting
Let’s start by examining indices in the equity markets. In a traditional benchmark, each company’s weighting is a function of its shares outstanding times the price per share. However, an investor cannot know at a given point in time whether that price is the ‘correct value’. If markets are perfectly efficient, then the price is assumed to be ‘correct’, but markets may not always be perfectly efficient.

For example, the technology sector became more than 44% of the global equity market’s value in early 2000, so that a neutral allocation based on a traditional index would have put almost half of an investor’s capital into this narrow sector − even as many companies had yet to show positive cash flows or pay dividends!

Similarly, in 2006 the financial sector became more than one-third of the global equity market, and in the late 1980s, Japan represented 44%. In each case, an investor using traditional indices was making the implicit bet that these segments would contribute the same share of global profits in the coming years. Sadly, in all three cases, the respective markets declined by 45%−50%.

The same phenomenon occurs when looking at individual equities; Research Affiliates has shown that the highest market-capitalization stock in the MSCI World Index has underperformed the MSCI World Index 73% of the time over subsequent three-year periods and 91% of the time over subsequent 10-year periods. So, in fact, the performance of ‘high-flying’ stocks historically has not kept pace with what has been implied by starting valuations.

Smart beta alternatives: equities
One alternative approach to market-cap weighting takes price out of the equation and replaces it with measurable economic fundamentals such as sales, dividends, cash flow and book value when determining index weights. By using this approach, an investor can often avoid introducing pro-cyclical tilts, which allocate increasing capital to equities that move up in price.

PIMCO has found that a smart beta approach using economic fundamentals rather than stock prices helps to reduce these pro-cyclical risks. One reason: Fundamentals don’t change as frequently as stock prices; therefore, a natural sell discipline ensures that stocks that have posted strong recent performance are automatically reduced in weighting during index rebalancing (unless the underlying fundamentals have commensurately improved).

To implement a smart beta strategy, investors can passively invest in the basket of stocks represented in the smart beta index. While this offers simplicity, it leaves potential ‘alpha’, or excess returns, on the table. An alternative is to combine aspects of passive management with the benefits of active management: specifically, by obtaining equity exposure to a ‘smart beta’ index passively via total return swaps and, at the same time, investing the cash collateral for the swap in an actively managed, high-quality bond portfolio.

When combined, this ‘portable alpha’ approach is designed to provide a portfolio with broad equity market exposure and a volatility profile similar to a pure passive portfolio, but with the potential to deliver equity market outperformance should the bond portfolio outperform money market rates. At PIMCO, we have used this approach since 1986.

Smart beta in bonds
The same principles of designing benchmarks and ‘beta’ based on fundamentals rather than market capitalization can be applied to the bond markets. In traditional bond indices, weightings are based on the par value outstanding times the price of a bond. This typically results in a potentially perverse situation: A bond investor lends the most money to the most heavily-indebted countries or companies. An extreme example might be Japan: The country has a debt-to-GDP ratio of more than 200% and is one of the largest economies in the world, which means it has a large amount of outstanding debt. As a result, its weighting in a broad investment grade bond index today is more than 16%, but it currently offers yields of less than 0.50% for 10-year government bonds.

An alternative approach that PIMCO has adopted for some clients uses GDP, rather than debt outstanding, to determine benchmark representation. In this way, an investor moves towards a portfolio that is more representative of global economic output and more forward-looking in nature. For example, emerging market economies now represent about 50% of global GDP, according to the IMF, and yet they have significantly less debt outstanding than their developed world counterparts. A GDP-weighted approach to bond investing would allocate more capital to this segment of the world, which, in many cases, also offers higher yields, albeit with the potential risk inherent in developing/emerging markets.

As with equities, a smart beta approach to fixed income can be achieved through either passive or active investment strategies. Passive approaches may offer simple implementation, but here again, potentially valuable alpha – especially in a world of low interest rates – may be left behind. Over time, skilled active managers can take advantage of structural inefficiencies in the bond market, including: (1) “clientele effects”, whereby certain investors must focus on bonds with certain ratings or maturities, (2) dislocations between derivatives and physical bonds, which help allow managers to arbitrage differences in pricing on an unleveraged basis, (3) intervention by central banks and other official institutions that may distort values in segments of the market like government bonds, mortgage-backed bonds and asset-backed securities, and (4) ETFs, which may use narrowly defined indices, creating arbitrage opportunities on individual securities amidst heightened inflows or outflows.

As a result of these inefficiencies, we believe investors should try to get the most from their fixed income allocation by combining a ‘smart beta’ approach to indexing based on economic footprint with the benefits of an active management approach designed to take advantage of the ample opportunities for generating alpha in the bond market.

Smarter investing
All investing involves a tradeoff between risk and return, but thinking about the index is critical. Smart beta, or an approach to indexing based on economic fundamentals, is gaining traction in the marketplace. This innovative approach to capital allocation offers the potential for a better risk/return profile and may enhance returns in portfolios that are oriented to more backward-looking approaches to capital allocation, such as those based on stock prices and historical debt issuance.

Whether investors pursue a pure passive approach or a portable alpha strategy that combines passive investing with active management, a smarter benchmark may provide a better starting point for investment decisions.

A word about risk: Past performance is not a guarantee or reliable indicator of future results. 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. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. 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. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Swaps are a type of derivative; swaps are increasingly subject to central clearing and exchange-trading. Swaps that are not centrally cleared and exchange-traded may be less liquid than exchange-traded instruments. All investments contain risk and may lose value.

This material contains the opinions of the manager 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.

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The price of oil is the overriding economic theme at the moment. Oil prices have declined to their lowest level in more than four years and I believe they could continue to tumble. The market implications are positive in the near term, but there is a dark side to the decline in oil prices that is beginning to negatively impact a number of countries around the world and which could ultimately come home to roost in the United States.

First, the positive: falling oil prices and the subsequent decline in gasoline prices act like a tax cut, transferring cash into the pockets of consumers, leaving more money for discretionary spending. The combined benefit of declining gas prices and lower interest rates is likely to provide American consumers, and subsequently the U.S. economy, with a boost as we head into the all-important holiday shopping season.

The darker side to falling oil prices is that they signal that the global economy isn’t growing fast enough to absorb the growth in oil production. The slump in oil prices has led to a weakening in the currencies of some major oil-exporting nations. Russia, for example, has witnessed a 24 percent decline in the value of the ruble against the dollar since the beginning of November. Russia needs oil at $100 a barrel to support its economy, and many other oil-dependent economies rely on oil prices well north of current levels. Over time, as foreign currency reserves run dry, the likelihood is that we will see economic contraction and possibly recession in these countries.

A recession in countries such as Russia will have significant knock-on effects, particularly for European exporters, creating another headwind for beleaguered euro zone economies. An oil-price-induced negative feedback loop would stifle global growth and could even lead to political instability in any number of oil-dependent nations.

Beginning as early as the first quarter of 2015, investors should be wary of the potential for a setback in U.S. equities as the adverse impacts of lower growth and weaker foreign currencies begin to show through in the results of leading multinational companies.

In Europe, it doesn’t seem likely the European Central Bank is going to be able to reach the necessary consensus to begin quantitative easing through the purchasing of sovereign debt until the end of the first quarter or possibly into the second quarter, and perhaps never. ECB President Mario Draghi is running into roadblocks with the German Bundesbank over the sovereign bond-buying option, which will probably end up in the European courts. The problem is, the longer this situation drags on, the worse the situation in Europe is going to get. The clock is ticking and policymakers are running out of time.

One option the ECB still has left is to buy gold. If European inflation data comes in weaker and the European economy continues to sputter, I think we could see the ECB consider gold purchases, but if we do it will be an act of desperation. Gold may prove the ultimate hedge against a financial crisis in Europe should the ECB fail to act quickly.

Chart of the Week

The Bright Side: Cheaper Gas, Rising Consumer Confidence Should Boost U.S. Holiday Spending

Despite the drop in consumer spending during the Black Friday weekend, the outlook for consumption remains solid heading into the holiday shopping season. Historically, Black Friday sales have had little predictive value for total holiday season sales. A more important relationship is between gasoline prices and consumer confidence, and then between consumer confidence and holiday sales. With gas prices at their lowest levels since 2010, consumer confidence has jumped to seven-year highs, and higher consumer confidence predicts higher holiday sales. Increased consumer confidence, combined with additional discretionary income freed up by falling gas prices, should provide a boost to economic growth in the fourth quarter.

GAS PRICES AND CONSUMER CONFIDENCE

Gas Prices and Consumer Confidence

Source: Bloomberg, Haver, Guggenheim Investments. Data as of 11/28/2014. Note on methodology: The estimated change in consumer confidence is based on monthly retail gasoline prices and University of Michigan consumer confidence. The holiday sales estimate is based on the average reading of the University of Michigan consumer confidence index in November and December and retail sales excluding autos, gas, and building materials in November and December. All data since 1994.

Economic Data Releases

ISM Readings Signal Continued Strength in U.S. Economy
  • The ISM manufacturing index continued its strong expansion in November, although the reading ticked down to 58.7 from 59.0.
  • The ISM non-manufacturing index jumped to 59.3 in November, a three-month high.
  • Durable goods orders beat expectations in October, rising 0.4 percent. However, the less volatile component of non-defense capital goods orders, excluding aircraft, dropped 1.3 percent, the same decline as the previous month.
  • New home sales inched up in October, increasing 0.7 percent to an annualized pace of 458,000. The prior two months were revised downward.
  • Pending home sales decreased 1.1 percent in October, following September’s 0.6 percent gain.
  • Construction spending rose 1.1 percent in October, a five-month high.
  • University of Michigan consumer confidence was revised down slightly in the final November reading to 88.8, but remained at a post-recession high.
  • Initial jobless claims jumped to 313,000 for the week ended Nov. 22, up from 292,000.
  • The core Personal Consumption Expenditures deflator, the Fed’s preferred inflation gauge, ticked up to 1.6 percent in October after five months at 1.5 percent.
Euro Zone Disinflation Continues, Chinese Data Is Mixed
  • The euro zone manufacturing Purchasing Managers Index decreased to 50.1 in the final November reading, a 17-month low.
  • The euro zone services PMI was revised lower in the second November estimate, falling to an 11-month low of 51.1.
  • Euro zone economic confidence improved for a second consecutive month in November, inching up to 100.8 from 100.7.
  • Euro zone retail sales increased 0.4 percent in October, slightly under expectations.
  • The euro zone-wide Consumer Price Index ticked back down to 0.3 percent in November, while core prices remained at 0.7 percent.
  • Germany’s manufacturing PMI was revised into contraction in the final November estimate at 49.5, the lowest level since June 2013.
  • Germany’s GfK consumer confidence continued to rebound in the December reading, ticking up to 8.7.
  • Retail sales in Germany surprised to the upside in the October reading, up 1.9 percent.
  • Germany’s CPI fell to 0.5 percent in November, the lowest since February 2010.
  • U.K. third-quarter GDP rose in line with expectations at 0.7 percent. Consumer spending had the best quarter in over four years, while exports and investment fell.
  • China’s official manufacturing PMI fell to 50.3 in November, the second consecutive slowdown.
  • China’s non-manufacturing PMI ticked up to 53.9 in November from 53.8, following two months of declines.
  • Japan’s CPI fell for a fifth straight month in October, down to 2.9 percent from 3.0 percent. Prices excluding food and energy fell to 2.2 percent.
  • Japanese industrial production beat estimates in October, rising 0.2 percent after a 2.9 percent gain in September.

© Guggenheim Partners

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Tax-exempt income historically has been the main reason why investors buy municipal bonds. As a result of newer tax laws, including several provisions that expired at the end of 2013, tax bills for high-income earners have increased in recent years. Some of the significant changes to tax law include:

 

• A top marginal rate of 39.6%, up from 35%

 

• A 20% tax on long-term capital gains and dividends, up from 15%

 

• A new 3.8% tax on investment income, from which municipal income is exempt

 

We believe that these higher tax rates increase the incentive for taxpayers to seek tax-exempt income using municipal bonds. Municipals have the potential to offer a broad range of investment options that are exempt from federal income tax and, potentially, from state and local income taxes. In addition to those considerations, investing in this market has several other potential benefits that are often overlooked, including:

 

1.    Attractive yields on a before- and after-tax basis, with relatively low volatility

 

The gap between perception and reality that was created in 2013 represents an opportunity for long-term investors who have a focus on after-tax income. As shown below, yields on municipal bonds, particularly high yield, are attractive relative to other fixed income asset classes — even on a before-tax basis. There is no guarantee that low-volatility stocks will provide low volatility.

 

 

2.    Relatively lower default risk

 

Contrary to popular belief, the vast majority of municipal bond issuers remain creditworthy, and municipal default rates have remained relatively low, especially when compared with US corporate bonds. As shown in the chart below, when the credit structure decreases, the odds of a default rise. However, the percentages are much higher for investment-grade corporates compared with municipals. Since 1970, there has never been an Aaa-rated municipal bond default. Similarly, in the same time frame, only 0.01% have defaulted with an Aa-rating. By contrast, Aa-rated -corporate issuances have had a nearly 1% default rate since 1970.1

 

 

3.    Diversification potential

 

Diversification can potentially increase opportunities for growth and reduce overall portfolio volatility. Because municipal bonds, more specifically high yield municipal bonds, have historically had very low correlation to other asset classes, including equities and Treasuries, they can be effective portfolio diversifiers.

 

Over the last 10-year period, ending Oct. 31, 2014, the Barclays High Yield Municipal Bond Index has exhibited a low 28% correlation with the S&P 500 Index. This is in contrast to the Barclays U.S. Corporate High Yield Index, which has had a much higher 73% correlation with the S&P 500 Index over the same time period.  This lower correlation demonstrates that high yield municipal bonds have not moved to the same degree as their corporate counterparts when the equity market rises or falls. We believe that this low correlation can potentially enhance a portfolio’s diversification benefits.

 

 

Talk to your advisor

 

While municipal bonds are rightly renowned for generating tax-exempt income, there are several other reasons to consider them as well, including their relatively attractive yields, low default risk and diversification benefits.  Talk to your advisor to get more information about the benefits and risks of using municipal bonds in your portfolio.

 

Source 1: Moody’s Investors Service, US Municipal Bond Defaults and Recoveries, 1970-2013, May 7, 2014

 

Important Information

 

Correlation indicates the degree to which two investments have historically moved in the same direction and magnitude.

 

Yield-to-Worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting.

 

Diversification does not guarantee a profit or eliminate the risk of loss.

 

Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/ or interest.

 

Most senior loans are made to corporations with below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid.

 

High yield bonds invest in noninvestment-grade bonds and are therefore subject to greater volatility than investment-grade bonds.

 

Securities which are in the medium- and lower-grade categories generally offer higher yields than are offered by higher-grade securities of similar maturity, but they also generally involve more volatility and greater risks, such as greater credit, market, liquidity, management, and regulatory risks.

 

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

 

The tax information contained herein is general and is not exhaustive by nature. It is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer under U.S. federal tax laws.

 

The Barclays U.S. Corporate High Yield Index is an unmanaged index considered representative of fixed-rate, non-investment-grade debt. The Barclays High Yield Municipal Bond Index is an unmanaged index considered representative of noninvestment grade bonds. The S&P/LSTA Leveraged Loan Index is a weekly total return index that tracks the current outstanding balance and spread over Libor for fully funded term loans. The Barclays Municipal Bond Index is an unmanaged index considered representative of the tax-exempt bond market. The Barclays U.S. Corporate Investment Grade Index is an unmanaged index considered representative of publicly issued, fixed-rate, nonconvertible, investment-grade debt securities. The Barclays U.S. Aggregate Bond Index in an unmanaged index considered representative of the US investment-grade, fixed-rate bond market. The S&P 500 Index is an unmanaged index considered representative of the US stock market. The MSCI EAFE Index is an unmanaged index considered representative of stocks of Europe, Australasia and the Far East. The index is computed using the net return, which withholds applicable taxes for non-resident investors. The MSCI Emerging Markets Index is an unmanaged index considered representative of stocks of developing countries. The index is computed using the net return, which withholds applicable taxes for non-resident investors. The Russell 2000 Index is an unmanaged index considered representative of small-cap stocks. The Russell 2000 Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co. The Barclays U.S. Government Bond Index is an index that measures the performance of all public U.S. government obligations with remaining maturities of one year or more.

 

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

 


Before investing, investors should carefully read the
prospectus and consider the investment objectives, risks, charges and expenses. 

 

All data provided by Invesco unless otherwise noted.

 

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd.

 

©2014 Invesco Ltd. All rights reserved.

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The minutes of the October 28-29 Federal Open Market Committee meeting suggested that there is still no consensus opinion among senior officials regarding when the Fed will begin raising short-term interest rates. There is strong agreement that monetary policy moves will be data-dependent. However, policymakers differ in their views on the amount of slack in the job market. Only “a few” Fed officials expressed concerns that inflation might persist below the Fed 2% target. However, while survey-based measures of long-term inflation expectations had remained stable, “market-based measures of inflation compensation had declined somewhat.” While this bears watching in the U.S., it’s a much bigger worry for the euro area.

“Indicators of labor market conditions continued to improve over the intermeeting period, with a further reduction in the unemployment rate, declines in longer-duration unemployment, strong growth in payroll employment, and a low level of initial claims for unemployment insurance. Business contacts reported employment gains in several parts of the country, with relatively few pointing to emerging wage pressures, although one participant indicated that larger wage gains had been accruing to some individuals who switched jobs. Labor market conditions indexes constructed from a broad set of indicators suggested that the underutilization of labor had continued to diminish, although a number of participants noted that underutilization of labor market resources remained. A couple of participants judged that the large number of individuals working part time for economic reasons and the continued drift down in the labor force participation rate suggested that the unemployment rate was understating the degree of labor market underutilization.” 
– FOMC Minutes (October 28-29)

The labor market slack debate has grown in recent weeks. One issue is how to weigh the various measures. The Kansas City Fed’s Labor Market Conditions Index provides a handy summary. The LMCI suggests that slack is being taken up, perhaps a bit more rapidly in recent months. However, it also indicates that a lot of slack remains. Other parts of the debate focus on which measures of slack matter more. Currently short-term unemployment (those out of work for six months or less) is trending low (at a level which we would normally associate with a job market that is running at full steam). Longer-term unemployment (more than 6 months) has been trending lower, but remains relatively high by historical standards. Some economists have argued that long-term unemployment is largely irrelevant to the inflation outlook. Last week, New York Fed economists argued that it does matter. There are enough people on the sidelines (not officially counted as “unemployed,” but who would still take a decent job if one were offered) to keep wage pressures relatively muted.

The major surprise in the October 29 policy statement was the absence of concern about low inflation. In policy statements in the first half of this year, the FOMC noted that “inflation persistently below the 2% objective could pose risks to economic performance.” This sentiment was missing from the October policy statement, but also from the FOMC minutes. Many economists had expected that the current low trend in inflation and downward inflationary pressure coming from the rest of the world would lead to a delay in the first Fed rate hike.

Inflation Compensation, the spread between fixed rate and inflation-adjusted Treasury securities, is not an exact measure of inflation expectations. However, recent values suggest a lower inflation outlook over the next five years and over the five years after that (the five-year rate five years forward).

As inflation expectations fall, real interest rates rise, which has a negative impact on growth. Nominal interest rates can’t be lowered. This isn’t a big concern for the U.S. economy just yet, but it is a critical problem for the euro area, where the economy is much weaker than in the U.S.

© Raymond James

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Year-end letters are always difficult to write because there is a tendency to discuss the year gone by, or worse, try and predict what is going to happen in the New Year. I mean really, at this time last year who predicted Russia would invade Crimea, that ISIS would effectively take over a significant portion of Iraq, or the Republicans would sweep Congress. Actually I did get the last one right given my mantra that, “We are going to elect smarter policymakers and therefore get smarter policies.” Coming into 2014, in all of my presentations I noted that despite the “tapering” announcement, the Fed’s balance sheet was likely going to increase by 10% - 12% and the S&P 500’s earnings were going to increase by roughly the same amount. I further opined there has been a fairly tight correlation between those data points and how much the S&P 500 (SPX/2067.56) gains during the year. Accordingly, my guess was that the SPX would gain somewhere between 10% and 12%. As of this writing that looks close enough for government work.

In retrospect one of my worse calls was to avoid Utilities because I thought interest rates were going to rise. With a nearly 20% gain YTD the Utility sector has been one of the best performing macro sectors, while obviously my interest rate call was equally as poor. However, I did get most of the other sectors generally correct. Also coming into 2014 I wrote:

The S&P 500 was better by 32.4% last year (2013), and up over 45% from the June 2012 low without any meaningful correction. The median historical drawdown following such a rally called for between a 5% and 7% decline in the first three months of this year and between a 10% and 12% pullback sometime during the year. But, such a drawdown/pullback should be viewed within the context of a secular bull market.

Well, we got the 5% - 7% pullback in the first three months of the year (6%), and I thought the 10% - 12% had commenced in July when we started experiencing various divergences. Recall the small/mid-capitalization stocks were declining while the large caps were hovering near their highs. Additionally, my Advance/Decline Line Indicator was not confirming the SPX’s upside move and the U.S. Dollar Index was screaming higher. Subsequently I said that if you have stocks in your portfolio that have not performed over the past two years there is likely something wrong and you should sell them to raise some cash. Plainly that “call” proved premature, but came home in spades from mid-September into mid-October where the SPX lost 9.84% from intraday highs to intraday lows. On October 15, 2014 my colleague Andrew Adams and I did a special conference call on behalf of the Raymond James Investment Strategy Committee. Their concern was, “Should we sell stocks?” Our advice was a resounding NO! We stated the time to sell stocks, and raise some cash, was back in July and August, not after a nearly 10% decline that had left the equity markets as oversold as they have been since October 2011. In fact, we espoused that this is how bottoms are made; and while the bottoming process was not textbook, hereto it was close enough for government work.

So, here we are entering the month of December, which historically is a pretty strong month for the equity markets. According to “Moneychimp,” since 1950 the SPX has been “up” during December 49 years and “down” 15 years with an average monthly gain of 1.62%. I would note that if there is going to be some pre-Santa rally weakness, it historically comes in the first two weeks of December. If those historical odds hold this year, it is going to put tremendous pressure on the 90% of money managers that are underperforming their respective benchmarks. Indeed, even from most financial advisors I get the question, “Would you please explain in one of your letters why our portfolios are underperforming the S&P 500.” The answer to said question is pretty easy. You probably have too much cash and have too big a position in international investments. I would suggest advisors tell their clients just what their benchmark is. Additionally, if you are underperforming, but doing so with half of the S&P 500’s “risk” (beta), then you are a “risk-adjusted” financial advisor and have nothing to apologize for to your clients.

Going into the new year presents some headwinds. My biggest concern lies with Washington, D.C. If our president continues to “dig in his heels,” it could damage the economy. Exing that, earnings should continue to grow at a high single-digit pace and revenue growth should accelerate. While the impact of a stronger U.S. dollar, a gradual increase in wages, and higher interest rates will also represent headwinds, these should be more than offset by stronger GDP growth, better productivity, and continued elevated profit margins. Moreover, due to strong earnings growth valuations still look reasonable. Finally, in the U.S. investors are sitting on $11 trillion dollars in cash earning a zero return. As fears of the 2008 financial fiasco dissipate, this cash is likely going to find its way into stocks. Given these thoughts, I believe it is reasonable for the S&P 500 to achieve a total return in 2015 close to its historical (since 1921) 10.4% per annum return. The bulk of this return should come in the first half of 2015 and then grind higher in the second half as interest rates rise, causing P/E ratios to marginally contract. I think 2015 will be a year that favors cyclical stocks over the defensive names as the economy continues to strengthen. Large capitalization stocks have clearly outperformed the small/mid-cap complex, but I believe we are at the stage of the secular bull market where everything is going to work. I also think growth stocks look cheaper than value stocks.

As for the here and now, while the SPX grinded its way higher last week, the real show was in the crude oil futures market. By now everybody knows that OPEC did not cut production following Thursday’s meeting and the result was a weekly wilt (-13.72% spot oil) in crude oil prices. In fact, in the last 30 minutes of trading on Friday it was an oil “smack down” that had the feel of capitulation. Rude crude’s slide of some 39% from its June high has had a devastating effect on the energy stocks, leaving the S&P Energy Sector off 9.45% last week. Consequently, it is the ONLY macro sector, at least by my work, that is currently oversold. Accordingly, I think some of the energy stocks are currently very attractive. If you are considering the Master Limited Partnership (MLP) space, the idea of averaging down in Yorkville’s two ETFs makes sense to me. The two ETFs in question are 10.4%-yielding YMLP ($14.84) and 5.7%-yielding YMLI ($21.81). If you own these two in equal dollar amounts you own the entire MLP space. Further, they are structured as C-corps, meaning there is no K-1 to be filed. Moreover, much of the dividend distribution is classified as return-of-capital and are therefore tax deferred (for more tax info please consult your tax attorney). I continue to think crude oil is in a bottoming phase and would advise clients to purchase at least half positions in the energy space with the idea of completing the other half of those purchases during tax loss selling season in the weeks ahead because this is how bottoms are made!

The call for this week: As usual, I will be in NYC this week seeing portfolio managers, doing media, and speaking at a conference. If there is going to be any stock market weakness, at least on a trading basis, it should come this week into next week. From there the seasonality should have an upward bias buoyed by the “Santa Rally.” As for oil, it is now quite apparent that Saudi Arabia is using it as a weapon for whatever reason. Many reasons have been offered in these missives over the past few months, but the Saudis’ action last week, when they knew those actions would accelerate oil’s price decline, makes it clear there are political reasons afoot. This morning Japan’s debt is downgraded, Europe’s factory output weakens, emerging markets get hammered, there is a Russian Rouble rout, October U.S. oil shale permits decline, Hong Kong warns protestors, and all of this has the preopening SPX futures down 9 points at 5:00 a.m. Indeed, if we are going to get weakness it should be in the first two weeks of December.

© Raymond James

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By: Tim Gramatovich, CFA, CIO for Peritus Asset Management, the sub-advisory firm of the AdvisorShares Peritus High Yield ETF (HYLD)

It has been a poorly kept secret that I am among the biggest skeptics on the planet as it relates to this whole US “energy independence” fantasy.  As a credit investor, I have been “no bid” on the entire US E&P business.  This was not an easy thing to sidestep as “energy” as a sub-set is by far the largest component of the various high yield indexes representing around 18%1.  Interestingly, we have been severely punished for our exposures to “energy,” however, we continue to have confidence in certain sub-segments of the energy space, as we expect that oil will ultimately move dramatically higher, likely leading many industry players to not only come back but prosper in the coming years.

We have written chapter and verse on what we want to be long in the oil space: long lived production and reserves, reasonable decline rates, moderate leverage and exposure primarily to heavy oil.  We have found this in many companies in the Western Canadian basin and will continue to focus our attention there.  The Gulf Coast (and the rest of the world) needs heavy oil and Venezuela and Mexico, the traditional providers of this crude, are declining rapidly.  This has already created increased demand for the heavy oil from Canada (versus the light oil largely produced domestically).  The plunging Canadian dollar and tightening heavy/light differentials have offset some of the price decline realized by many Canadian producers.

We see the US shale basins as almost the mirror opposite of what we are looking for.  We are watching bond prices of these E&P (exploration and production) companies plunge over the past few days but remain completely and totally disinterested in what we would view as falling knives.  But our disinterest has nothing to do with the price of oil.  Our issue with all of it has to do with the confusion of a single word.  And that word is “of” vs “on.”  Stated more completely investors are going to be given a lesson on the difference between return “of” capital versus return “on” capital.  How many times must we listen to the word “breakeven” as it relates to these producers?  Candidly, I have no idea what is meant by breakeven.

My take is straightforward.  There is no free cash flow generation in any of these shale E&P “companies” that I have reviewed.  Let’s use the simplest definition of free cash flow we can:  EBITDA less interest less capital expenditures.  If you run those numbers they will frighten you.  We believe that the business models were broken from the start because capital expenditures dwarf EBITDA generation.  This is because tight oil/shale wells have decline curves that are around two years.  This means that production declines by 90-95% every two years2.  We don’t see them as businesses, they are projects.  We believe that financing these so called companies using long term debt (5-7 years) will end badly.  These companies were bleeding cash with oil at $100 but nobody was looking at the numbers; there was just an assumption that everyone makes money at high oil prices.  But oil’s price collapse has woken up the herd and they are beginning to look under the hood.

Now let’s deal with some realities.  If you are an income investor you are most likely invested in the energy game whether you know it or not.  This includes high yield bonds and loans along with the very popular MLPs (master limited partnerships).  It is imperative that you know what you own and why you own it.  Most importantly, businesses need to generate a return on capital not a return of capital.  When financing markets close, the return of capital game ends.  And my take is that it has ended.

While we love to buy value created by some stress, I have no interest in putting on positions in “companies” that aren’t companies.  We see no safety in numbers here: owning a whole bunch of names in the same space gets you to the same place.  And to us that place is default.  But more concerning should be recovery values.  If these “companies” limp along for another few years (likely) and continue to drill out the inventory (sweet spots aren’t that large), what is left at the end of the day?  Rocks in Fargo I guess.  Perhaps it unravels sooner.  If you ratchet back capital expenditures to preserve liquidity your production collapses along with cash flows.  You can see the endless treadmill that many of these guys are on because two year declines won’t allow you to build a business.

Did I expect oil to trade down $40 a barrel?  I did not.  Do I think oil prices stay down for an extended period of time?  No I am not in that camp.  In fact I am a raging bull on oil markets.  Demand is growing (which is likely to speed up with lower prices) and the world’s production of conventional oil is stagnant to declining.  That leaves unconventional production to fill in the gap.  This production will need to come from oilsands, deep water projects and even these tight basins and all of this needs higher prices to cover the cost of production.

Buying low and selling high is a main tenant in investing.  We see that selective energy names need to be bought as we expect investors with a multi-year year horizon will do very well as we believe oil is ultimately set to increase.  For us, this does not include US shale names.

1  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.

2  Determination based on Peritus’ research.

© AdvisorShares

[description] => It has been a poorly kept secret that I am among the biggest skeptics in the planet as it relates to this whole US “energy independence” fantasy. As a credit investor, I have been “no bid” on the entire US E&P business. This was not an easy thing to sidestep as “energy” as a sub-set is by far the largest component of the various high yield indexes representing around 18%1. [author] => Tim Gramatovich [legacyinterface_firm_id] => 14 [published_on] => 2014-12-05 [digest_date] => 2014-12-05 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-05 16:10:24 [created_by] => 948 [modified_on] => 2014-12-05 16:29:27 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2077 [hits] => 0 ) [19] => stdClass Object ( [legacyinterface_commentary_id] => 2012 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15250 [apv_conversation_id] => [content_type] => market-commentary [title] => A Mix of Central Bank Action and Oil [slug] => blackrock_120514 [fulltext] =>

Global stock and bond markets have been impacted by a couple of big themes of late: monetary stimulus overseas and the plunge in oil prices, with both trends creating winners and losers, as I write in my weekly commentary.

Cheaper Oil and its Effects

Oil prices have been trending downward in recent months, and after OPEC took no action to curtail oil output at last Friday’s meeting, prices fell to multi-year lows. This creates additional pressure on energy companies, and could lead U.S. oil exploration and production companies to cut capital spending. Ultimately though, this will only slow production growth, not cut supply. With oil prices stuck and capital spending likely to fall, we would be cautious on both the stock and the credit of explorers and oil servicing companies. However, we do see opportunities in integrated global oil companies given their relatively low valuations and diversified business models.

In addition, cheaper oil is good for some emerging markets. We see the best opportunities in emerging markets Asia, with oil importers India, Indonesia and Thailand all benefiting from lower oil prices.

Bond Yields Continue to Plunge

Central bank activity is having an impact on bond yields, which continue to grind lower. The fall has been most acute in Europe, as German bund yields broke through record lows and the 10-year yield traded around 0.70% last week. Key reasons: speculation that the European Central Bank will expand its asset-purchase program to include sovereign bonds; soft growth; and falling inflation and inflation expectations.

While the drop in yields has been most acute in Europe, the trend is visible in almost every developed country. Part of the cause is slower economic growth, now a global phenomenon. But even in the United States, despite an accelerating economic recovery, a lack of bond supply is keeping downward pressure on long-term yields. The yield on the 30-year bond dipped back below 3% while the yield on the 10-year note fell below 2.2%, the lowest level in a month.

As we’ve discussed previously, U.S. yields are being suppressed by low global yields (which increases demand for the relatively higher U.S. yields) as well as persistent demand from institutions and banks. But a lack of supply relative to demand is also having an impact. JP Morgan estimatesthat in 2015, global demand will outstrip supply by $400 billion thanks to stepped up purchases by central banks in Japan and Europe.

Still, we expect U.S. short-term rates to climb next year as the Federal Reserve initiates hikes in the federal funds rate. That said, the overall rise in yields is likely to be inhibited by: 1) low yields in the rest of the world, which encourage foreign buying of U.S. Treasury securities, and 2) the persistent imbalance between demand and supply. In short, while long-term rates are likely to rise next year they will remain low relative to historical standards.

Source: Bloomberg.

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-14151

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) [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 ( [view] => commentaries [start] => 420 [limitstart] => 420 [option] => com_legacyinterface [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_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8 [HTTP_ACCEPT_ENCODING] => gzip [HTTP_ACCEPT_CHARSET] => ISO-8859-1,utf-8;q=0.7,*;q=0.7 [HTTP_ACCEPT_LANGUAGE] => en-us,en;q=0.5 [HTTP_REFERER] => http://wordpress.hubtech.tv/?view=commentaries&start=420 [HTTP_USER_AGENT] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729) [HTTP_HOST] => wordpress.hubtech.tv [HTTP_CONNECTION] => Keep-Alive [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => wordpress.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 46.98.11.64 [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] => 62433 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => view=commentaries&start=420 [REQUEST_URI] => /?view=commentaries&start=420 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1516423709.538 [REQUEST_TIME] => 1516423709 ) [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] => 1516423709 [session.timer.last] => 1516423709 [session.timer.now] => 1516423709 [session.client.browser] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729) [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 420 [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 ( [view] => commentaries [start] => 420 [limitstart] => 420 [option] => com_legacyinterface [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_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8 [HTTP_ACCEPT_ENCODING] => gzip [HTTP_ACCEPT_CHARSET] => ISO-8859-1,utf-8;q=0.7,*;q=0.7 [HTTP_ACCEPT_LANGUAGE] => en-us,en;q=0.5 [HTTP_REFERER] => http://wordpress.hubtech.tv/?view=commentaries&start=420 [HTTP_USER_AGENT] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729) [HTTP_HOST] => wordpress.hubtech.tv [HTTP_CONNECTION] => Keep-Alive [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => wordpress.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 46.98.11.64 [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] => 62433 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => view=commentaries&start=420 [REQUEST_URI] => /?view=commentaries&start=420 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1516423709.538 [REQUEST_TIME] => 1516423709 ) [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] => 1516423709 [session.timer.last] => 1516423709 [session.timer.now] => 1516423709 [session.client.browser] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729) [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 420 [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 ( [view] => commentaries [start] => 420 [limitstart] => 420 [option] => com_legacyinterface [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_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8 [HTTP_ACCEPT_ENCODING] => gzip [HTTP_ACCEPT_CHARSET] => ISO-8859-1,utf-8;q=0.7,*;q=0.7 [HTTP_ACCEPT_LANGUAGE] => en-us,en;q=0.5 [HTTP_REFERER] => http://wordpress.hubtech.tv/?view=commentaries&start=420 [HTTP_USER_AGENT] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729) [HTTP_HOST] => wordpress.hubtech.tv [HTTP_CONNECTION] => Keep-Alive [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => wordpress.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 46.98.11.64 [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] => 62433 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => view=commentaries&start=420 [REQUEST_URI] => /?view=commentaries&start=420 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1516423709.538 [REQUEST_TIME] => 1516423709 ) [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] => 1516423709 [session.timer.last] => 1516423709 [session.timer.now] => 1516423709 [session.client.browser] => Mozilla/5.0 (Windows; U; Windows NT 5.1; pt-PT; rv:1.9.1.2) Gecko/20090729 Firefox/3.5.2 (.NET CLR 3.5.30729) [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 420 [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 ) 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Oil isn’t the only commodity enduring a significant correction

December 5, 2014

Television networks have started airing their libraries of holiday movies. There are timeless classics like "It’s A Wonderful Life" and "Miracle on 34th Street," and more recent, campier entries like “Home Alone” and "Scrooged." It’s interesting to see how cinematic visions of the season have evolved.

Among the films running this month is "Trading Places," the Eddie Murphy/Dan Aykroyd production of 30 years ago. At the center of the film is a commodities trading firm run by the Duke Brothers (Don Ameche and Ralph Bellamy), who are trying to make a big score in the futures market. In the end, their plot unravels, leaving unexpected winners and losers.

Commodities really are in the limelight as the 2014 holiday season enters full swing. Markets for some elements are in full retreat, creating a string of unexpected winners and losers. Central banks trying to manage inflation in this scene will be forced to account for these earthy developments.

Those who have been shorting futures contracts for certain commodities have been pleased in recent years as industrial metals endured significant corrections.



Recent trends certainly reflect reduced demand from China, which surpassed the United States as the world’s largest manufacturer in 2010. Overall industrial output in China is growing at half the rate it was four years ago. Chinese steel production, which represents more than half of the world’s output, seems poised to decline for the first time in 14 years. China mines a significant fraction of the minerals it needs, but the sheer scale of its operations requires significant imports as well.

Chinese leaders have been trying to bring better balance to their economy, with heavy industry a focus of reform. Aside from achieving better diversification across sectors, the current regime has focused on reducing the environmental consequences of mines and factories. As a result, the country has been on something of a diet when it comes to raw materials.

This is bad news for suppliers. Among advanced economies, Australia is bearing the biggest cost. Australia exports 43% of the world’s iron ore and 11% of its copper ore. Investment in the mining sector has contributed significantly to growth in recent years. With that sector now in retreat, the Australian economy grew by just 0.3% in the third quarter of the year.

Australia has not endured a recession since 1991, and analysts are not calling for one any time soon. Australia has a significant service sector; at 70% of gross domestic product (GDP), it is as large as that of the United States. Nonetheless, the Australian dollar has fallen by more than 10% in the past three months.



Emerging economies that rely on commodities may not fare as well. These countries embrace mining as a means to attract foreign investment and generate exports. The industry provides employment to citizens with more-modest levels of education and generates revenue for governments.

When prices reverse, it can create tremendous problems if development has not been properly managed. The failure to keep reserves against changes of fortune can leave significant holes in public budgets and risks unemployment and unrest. Should recent trends continue, small producers in Africa and South America will be most acutely affected.

On a larger scale, both Brazil and Russia have significant mining sectors. Both face challenging economic times; real GDP has fallen over the last 12 months in both countries. Both rely on foreign investment, which has diminished importantly.

The drop in commodities prices will have an impact on the overall price level in the developed world. This will make it more challenging for central banks to achieve targeted levels of inflation. It also raises the difficult question of how to view adjustments in commodities prices when assessing price stability. Given their historic volatility, such shifts are often viewed as transitory, and “core” measures of inflation are constructed to minimize their impacts.

Yet recent trends in certain commodities prices have been ongoing and may persist for a while longer. Reflecting the diminished outlook for global inflation, precious metals have joined their industrial cousins in decline. The price of gold has fallen by more than 10% since July, and the price of silver is off almost 25% during that interval.

Such substantial corrections have roiled the commodities futures markets caricatured in “Trading Places.” Alas, the sea of smocks once seen in the pits has thinned over the years with the onset of electronic trading. A faithful remake of the movie would have computers plotting against one another; I am not sure that would play well at the box office.

Mario Draghi Sets the Stage for More QE

Mario Draghi, president of the European Central Bank (ECB), sent a strong signal that additional monetary accommodation may be necessary in early 2015 in light of weak economic data and low inflation. The underlying implication is that broad-based quantitative easing (QE) would be effective in lifting inflation toward the central bank’s inflation target of 2.0%. However, this outcome is not assured.

The ECB’s updated forecast places eurozone inflation in 2014 at 0.5%, followed by 0.7% and 1.3% in 2015 and 2016, respectively. Eurozone real GDP is currently estimated to grow by 0.8%, 1.0%, and 1.5% during 2014-16, respectively. Updated forecasts of both inflation and GDP in the eurozone are materially lower than the ECB’s September prediction and this raises expectations of QE in 2015.

There are several roadblocks to overcome for these expectations to become reality and for QE to be effective.



First, the initial round of the ECB’s longer-term refinance operations (which offered low-cost funding to banks) expires in 2015 and will reduce the ECB’s balance sheet. To replace the runoff, the new targeted longer-term refinance operations (TLTRO) must be sizeable. The first offering of TLTRO was not well-received; the second one is scheduled for December 11.

In light of this, reaching the ECB’s goal of increasing its balance sheet by €1 trillion will require large-scale purchases of assets. Recent additions of covered bonds and asset-backed securities total just over €21 billion to date, a very modest sum. Clearly, new asset classes will be needed to generate additional volume.

Mr. Draghi mentioned that his governing council considered a range of alternatives for future QE. Previous statements have noted consideration of corporate and sovereign bonds, and Draghi hinted strongly that one or both of them might be approved for purchase early next year. Without them, the ECB will struggle to meet its balance sheet target.

There is ample dissent within the Governing Council of the ECB, particularly from Germany, about purchases of sovereign bonds. However, Draghi noted that he is determined to honor the price stability mandate even at the expense of losing support of some members of the Governing Council.

Assuming that these procedural hurdles can be overcome and QE expands in Europe, attention will turn to its effectiveness.

Credit easing is one of the channels through which QE operates; purchases of long-term securities lower long-term interest rates. Credit extension in the eurozone is largely done through the banking system, particularly for small- and medium-sized enterprises. Unfortunately, lending to the private sector in the eurozone has declined for 10 quarters in a row. European banks have been conservative with their capital, and firms have been reluctant to borrow amid a soft economic outlook. It will be a challenging task to revive credit in an environment where regulators are strict about strengthening weak bank balance sheets.

QE can be beneficial through another channel. Central bank purchases of securities make available cash that can then be invested in risky assets. This, in turn, increases prices of risky assets and raises wealth. The wealth effect from QE in the United States has helped lift consumer spending. Unfortunately, the percentage of eurozone households with risky assets in their portfolios is smaller than in the United States, which implies that the impact through the wealth effect will most likely be modest.

Despite these potential impediments, the ECB must press forward. European inflation and inflation expectations are both in decline. This implies higher real interest rates and an unintended tightening of monetary policy. It may not be clear that QE will work, but the consequences of doing nothing seem quite clear.

U.S. Employment Gains: Solid But Not Sufficient to Prompt Tightening

The November U.S. employment report was another strong one. But while we continue to make progress in the labor market, the inflation outlook has become the more-important driver of Federal Reserve policy.

The American unemployment rate was unchanged at 5.8% in November, but this is a notable improvement from a year ago when the jobless rate was 7.0%. The broad measure of unemployment (which includes discouraged workers, part-time employees and marginally attached workers) stands at 11.4%, down from 12.1% in May. Long-term unemployment (30.7% versus 34.6% in May) shows a steady downward trend.

There has also been a noticeable reduction in part-time employment (6.8 million versus 7.5 million in May). These improvements have occurred during a period when the participation rate has held steady. Putting these numbers together, several of the indicators on Janet Yellen’s dashboard are turning green and signify labor market conditions are improving.



The establishment survey results were stronger than the household survey data. Payroll employment increased 321,000 in November, and revisions added 44,000 new jobs. The three-month moving average has held above 200,000 for eight straight months.

The strength of the report is not likely to result in the Fed considering an early date for tightening monetary policy. Although the economy is approaching full employment, inflation remains well below the targeted level of 2.0%. The personal consumption expenditure price index is up only 1.4% over the past year, and “core” inflation is up only 1.6%.

The recent views of two members of the Federal Open Market Committee are worth noting. Federal Reserve Vice Chairman Stanley Fischer indicated that the inflation part of the Fed’s dual mandate also needs to be met in order to consider tightening monetary policy. New York Fed President William Dudley pointed out that the experience of the Great Depression and Japan in the last two decades “illustrates the risks of raising interest rates too soon, especially when inflation is running below the central bank’s objective.” He added that allowing hiring to proceed at a solid pace for a while when long-term unemployment is elevated will not “jeopardize” the price stability objective.

The bottom line is that as long as inflation is below the Fed’s target and is not showing signs of moving closer to it, the Fed is unlikely to bring forward normalization of interest rates.

© Northern Trust

www.northerntrust.com

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Based on insights from our team’s recent trip to China, we noted that the country is likely headed for a long economic landing. What does that mean for its infrastructure and commodity sectors?

Infrastructure: High Growth, but Some Challenges

Infrastructure, particularly railways and subways, remains a high-growth sector because of a shortage of cargo and passenger capacity. A key issue from our perspective: state-owned enterprises in the sector need to improve their net profit margins and returns on equity, which can be as low as 2% and the low teens, respectively.

Another challenge the sector faces is delays in payments from local government clients. This is actually old news, and the prevailing sentiment is that payments will eventually be made. We haven’t yet heard of any cases of nonpayment, and we don’t expect to. If this happened, though, it would be a serious issue—and not just for construction companies.

The company managers we spoke with—including those at a railway construction company involved in railway-related property development to boost profitability—are broadly positive about the property industry. From their perspective, the sector is in a short-term structural downturn and correction, with a positive medium- to long-term outlook based on China’s continuing urbanization. Railway builders enjoy an advantage when it comes to land acquisition; nevertheless, we think that the strategy of growing their property businesses carries high execution risk.

Commodities: Feeling the Squeeze

For the coal sector, the challenge is to cut capacity and costs; coal prices may have bottomed but there appears to be little upside, as shown in the Display below. High fixed costs make shutting down mines uneconomical, unless it’s done permanently; the alternative is to maintain production but sell at a loss, including “dumping” into overseas markets.

In the cement industry, the overall tone was less negative but still cautious. One company described the pickup in infrastructure as weaker than expected, while the property sector remained sluggish. Sales volume year to date was flat, and managers didn’t expect improvement in the fourth quarter—usually the peak period for cement producers. Oversupply isn’t considered severe, given current inventory levels and the highly regionalized nature of the industry. Firms also reported no problems in rolling over bank loans. Like construction companies, however, cement companies were experiencing longer payment cycles as a result of their exposure to the infrastructure sector.

Our view on the aluminum sector is mixed. One company we spoke with was increasing capacity while its competitors were cutting theirs. The privately owned company had a positive outlook on sales volume and average sales price in light of steady demand for smartphones and tablets, social housing and autos. We expect corporate earnings in the sector to diverge over the next 12–18 months due to a wide range of cost curves, reflecting such factors as access to bauxite, power costs and distance from customers.

Selective Investments Still Rewarding

These assessments—combined with our already published views on banks and property—support our view that China is in for a long economic landing rather than a hard or soft one. We expect the prospects for this to firm up over the next 12–18 months as a number of developments play out:

  • Defaults in stressed commodity-related industries, such as the steel sector, in which banks (the lifeblood of the Chinese economy) are reducing their exposures
  • Banks remaining in reasonable shape, taking advantage of the targeted flexibility provided by the government to help them avoid a liquidity crisis
  • An acceleration in infrastructure spending next year as the initial shock of the anti-corruption campaign subsides
  • The property sector muddling through its challenges

This is all predicated, of course, on the government continuing to pursue its reform agenda with only limited and targeted support for economic growth. But we think that path is highly likely. While the short- to medium-term outlook for China is mixed and involves risks, we believe select investments in China can be rewarding for investors.

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.

Hayden Briscoe is Director of Asia-Pacific Fixed Income, Shamaila Khan is a Portfolio Manager in Emerging Markets Corporate Bonds and Jenny Zeng is a Research Analyst in Corporate Credit, all at AllianceBernstein (NYSE:AB).

© AllianceBernstein

http://blog.alliancebernstein.com

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Emerging-market (EM) equities are far more turbulent than their developed-world peers. But there are several things investors can do to capture the attractive return potential while reducing volatility. Staying active is the lynchpin for success.

Economic progress and structural reforms over the past 20 years have reduced some volatility in many EM countries. However, EM stock markets are still more volatile than their developed-market (DM) counterparts. And single-stock EM volatility tends to spike more sharply in times of crisis. Our research shows that since 1996, the chance of losing more than 30% of an investment in a single stock was far more common in EM than in DM. In declines of 30% or more, the average loss was also higher for EM than for DM.

The Problem with Indexing

Buying the index might seem like a low-risk approach. However, the four riskiest emerging-market countries over the past 20 years—Russia, Indonesia, South Korea and Brazil (Display)—represented over 35% of the EM Index’s market capitalization at the beginning of this year. By being concentrated in the most volatile set of countries, a passive index will take on substantial excess risk. We believe investors can proactively mitigate the risks with these five active principles in mind.

 

Don’t Be Too Quick to Reload into Losers—In emerging markets, price momentum is very powerful. Winning stocks typically stay winners for longer than in DM, and losers keep on losing for longer too. So when a money-losing stock faces significant headwinds, we think investors should think twice before reloading—and should be quicker to consider selling a position.

Invest in Less Volatile Companies—Companies with stable cash flows, good capital stewardship and/or lower sensitivity to the business cycle are good targets in emerging markets. Our research shows that the lowest-beta quintile of EM stocks was three percentage points less likely to decline by more than 30% than was the EM market as a whole. This resulted in a meaningful pickup in long-term returns.

Stocks of such companies might not do as well when markets are exuberant. However, they have tended to outperform the market over full market cycles. We call this gaining more by losing less.

Hedge Currency Risk for Times of Stress—Currency is an important component of equity returns for nondomestic investors. Our research found a negligible relationship between the strongest-performing EM equity markets and their currencies since 1997, during typical market conditions. However, in extreme market volatility, the linkage between a country’s currency as measured by the real effective exchange rate (REER) and its equity returns tends to increase significantly (Display). So managing the risk of sharp swings in currency should always be considered by emerging-market equity managers.

 

Diversification Matters More in EM—Unexpected—and often unpredictable—events happen far more frequently in the developing world. In developed markets, we generally believe you need at least 40 stocks to diversify away 95% of the risk of individual stocks. However, because of the higher levels of single-stock volatility and higher correlations between those stocks in EM, we need nearly twice as many to provide the same level of risk reduction.

Following the largest names in the index can lead to unintended concentrations in specific countries, sectors, or styles. For example, if we just bought the 75 largest stocks in emerging markets, over 65% of the portfolio would be allocated to just four countries, with nearly 70% to financials, technology and energy. Don’t shy away from taking high active risk, but combine it with prudent diversification.

Holistically Combine Stocks and Bonds—Think beyond equities when considering diversification. Combining EM stocks, bonds and currencies, managed in an active, unconstrained and integrated strategy can generate returns that are similar to those of an EM stock-only strategy, but with much less volatility. It also provides more flexibility than a stand-alone equity or debt portfolio to seek higher risk-adjusted returns.

Risk control is a critical component in managing an EM equity portfolio. Because of the higher possibility of loss, we believe that EM investors should deploy a systematic approach, which could also enable them to potentially compound more of their gains over the long term.

© Alliance Bernstein

http://blog.alliancebernstein.com

[description] => Emerging-market (EM) equities are far more turbulent than their developed-world peers. But there are several things investors can do to capture the attractive return potential while reducing volatility. Staying active is the lynchpin for success. [author] => Nelson Yu and Morgan C. Harting [legacyinterface_firm_id] => 20 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 03:43:51 [created_by] => 945 [modified_on] => 2014-12-06 03:44:45 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2086 [hits] => 0 ) [3] => stdClass Object ( [legacyinterface_commentary_id] => 2021 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15259 [apv_conversation_id] => 2856 [content_type] => market-commentary [title] => China’s Economy Gliding into “Long” Landing [slug] => bernstein_120614b [fulltext] =>

China’s economy isn’t headed for a hard or soft landing—instead, it’s more likely to be a long landing. That’s our perspective, based on our team’s recent visit to China to get an up-close look at the economic landscape.

The country’s economy clearly faces another few years of uncertainty and negative headlines, but we think the risks will be contained as long as the government sticks to its reform agenda. On our China trip, we assessed conditions in important cyclical sectors such as banking, basic industries and property.

Our takeaway: Investors who think the government’s recent stimulus tweaks are a prelude to a more general nationwide stimulus—global financial crisis–style—are wide of the mark. In our view, the Chinese economy is actually in store for a long landing lasting two or three years. Commodity-related industries will face a painful readjustment, and some companies will default and may even collapse.

This scenario assumes that Chinese Premier Li Keqiang will stick to his structural reform agenda. We’ve said that policy risk is one of the biggest risks China faces: if the government were to abandon its reforms and revert to a broad stimulus, our view would turn negative. But we’re still convinced—strengthened by the announced formation of a new anti-corruption body at last month’s National People’s Congress—that reforms remain on track.

Among the sectors we looked at in detail were banks and the property sector; the Display below provides a quick summary of our views.

Banks: Getting Tough on Steel Mills

There are signs that China’s large banks were more inclined to increase their property exposures in the first half of the year, as other sectors are facing headwinds that carry higher risks for them. Still, we regard short-term liquidity, not oversupply, as one of the two key risks for the property industry (government policy is the other). Banks said they were cautious about lending to developers; some have tightened their lending practices or are being selective, including concentrating on residential loans.

Banks are reducing their exposure to sectors burdened by overcapacity. For the first time, we heard that they weren’t renewing loans to weak steel mills. This should lead to faster defaults and more consolidation, which would be positive for the sector in the medium term. We doubt, however, that smaller banks are reducing their lending to sectors with overcapacity. Doing this would create problems for the banks’ own cash flows and balance sheets.

We saw differences in the way banks are managing their exposure to the shadow banking sector. One bank we spoke to had increased its exposure; in its view, recent announcements from the China Banking Regulatory Commission signaled an intent to regulate the sector, not slow it down. Another bank kept its exposure the same during the first half of the year compared with the previous corresponding period.

Property: Muddling Through

When we visited residential projects in the luxury and mass-market sectors, as well as some commercial projects, all in Changsha and Shanghai, we saw some distinctions. Overall sentiment is much more bearish in lower-tier cities than in “Tier 1” cities, even though Tier 1 cities have seen a bigger correction in sales volumes so far this year.

The companies we spoke to believe that underlying demand remains strong, and that supply and demand are much more balanced in Tier 1 cities, as shown in the Display below, while inventories in lower-tier cities have been increasing, and destocking has been slow.

Most property developers remain reluctant to cut prices. They’re hoping the government will eventually provide significant support for the market, despite the fact that developers who have cut prices by 10% in Tier 1 cities and 20% elsewhere have enjoyed good sales.

We believe the sector is unlikely to collapse, given the long-term prospects from trends such as continuing urbanization. We agree that the sector just needs time to consolidate and absorb the building surplus. Managers told us they expected the correction to last 18–24 months; sales should remain flat during 2015, but new construction should start rebounding year over year, helped by a low base in 2014.

These insights largely confirmed our view of the property sector. The only new information was that the government has started to allow certain developers to issue onshore medium-term notes. We consider the diversification of funding sources a positive for large developers.
In the second part of this blog, to be published soon, we’ll look at prospects for the infrastructure and commodity sectors.

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.

Hayden Briscoe is Director of Asia-Pacific Fixed Income, Shamaila Khan is a Portfolio Manager in Emerging Markets Corporate Bonds and Jenny Zeng is a Research Analyst in Corporate Credit, all at AllianceBernstein (NYSE:AB).

© AllianceBernstein

http://blog.alliancebernstein.com

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Key Points

  • Some attitudinal measures of investor sentiment show troublingly high levels of optimism.
  • Longer-term sentiment surveys that separate individuals from institutions show something much, much different.
  • These longer-term surveys suggest there’s little risk that the “wall of worry” the market likes to climb is crumbling.

I write and talk about investor sentiment quite often, particularly when it becomes extreme- at either the optimistic or pessimistic end of the spectrum. There are myriad indexes I review regularly, several of which are incorporated into the Crowd Sentiment Poll, put together by Ned Davis Research (NDR), as seen below.

Crowd Sentiment Spiked With Rally

Crowd Sentiment Spiked With Rally

Source: FactSet, Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2014© Ned Davis Research, Inc. All rights reserved.), as of November 25, 2014.

It should not be surprising to see optimism having spiked in light of the ferocious rally in the stock market off the October lows. This index is now back into the zone in which the stock market has historically had a bit of trouble, at least short-term.  Remember, this is a contrarian indicator.

Wall of worry

But there are a few other interesting sentiment surveys that suggest the so-called “wall of worry” the stock market likes to climb remains intact. My thanks to Bespoke Investment Group (BIG)  for highlighting a couple about which I was less familiar—and one I’ve discussed on these pages in the past.

Robert Shiller at Yale is well-known for his “cyclically-adjusted price/earnings” ratio (CAPE). But via the Yale International Center for Finance he has been conducting a few interesting sentiment surveys since 1989—posing questions to both individual and institutional investors.

The first chart below shows the results for a question asking investors about their confidence in the market not suffering a crash. I’ve highlighted this one several times in the past. It’s a bit convoluted in terms of how the question is posed and how the data is charted; but the way to read it is if the reading is low (and falling), it means there is increasing confidence there will be a market crash.

Low Confidence Crash Will Be Avoided

Low Confidence Crash Will Be Avoided

Source: Yale School of Management, International Center for Finance, as of October 31, 2014.

It should come as no surprise that the all-time low in this survey was near the crescendo of the financial crisis in late-2008. At that time, confidence among individuals and institutions was nearly equally low that there would be no market crash. Earlier this year, the reading ticked up to its highest level of the current bull market, meaning investors were less worried about a crash. But what’s most interesting lately is that alongside a very strong market rally since October, this survey has dropped noticeably, meaning investors’ worries about a crash have gone up alongside the market’s rally.

The next chart below shows the results for a question asking investors about their confidence in the market going up over the next year. Interestingly, individual investors’ confidence has generally been in a weakening cycle over the past 14 years, and today’s confidence (or lack thereof) is even lower than it was during the heat of the financial crisis. Institutional confidence has been a bit steadier, albeit with more short-term volatility.

Confidence in Market Sinking

Confidence in Market Sinking

Source: Yale School of Management, International Center for Finance, as of October 31, 2014.

As you can see above, there was a very large gap between individuals’ and institutions’ confidence earlier this year; with institutions well more bullish. Both cohorts have recently become much more bearish, although the spread remains quite wide. Notable is the fact that individuals have a record low level of confidence in the history of this survey.

The final chart below shows the results to a question asking investors about their confidence in market valuation. Much like with the prior two surveys, individual investor confidence has plunged. Individual investors today believe the market is more highly-valued than any time since 2001, just after the bursting of the tech stock bubble.

Confidence in Valuation Sinking

Confidence in Valuation Sinking

Source: Yale School of Management, International Center for Finance, as of October 31, 2014.

These Yale surveys are longer-term in nature and highlight the persistence of skepticism during the bull market underway since March 2009. So, although I and other sentiment-watchers may fret about data like that seen in NDR’s Crowd Sentiment Poll (and/or among its component indexes), there is little to worry about from a longer-term sentiment perspective. This has been the “most hated bull market in history” as noted by BIG, and reinforces the “wall of worry” the stock market is likely to continue to climb.

© Charles Schwab

www.schwab.com

[description] => Some attitudinal measures of investor sentiment show troublingly high levels of optimism. Longer-term sentiment surveys that separate individuals from institutions show something much, much different. These longer-term surveys suggest there’s little risk that the “wall of worry” the market likes to climb is crumbling. [author] => Liz Ann Sonders [legacyinterface_firm_id] => 79 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 03:51:34 [created_by] => 945 [modified_on] => 2014-12-06 03:52:43 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2088 [hits] => 0 ) [5] => stdClass Object ( [legacyinterface_commentary_id] => 2023 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15261 [apv_conversation_id] => 2858 [content_type] => market-commentary [title] => Revisiting a YouTube Classic [slug] => sungarden_120614 [fulltext] =>

Back in the summer of 2011, a short animated film was built using a website called XtraNormal. The site allows anyone to create a film and chose animated characters and voices. This one particular film sought to educate (with the creator’s strong opinions included) the audience on the Federal Reserve’s Quantitative Easing (QE) program, which then was in its middle stages. And boy, did it find an audience, with over 5 million people viewing it!

With QE ending recently in the U.S. but accelerating elsewhere in the world, we thought it was the right time to revisit this now-iconic piece of modern economic commentary. And while some of the things noted in the film have changed (gas prices now falling instead of rising, Janet Yellen replacing Bernanke as Fed-head, and the U.S. QE ended), much of what was discussed has stayed the same (QE has not yet staved off deflation, Yellen thinks like Bernanke, stock and bond prices still rising). And of course, the Fed is now holding enough U.S. Treasury Bonds on its balance sheet to build a city full of skyscrapers.

 

https://www.youtube.com/watch?feature=player_embedded&v=PTUY16CkS-k

As we have said before, we don’t know when the negative impact of QE will be felt, and we position our portfolios based on a combination of factors.  But when it hits the fan, we expect an “Xtra Normal” sized problem for investors who choose to carry on as if this market condition is not relevant.

 

© Sungarden Investment Research

http://www.sungardeninvestment.com

 

 

[description] => Back in the summer of 2011, a short animated film was built using a website called XtraNormal. The site allows anyone to create a film and chose animated characters and voices. This one particular film sought to educate (with the creator’s strong opinions included) the audience on the Federal Reserve’s Quantitative Easing (QE) program, which then was in its middle stages. And boy, did it find an audience, with over 5 million people viewing it! [author] => Robert Isbitts [legacyinterface_firm_id] => 402 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 03:59:01 [created_by] => 945 [modified_on] => 2014-12-06 04:01:57 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2089 [hits] => 0 ) [6] => stdClass Object ( [legacyinterface_commentary_id] => 2024 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15262 [apv_conversation_id] => 2859 [content_type] => market-commentary [title] => Five Things To Ponder: Unstoppable Force Paradox [slug] => streettalk_120614 [fulltext] =>

As we enter the final month of the year, the markets advance got me thinking about something known as the "Unstoppable Force Paradox." While you may not be familiar with the name, you will certainly know the definition which questions "What happens when an unstoppable force meets an immovable object?"

Even Frank Sinatra sang about it in "Something's Gotta Give:"

The paradox arises because it rests on two premises—that there exist such things as irresistible forces and immovable objects. The paradox is that both cannot both be true at same time. If there exists an irresistible force, it follows logically that there cannot be any such thing as an immovable object and vice versa.

However, that has become the general view of the financial markets currently. As discussed in yesterday's missive on excessive exuberance, investors have been lulled into a state of complacency due to a seemingly "unstoppable" rise in the financial markets. Bad news remains good news, and even small drawdowns are quickly reversed sending stocks surging higher.

AAII-INVI-BullBear-Ratio-120414

Eventually, the paradox of what happens when a seemingly unstoppable force collides with an immovable will be answered. Historically, such realizations have not been kind to investors. 

This weekend's reading list takes a look at the reasons why stocks could rise higher, and the potential they won't. The question to be answered is "What will you do when the immovable object is met."


1) Stocks Set For A Santa Rally If No Bad News by Adam Shell via USA Today

December-Market-Stats-120414"The combination of seasonal strength, strong business fundamentals and valuations at or below long-term averages increases the odds that stocks can continue to rise into the year's end, perhaps as much as 2%, says Sam Stovall, U.S. equity strategist at S&P Capital IQ.

"In support of history, we think the S&P 500 should do well in December," Stovall says. "Our projection for solid November employment gains (when the results are released Dec. 5), our forecasts for improving holiday retail sales and the prospects for better-than-expected fourth-quarter profit growth should help maintain the market's upward momentum."

2) Sorry, Santa Won't Deliver Year-End Gains by Mark Hulbert via MarketWatch

"For this column I surveyed the several hundred advisers monitored by the Hulbert Financial Digest in search of a precise definition for the Santa Claus Rally. I came up with three more or less distinct possibilities, and I subjected each to statistical scrutiny."

1) The Stock Market Rallies At Some Point During December

2) December Tends To Be A Good Month For Stocks

3) Stock Market Tends To Perform Well Between Christmas And New Year's

"The bottom line? For this definition, as well as the first two, the statistical basis of the Santa Claus Rally is too weak to make it worth the bother."

3) The Fed's Economic Coup - Why Every Asset Price Is Manipulated by David Stockman via ContraCorner

"Now in a recent forked-tongue effort to deny the existence of a Fed “put” under the stock market, Goldman’s plenipotentiary at the Fed, perhaps better referred to as B-Dud, has told us exactly that. If the monetary politburo deems that the nation’s economic bathtub is not full to the brim and therefore requires 'extremely accommodative' policy, the central bank will indeed deliberately pump-up the S&P 500 to achieve its misguided ends."

4) James Montier: "Stocks Are Hideously Expensive" via ZeroHedge

"Four words seem to define the current mood in financial markets: There Is No Alternative. Yes, equity markets might be somewhat expensive, but considering the alternatives – bonds and cash –, they are still the best investment. The correction in October turned out to be a mere hiccup in a solid bull market.

But James Montier remains skeptical. The value investor and member of the asset allocation team at Boston-based asset manager GMO sees the stock market in a near-bubble and warns investors from being complacent. 'To think that central banks will always be there to bail out equity investors is incredibly dangerous,' says the outspoken Brit. His source of wisdom in current markets comes from none other than Winnie the Pooh: 'Never underestimate the value of doing nothing.'"

Read Also: It's Painful Waiting For The Bubble To Burst via Comstock Partners

5) A Rising Aversion To Risk by Michael Kahn via Barron's

"Interpretation of the economic implications of the changing relationships of asset classes is beyond the realm of technical analysis. Still, action in the global bond market is hard to ignore right now with U.S. and many European government bond prices rising while riskier junk-bond prices are falling.

This suggests rising risk aversion. Despite climbing U.S. stock prices, the credit market's action—with yields on government obligations falling to unprecedented lows while riskier credits' yields are rising—implies nervousness about the global economy. Perhaps—though drawing big conclusions about the global economy is well beyond the scope of this column.

In my view, the bond market is telling us two things. First, low yields across the globe point to economic weakness, which is being met by ultralow rates set by central banks that are likely to persist. Second, risk aversion is growing even as the Dow Jones Industrial Average notches new records. Taking it easy with your money is probably a good idea."

Read Also: A Stock Market Correction Is Imminent by Lawrence McMillan via MarketWatch

Chart Of The Day: "Something's Gotta Give"

Somthings-Gotta-Give-120414


"In 1979, an unstoppable force met an immovable object. Chuck Norris kicked Mr. T in the jaw. The result was the '80s." — Chuck Norris Facts

Have A Great Weekend

© Streettalk Live

http://streettalklive.com

[description] => As we enter the final month of the year, the markets advance got me thinking about something known as the "Unstoppable Force Paradox." While you may not be familiar with the name, you will certainly know the definition which questions "What happens when an unstoppable force meets an immovable object?" [author] => Lance Roberts [legacyinterface_firm_id] => 400 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 04:04:45 [created_by] => 945 [modified_on] => 2014-12-06 04:05:29 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2090 [hits] => 0 ) [7] => stdClass Object ( [legacyinterface_commentary_id] => 2025 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15263 [apv_conversation_id] => 2860 [content_type] => market-commentary [title] => China's One-Child Policy [slug] => matthews_120614 [fulltext] =>

Last year’s decision to relax the one-child policy was an important political step by the Chinese government but it will have little impact on the country’s demographic and economic trends. Chinese leaders have effectively ended “one of the most draconian examples of government social engineering ever seen.”

Historical Background


Rapid population growth after World War II led to a global focus on birth control. One extreme response was India’s forced sterilization campaign between 1975 and 1976 when more than 8 million sterilizations were performed. In 1980, China began enforcing its “one-child policy,” which three prominent Chinese demographers, writing recently in a U.S. academic journal, called “the most extreme example of state intervention in human reproduction in the modern era. . .that has forcefully altered family and kinship for many Chinese.”

Last Year’s Policy Change


Last November, China’s Communist Party announced that the one-child policy would be relaxed by implementation of a policy in which families are permitted to have two children if either a husband or a wife is an only child. This marks a change from the previous rules which required both the husband and wife to be only children in order to qualify to have a second child.

Because this relaxation was accompanied by a decision to dismantle the one-child enforcement bureaucracy, in my view it spells the rapid end of the one-child policy.

The most significant aspect of this move is political, as it represents the Party’s decision to withdraw from its citizens’ bedrooms. Restoring this element of personal freedom should help rebuild people’s trust in the Party.

But, contrary to conventional wisdom, ending the one-child policy is unlikely to change the longer-term trend toward a lower fertility rate. China’s current fertility rate of about 1.5 could drop even lower in the future, closer to South Korea’s 1.3, as the pressures of modern life lead Chinese couples to have smaller families. 

Smaller Families Before One-Child


It is important to recognize that the steepest fall in China’s total fertility rate (the average number of live births per woman) actually came before enforcement of the one-child policy began in 1980. The fertility rate dropped by more than half, from 5.5 to 2.7, between 1970 and 1980, influenced by rising urbanization and falling infant mortality rates. Today, China’s fertility rate is about 1.5.



Although 11 million couples are now eligible to apply for permission to have a second child under the new policy, only 700,000 couples (6% of total) applied through August of this year.

Long-Term Impact


Last year, before the policy change was announced, I spoke with one of China’s leading demographers, Wang Feng, about the prospects for change. Wang is a professor of sociology at the University of California, Irvine, and is on the faculty of Fudan University in Shanghai. He is also a nonresident senior fellow at the Brookings-Tsinghua Center in Beijing, and he recently wrote that the one-child policy “will go down in history as a textbook example of bad science combined with bad politics.” 

Following are excerpts from my interview with him. I began by asking him about the long-term impact of ending the one-child policy. Professor Wang said expectations for a rebound in the fertility rate have been exaggerated:

Professor Wang: The reason I say it’s exaggerated is because in most of China’s rural areas, couples who want to have two children have already had two. There are certainly some couples who would want to have two children, which would be good for them, but we have all indications showing that many urban couples are happy to stay with one. And then there are couples who are actually choosing not to have any children, given the larger financial ramifications—the cost of having them.

For instance, in Shanghai, fertility is even below the one-child-per-couple level. This is despite the fact that, because of the early implementation of the one-child policy, many Shanghai couples are in the only-child cohort and are thus eligible, under the current rules to have a second; but they are often choosing not to have a second and many are not even having one.

Q: What will be the longer-term impact on demographic trends of ending the one-child policy?


A: In terms of individual families, we will have more stable, and I would say happier, families because couples would have the option of having a second child, or even more. More children will have siblings and there will be more children to care for older parents. So there will be happier, safer families.

Even at the aggregate level, if there’s a rebound in births, it would be short-lived and of moderate magnitude. There’s no indication whatsoever that the fertility level in China could return to what we call a replacement level, even after the one-child policy ends.

This means that China will continue to have a very low fertility rate: from today’s 1.5, it could go as high as 1.6, so the aging scenario we’ve been talking about will not be affected by this policy.

Q: So right now the fertility rate is about 1.5?


A: Right.

Q: And 10 years from now, which will be a decade after the one-child policy is lifted, do you think it will only rise to 1.6?


A: That is possible; but I would not be surprised if the fertility rate was to drop even lower, to 1.3 for instance, to what we see in Japan and South Korea. This is because the larger context of the financial pressure on a parent is unlikely to change in the short term and could actually become more stressful.

Q: What conclusions can we draw by looking at other countries in the region that have gone through China’s development cycle? Is China’s fertility rate following a similar trajectory and, based on this comparison, is it likely to go lower?


A: Absolutely. If you look at the whole world, the region that has the lowest fertility levels is East Asia. Regardless of political system or policy, they all share the same feature of very low fertility. Even when governments in this region have adopted pro-birth policies, those have had little effect.

Q: Do you think that ending the one-child policy will have an impact on the imbalance in China’s male-to-female ratio?


A: I think it will. There are two things that are happening right now that are resulting in the abnormal sex ratio. One is the effect of policy, because policy suppresses people’s behavior or choices. The other is something that is actually not talked about much: it’s not because of the policy; it is because when fertility is going down to a very low level, and when people still have a preference for boys, the sex ratio becomes abnormal. This was what happened in South Korea in the mid-1990s. Eventually, the preference for boys will decline and, as the policy is changed, both factors will lead to an improvement in the sex ratio.

Q: How large is the sex ratio imbalance today?


A: We estimate there are between 20 to 40 million excess males in China. Such a number, though spread over time, could have a number of social consequences. Primarily, poor rural men will struggle to find a spouse in the coming years. Further down the road, these will be lonely elderly men who will need the society’s support during their old age. The threat they pose to society is highly exaggerated, as these are most likely immobile poor men at the bottom of society, without the resources to organize or harm others.

Q: Let us now talk about some of the longer-term demographic trends in China. People often say that China is going to get old before it gets rich and that the dependency ratio of the elderly in particular is going to rise to a high level in the not-too-distant future. Can you talk about that?


A: China has become a lot richer in the past couple of decades, especially the last one, but China is already getting older and the question is how much richer it will get down the road. In China, about 9% of the population was aged 65 and over in 2010. When Japan reached that age level, its per-capita income was almost twice the level of China’s in 2010. When South Korea reached that point, its income was almost three times higher than China’s. So in that sense, China has already grown old and yet is not as rich as the other societies.



What is important is not just individual wealth, but that China’s social infrastructure is inadequate, in terms of an equitable and sustainable health care system and a national social security system. This social infrastructure is not yet in place, so China does face a very, very serious situation.

Q: China’s growing population has meant that its economy has benefited greatly over the past few decades from a demographic dividend. Now that the working age population has begun to shrink, is that dividend exhausted? Will that be changed as a result of the termination of the one-child policy?


A: Using sophisticated methods to calculate the demographic dividend, which would include not only population age structure, but also productivity and consumption by age, China reached the end of its demographic dividend period last year. Economists have estimated anywhere between 15% to 25% of China’s economic growth in the past couple of decades was due to a favorable demographic profile - the demographic dividend - but that dividend has now become zero. In the coming years, China will experience a so-called negative demographic dividend, which will take its toll on China’s economic growth rate, assuming everything else stays the same. 

Q: Will ending the one-child policy have any impact on this process?


A: No.  As we discussed earlier, the magnitude and duration of the birth rebound is not going to be very big, and in any event, over the next couple of decades most new births will increase the size of the younger dependent population rather than increase the size of the workforce.

Q: When you look at other countries that have gone through this demographic shift, what conclusions do you draw about the impact of this shift on China’s economic growth?


A: China’s economic growth faces many constraints. One of them is the change in population age structure and, in China’s case, the change is much more rapid than other countries that have gone through this. There are two broad areas we could look at in terms of economic impact. One is better understood, which is the changing support ratio, or the dependency ratio. China now has a five-to-one ratio of working- (or taxpaying-age) to pensioner-age population (60 and over). But within 20 years, that ratio will be two-to-one. 



People point to Japan as an example, with the malaise in its economy in the past two decades; many people increasingly argue that Japan’s aging population is dragging down its economic growth. China of course is different from Japan in terms of where its economy is, and how the economy is organized. Demographically, however, China does share similar features with Japan, though change is coming even faster. So I would say that Japan does serve as a cautionary example. 

Andy Rothman 
Investment Strategist 
Matthews Asia

© Matthews Asia

http://us.matthewsasia.com

[description] => Last November, China’s Communist Party announced that it would relax its famed one-child policy—“one of the most draconian examples of government social engineering ever seen.” This is a significant political move, as it represents the Party’s decision to withdraw from its citizens’ bedrooms, restoring a key element of personal freedom that should help rebuild people’s trust in the Party. But what some observers may not realize is that the steepest fall in China’s total fertility rate (the average number of live births per woman) actually came before enforcement of the one-child policy began in 1980. The fertility rate dropped by more than half, from 5.5 to 2.7, between 1970 and 1980, influenced by rising urbanization and falling infant mortality rates. So, will China’s new family planning policies actually have an impact on the country’s demographic and economic trends? Sinology explores. [author] => Andy Rothman [legacyinterface_firm_id] => 286 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 04:09:51 [created_by] => 945 [modified_on] => 2014-12-06 04:10:33 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2091 [hits] => 0 ) [8] => stdClass Object ( [legacyinterface_commentary_id] => 2026 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15264 [apv_conversation_id] => 2861 [content_type] => market-commentary [title] => Draghi Crosses the Rubicon while Juncker Peddles "Europhemisms" [slug] => franklin_120614 [fulltext] =>

The announcement by newly installed European Commission President Jean-Claude Juncker of a package designed to secure €315 billion of investment for the eurozone garnered a lot of press interest in late November. However, John Beck, director of Fixed Income, London, and portfolio manager, Franklin Templeton Fixed Income Group®, believes a speech by European Central Bank (ECB) President Mario Draghi at a bankers’ conference in Frankfurt earlier in the month offers more practical insight for investors. Here he outlines lessons to take from Draghi’s speech in the lion’s den.

John Beck
Director of Fixed Income, London
Senior Vice President, Portfolio Manager,
Franklin Global Government Bond Fund
Franklin Templeton Fixed Income Group®

On the face of it, the €315 billion investment plan unveiled on the 26th of November by European Commission President Jean-Claude Juncker1 may look impressive, but when you consider that it represents less than 3% of the eurozone GDP, it’s perhaps not that exciting. Equally when you look at the specifics, the European authorities, through the European Investment Bank (EIB), are putting up just €16 billion, and they are hoping that the private sector is going to come in and supply the rest. That’s not going to transform the world, in my view.

Even considering that these EIB-sponsored funds may be eligible for the European Central Bank (ECB) to buy as part of its asset-buying project that it hopes will drive increased liquidity across the eurozone, I don’t think this is anything close to a revolutionary approach. I think it shows how hesistant different parts of the eurozone are in terms of trying something different.

Juncker’s announcement was packed with what I call “europhemisms”—meaningless euphemisms expressly designed not to offend any constituent of the European Union—such as “adding a third point to the virtuous circle,” “applying the jump cables” and “turning the page.”2 But if Juncker is “turning the page,” a few days earlier, right in the seat of monetary rectitude—the European Banking Congress in Frankfurt—ECB President Mario Draghi crossed the Rubicon and admitted the ECB has opened the door to quantitative easing. He told the audience of European bankers: “We resorted to asset purchase. Faced with continuously weak inflation, we reached the effective lower bound on our policy interest rates, and we resorted to asset purchases as a means to expand further our monetary policy stance.”3 This is a pretty powerful place for Draghi to be opening this conversation, in my view.

Addressing Inflation

Draghi went on to say that inflation has been too low and was affecting the future inflation outlook. As a result, he insisted it was essential the ECB has acted to bring inflation back toward 2% and ensure the firm underpinning of inflation expectations.4 Some observers would say he has been slow to make these decisions. There has been an internal debate within the ECB on whether to buy sovereign bonds, when to buy them, and what the break-down of the bonds they might buy should be. I think now we’re beginning to get some answers.

Japan is also attempting to counter what it sees as low inflation. Its central bank, the Bank of Japan, has an explicit inflation target: it is now trying to generate 2% inflation.5 In his recent speech, it seems to me that Draghi is reiterating, implicitly rather than explicitly, the fact that the ECB has a similar target. And in effect he is saying that, if the European authorities can’t get inflation up to that level quickly, they are going to have to do more—basically, they seem to be opening the door to formal sovereign buying in the secondary markets.

On the one hand, I think Draghi is careful to say all the right things about not letting inflation get out of control, but on the other hand, he concludes—and this is incredibly powerful: “If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialize, 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.”6

So I think what the ECB is proposing in terms of monetary policy should be a great deal more effective than the European Commission essentially providing €16 billion worth of capital and hoping that someone else is going to borrow the rest. In my view, that’s far from the application of jump cables that Juncker promised.

When you talk about “jump cables”—or when you defibrillate a patient—you deliberately stand away because you’re giving a real shock. I don’t think €16 billion is a real shock. I think what Mario Draghi is proposing has the potential to be much more transformative in terms of what the outcome could be from a European growth perspective.

Portfolio Balance Effect

The ECB is now talking about portfolio balance effect—the concept that, if a central bank buys up lower risk sovereign instruments, investors will likely move into riskier assets. This concept, to me, is very important.

In his speech on November 21, Draghi explained:

“As we buy assets, investors are likely to substitute the lower-risk assets we buy with riskier assets such as longer-term assets, equities and possibly real estate. This type of move has well-known effects on interest rates across the curve, on the cost of capital, on wealth—through higher equity and real estate prices—and therefore on balance sheets more generally.

“There are certainly question marks as how strong these effects are in the euro area. We do not have precedents and therefore empirical data for an economy such as ours, which has a different financial structure from the United States or Japan. But there is no question as to the sign of the effects—it is clearly positive.”7 

In so many words, I think this shows Draghi is likely telling us that the ECB is planning to do what the Bank of Japan and what the US Federal Reserve have done, in terms of quantitative easing.

And by acknowledging that substitution of assets can also take place across jurisdictions, “which would take the form of investors rebalancing portfolios away from euro-denominated assets towards other jurisdictions and currencies providing higher yields,”8 Draghi appears to be saying that, if the euro weakens, which is the likely effect of portfolio rebalancing, he’s happy with that outcome. A weak currency is generally good for growth because a country can export more.

The slight concern, in my view, has to be whether the ECB will achieve the weakening of the euro because the eurozone still has a very large current account surplus.

I do think the euro has the capacity to weaken further, but the flip side is the United States’ tolerance to shoulder the burden of global economic recovery, and it remains a question mark.

Key Takeaways

The lesson from Draghi’s speech, I believe, is “listen to what you’re being told.”

And what I interpret from his remarks is that investors might continue to be overweight periphery, continue to expect the yield curve to flatten, and anticipate sovereign buying in the first quarter of next year. My expectation is that sovereign buying will likely be based on the percentage allocations of capital paid into the ECB, which could mean that countries like France, Spain and Italy could very likely be large beneficiaries of that buying.

In summary I feel that when the head of the ECB makes a speech in Frankfurt—the “temple” of central banking—it’s incumbent on those of us who work in the markets to listen to his sermon and draw our own conclusions. Others might draw different conclusions, and that’s the power of active management.

The comments, opinions and analyses are the personal views expressed by the investment manager and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding any country, region, market or investment.

©Franklin Templeton

http://us.beyondbullsandbears.com

[description] => The announcement by newly installed European Commission President Jean-Claude Juncker of a package designed to secure €315 billion of investment for the eurozone garnered a lot of press interest in late November. However, John Beck, director of Fixed Income, London, and portfolio manager, Franklin Templeton Fixed Income Group®, believes a speech by European Central Bank (ECB) President Mario Draghi at a bankers’ conference in Frankfurt earlier in the month offers more practical insight for investors. Here he outlines lessons to take from Draghi’s speech in the lion’s den. [author] => John Beck [legacyinterface_firm_id] => 163 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 04:13:43 [created_by] => 945 [modified_on] => 2014-12-06 04:14:28 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2092 [hits] => 0 ) [9] => stdClass Object ( [legacyinterface_commentary_id] => 2027 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15265 [apv_conversation_id] => 0 [content_type] => market-commentary [title] => Weekly Market Summary [slug] => fatpitch_120614 [fulltext] =>

Coming into this week, SPY had been above its 5-dma for 30 days in a row. This was a new record, unlike any streak the index has ever seen. We reviewed prior examples of these streaks earlier; our conclusion was that the streak rarely marked the top in the market, meaning there were higher highs immediately ahead after the streak ended. But the index also struggled in the following weeks, often trading lower (the full post is here).

The set up we had been looking for after the streak ended was the first touch of SPY's 13-ema. That has been a reliable buy point which we have highlighted many times in the past. That occurred on Monday, with SPY at 205.5. By Wednesday, SPY had already gained $2.50.

That may not seem like much of a gain, but consider the context. In the past 4 weeks (since November 10), SPY has gained $4, but more than $2 of that gain occurred overnight on November 21 following announcements from both the PBOC and ECB to provide greater stimulus. Without that one gap, SPY is up less 1% in the past month.

Overall, the trend remains higher for both the main US indices and well as for a majority of the individual sectors. All of the US indices except RUT made new highs in the past week; all of the sectors except energy have made new uptrend highs in the past two weeks.



New highs imply limited resistance. After all, there are no prior buyers holding unprofitable shares at a higher price. So the main risk to trend is whether it is overextended. NDX may be the clearest example that it perhaps is. As the leader, NDX has the highest rate of appreciation; last week, it met its 2014 trend line, and this week, while SPX and DJIA closed higher, NDX closed lower.



NDX, by the way, still has not touched it's 13-ema since coming out of the October low. That's a set up worth watching into next week.

The Dow is also up against it's trend line;  moreover, it normally has resistance at its upper Bollinger, which is now just 0.1% higher. The trend is clearly up, but note the loss of momentum in RSI and MACD.



The same set up in the Dow also exists in SPY. The trend is higher; moreover, note how the index hugged the top trend line in June and July and again in late August and into September. With strong seasonality into year end, it would not be surprising to see SPY hug the top trend line for several more weeks.



The trend line shown above extends back 9 months. Interestingly, SPY is also up against a trend line extending back nearly 5 years. Again, there are no unprofitable buyers at current levels, but the rate of appreciation may be reaching its multi-month as well as its multi-year limit.



The chart above is on a weekly timeframe. Note that SPY is now up 7 weeks in a row. This is rare. In the past 10 years, this has only happened 4 other times. What happens next? In the past 4 cases, 3 closed lower the following week; the one positive case gained just 0.06% and then lost 1.6% two weeks later (data from Chad Gassaway).

Let's look at more examples, starting most recently. The vertical lines denote a 7 week up streak. Since 2004, the index has mostly struggled after the streak ended. Perhaps not immediately, but over the next weeks and sometimes longer. There is one exception where the index closed only slightly lower for two weeks and then zoomed higher (February 2013). Some of these streaks occurred before very long chop (2004) or major market tops (2007 and 2011).



There were only two examples of 7 week streaks in the late 1990s. In 1997, the index closed down one week and then went higher, but it was still trading at the same level 6 months later (green line). In 1998, the index moved higher in week 8 and then settled into a 13-week long choppy trading range (yellow highlight).



Since 1980, there have only been three other cases; in two, SPY generally struggled for many months and in the other it did not (this was 1985, early in a new bull market).



Overall, in 8 of these 10 examples, SPY struggled to retain any gains over the next two months or longer, and in two SPY basically continued higher. We should stress that in all 10 cases, the end of the 7 week streak did not mark an exact top; the index always made a higher high in the weeks ahead. That means that investors should be looking to accumulate on near term weakness, at least for a trade.

One more technical set up related to SPY is that it is again within 1% of a "round number" (e.g., 1900, 2000. 2100). In the past, these milestones have provided psychological resistance. There has been a minimum drawdown of 3%, but often much more. We often look for a retrace to the middle of the Bollinger, in this case about 4% lower (1980 on SPX). About half of these have started before the round number was formerly hit.



These technical patterns are arriving just as sentiment is once again becoming heated. This is to be expected when the index is up 12% in 7 weeks. The weighted put/call ratio for equities is now at an extreme where SPY often turns (chart from McMillan).



Moreover, inflows into equity ETFs and mutual funds reached $44b over the past 6 weeks. Inflows have been positive all 6 weeks; in the past 20 months, inflows extended into week 7 only three times: mid-August 2013, mid-July 2014 and mid-September 2014. Those occurrences are shown below with the subsequent drawdown.



Combining inflows and equity put/call ratios, among other indicators, is the basis for Sentimentrader's "dumb money" indicator. That indicator hit a fresh 2014 high this week. There is reason to suspect that bullish sentiment is reaching an extreme where the index either makes little progress or retraces.

We are now into December and the end of the year is near. This time period is particularly strong from a seasonality standpoint. The index might suffer a drawdown (the average since 2000 is 3.6%) but closes higher more than 80% of the time. When the index is in an uptrend, SPY has only closed more than 1% lower twice since 1980 and both times it regained all those losses and then some in January (a full post on this is here).



The only week in December that is not seasonally strong is coming up now (chart from Sentimentrader).



The week after last month's NFP release was uncharacteristically strong. However, over the last two years, the week following the release of NFP (which was this week) has been weak; two days later, SPY has been higher than Friday's close just 27% of the time (chart from Chad Gassaway).



Finally, an excellent post from Brett Steenbarger, discussing both breadth and sentiment, is worth reading closely (link). It highlights, using different metrics, some of the same issues discussed in this post.

Our weekly summary table follows.

© The Fat Pitch

http://fat-pitch.blogspot.com

[description] => Coming into this week, SPY had been above its 5-dma for 30 days in a row. This was a new record, unlike any streak the index has ever seen. We reviewed prior examples of these streaks earlier; our conclusion was that the streak rarely marked the top in the market, meaning there were higher highs immediately ahead after the streak ended. But the index also struggled in the following weeks, often trading lower. [author] => Urban Carmel [legacyinterface_firm_id] => 514 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 16:20:21 [created_by] => 945 [modified_on] => 2014-12-06 16:25:19 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2093 [hits] => 0 ) [10] => stdClass Object ( [legacyinterface_commentary_id] => 2028 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15266 [apv_conversation_id] => 2866 [content_type] => market-commentary [title] => Sources of Investment Power: Why Expertise Matters and What it Looks Like [slug] => arete_120614 [fulltext] =>

Despite the ever increasing array of accreditations in the investment business, there simply aren't any that match those of law or medicine for being reliable marks for high levels of expertise. The Chartered Financial Analyst (CFA) certification comes closest in terms of analytical rigor and practical experience, but falls far short in public awareness. As a result, investors must contend with an almost unbelievably wide dispersion of ability from the universe of investment "professionals".

Also complicating the search for expertise is a wide array of jobs in the investment industry upon which expertise is often unjustifiably conferred. Bankers, traders, brokers, financial planners, wealth managers, portfolio managers, and analysts are all referred to as investment "professionals" with the connotation being that these people are also experts. Sometimes the association with expertise is well-deserved, but often it is not. What’s worse is that each of these job titles can mean vastly different things and have vastly different qualifications whether in reference to a bank, a brokerage firm, or an asset manager. If you don’t always completely understand what someone does or how much they might know, don’t feel bad; it’s incredibly confusing. 

For many years this confusion didn't really matter very much. Declining interest rates and strong economic growth ensured that most investments did well regardless of who was "managing" them. In a humorous commentary on the times, Jim Ware, author of High Performing Investment Teams, flippantly remarked in a presentation to a group of CFAs that, "During the '90s, Forrest Gump could have managed a successful investment firm." Not missing a beat, an audience member shot back, "He did!"

In the absence of the prominent tailwinds to equity returns of the ‘80s and ‘90s and with the prospect of a much wider array of possible investment outcomes, investors are faced with increasingly difficult decisions. In such an environment, good results don’t just happen on their own. Doing the wrong thing can be costly, but doing nothing can be even worse.

Given the importance of decision making, it is also somewhat odd that there is so little formal attention given to the endeavor. It is not taught at schools and only rarely studied.

Fortunately, Gary Klein goes a long way to filling this important knowledge gap with his book, Sources of Power. By weaving lessons learned from high-stress jobs such as firefighting, aviation, and military conflict with academic research, Klein identifies many useful insights. For example, he finds that neither biases nor stress play a significant role in poor decisions. Rather, what matters most is adequate knowledge and expertise. As he says, "Most poor decisions may result from having inadequate knowledge and expertise."

This is a hugely important finding. When all you need to do is to hoist a sail in order to harvest great investment returns, almost everyone makes nice progress. Exposure is the only decision and often that happens by default. When conditions get a lot choppier, though, the quality of decisions becomes much more important. Expertise matters because it enables quality decisions in difficult circumstances — which often leads to significantly differentiated outcomes.

Although expertise may be hard to identify in the investment industry for various reasons, most of us have some notion of what it looks like in general. Klein gives us a taste: "Experts know how the official records are compiled, whether they are maps, computer manuals, diagnostic tests, or air crew checklists. They know when steps have to be followed and when to make exceptions." This is a useful start.

Klein further captures the nature of expertise through the title of his chapter on the subject, "The Power to See the Invisible.” In that chapter, he provides a useful list of the types of things experts see that novices do not:

  • Patterns that novices do not notice
  • Anomalies -- events that did not happen and other violations of expectancies
  • The big picture (situation awareness)
  • The way things work
  • Opportunities and improvisations
  • Events that either already happened (the past) or are going to happen (the future)
  • Differences that are too small for novices to detect
  • Their own limitations.

All of these examples are relevant to the realm of investing. Anomalies may be one of the most important at this point in time. Non-experts may look at equity returns and believe, based upon their personal experiences of the last thirty years, that equity returns are likely to remain quite strong for the next thirty years. Experts, on the other hand, look at equity returns over many decades and across many countries and see the exceptionally high returns to US stocks over the last thirty years as an anomaly in the greater context of history. That doesn't make high returns impossible, just extremely unlikely. As Klein notes, “We can learn the wrong lessons from experience."

Situational awareness is also an extremely important manifestation of expertise. Non-experts may look at things like debt levels and feel comforted by the fact that increases don't seem especially large or that because interest rates are low, there is little sign of danger. Experts, in contrast, know that debt is an especially pernicious problem because the relationship between debt and outcomes is non-linear. In other words, beyond a certain level of debt, relatively small catalysts can cause disproportionately negative outcomes. By analyzing debt in relation to both assets and income, and by comparing these relationships across time, experts gain a much greater perspective on the risks inherent to a given investment situation.

Often too, there are patterns in the market that novices don't notice. Non-expert investors, for instance, often tend to view prices of stocks just as they would prices of consumer goods. While fundamental underlying value is certainly a component of stock prices just like of consumer goods, stock prices are different because they are traded actively in a market -- which is very different than being set by a retailer. Experts realize stock prices can fluctuate rapidly and wildly from their fundamental underlying values based upon patterns in trading volume, market structure, and market sentiment. Most of these patterns are invisible if one only looks at prices and the magnitude of deviation between prices and fundamental values is invisible without valuation expertise.

Pulling these ideas together, we can see that expertise is a hugely important factor in successful investing (as in many endeavors). As Klein describes, "In aviation, there is a term to describe people who are so wrapped up in what they are doing that they are insensitive to what lies ahead: flying behind the plane. It describes people who are either so novice or so overworked or have such poor situation awareness that they are not generating expectancies; they are not preparing themselves properly.” This provides an informative and hopeful message for investors: There is nothing magical about preparing properly for your financial goals; you just need to find access to investment expertise to help inform important decisions. Picture

© Arete Asset Management

www.areteam.com


[description] => There is a wide dispersion of ability in the investment services industry which makes it difficult to identify expertise. This is a shame because expertise is a critical factor in making good decisions and in avoiding bad ones. As the investment landscape becomes more difficult, it will become progressively more important to identify and access expertise. [author] => David Robertson [legacyinterface_firm_id] => 526 [published_on] => 2014-12-06 [digest_date] => 2014-12-06 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-12-06 16:28:26 [created_by] => 945 [modified_on] => 2014-12-06 16:29:35 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 2094 [hits] => 0 ) [11] => stdClass Object ( [legacyinterface_commentary_id] => 2029 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15267 [apv_conversation_id] => 2870 [content_type] => market-commentary [title] => Weighing the Week Ahead: Time for a Santa Claus Rally? [slug] => newarc_120614 [fulltext] =>

The schedule for data releases is lighter than usual. The calendar year is about to end. The market continues to set records. The stage is set for the annual question:

Will there be a Santa Claus rally in stocks?

Prior Theme Recap

In my last WTWA I predicted a three-part week – some post-holiday digestion of the news, a mid-week focus on the Fed, and a shift to the jobs story. That was pretty accurate, although the continuing decline in oil prices was a constant subject.

Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.

This Week’s Theme

This is the time of year when the calendar seems to command extra attention. Having escaped the seasonal scare of October and with an eye to year-end price targets, the punditry considers the prospects for a year-end rally. The combination of the calendar, record market highs, and relatively light news brings this question to the fore:

Will there be a Santa Claus Rally in Stocks?

Here are the basic viewpoints:

  • Annual seasonal factors are strong. These include the year of the Presidential election cycle, years ending in “5” and similar historical factors. Myles Udland of BI has this story.
  • Monthly seasonals are supportive. (USA Today). This speaks to the information highlighted for average investors.
  • December is not that special. Mark Hulbert runs the numbers and compares to other periods.
  • Any effect will happen in the last few days. (Pension Partners)
  • Oil prices might rebound. Urban Carmel analyzes some correlations. (But see my final thoughts below).
  • A flattening yield curve and high yield spreads signal possible deflation.
  • Economic strength signals potential inflation, sparking faster Fed action.

I have some thoughts about Santa. More about that in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

The news last week was very good, once again even better than stock prices suggested.

  • ISM surveys were strong. The ISM manufacturing survey came in at 58.7 and services at 59.3 ISM research shows that this level corresponds to economic growth of 5.1%. The comments were also strong. See the official source for a good description and a discussion of the internals, which show continuing growth but a mixed story in the rate of growth.

ISM Manufacturing

  • Declining oil prices – providing benefits to consumers and a long-term boost to stock prices. (NYT) (Also Washington Post). Last but not least, the Fed (via Reuters).
  • Investor sentiment has turned more negative (bullish on a contrarian basis). Bespoke has continuing helpful coverage of this subject. I also appreciate AAII’s official coverage of this topic, which notes that optimism is still above the long-term average.

AAII Bullish Sentiment 120414

  • Chinese stocks get stronger. Josh Brown highlights the move in the ETFs featuring “A Shares” and also notes the implied economic strength for China. This seems counter to current trader expectations. Morgan Stanley agrees.
  • Employment gains are stronger. This is true whether you look at the number of jobs, the hours worked (gain equivalent to a 400K net job change) revisions, wages, or other elements of the survey of establishments. Here are two great sources:

BN-FW769_jobs2_G_20141205085301

Data spinners have plenty of opportunity on the employment report. One game is to cite whichever survey is weaker – household or establishment. Each has a wide error band and a different method. The conclusions often deviate in the short run. Eventually they converge. Those citing the household survey this month did not do so last month when it was strong. To keep perspective, here is a chart from Bob Dieli’s excellent monthly employment report analysis:

Dieli Household Survey

The Bad
There was not very much bad news. There were some very small misses in the data, but nothing really important. Readers are invited to nominate ideas in the comments, but remember that we are focusing on recent developments, not a list of continuing macro concerns.

  • Lower oil prices threaten US fracking. The effects might not occur right away, but there is plenty of attention on how profitable the new producers can be and at what price levels. Matthew Philips (Bloomberg Businessweek) has a good analysis.
  • F-150 Sales. Despite overall strong auto sales, some subgroups deserve extra attention. The Ford F-150 is often cited as an indicator for the strength of construction and small business. Bespoke covers this closely and notes the recent decline. They also observe that it is a time of transition to a new model, which has only recently hit the dealers. It bears watching. Here is the chart.

Ford f150 November

  • Factory orders declined 0.7%, MoM. Steven Hansen at GEI does a complete analysis, looking at unadjusted as well as seasonally adjusted data. He concludes:

    The data has been soft for three months in a row. Consider that this data is noisy – but the rolling averages (which include transport) are decelerating.

Noteworthy

Income inequality commands increasing attention. Here is an interesting analysis on which cities have the biggest gaps.

inequality

The Ugly

Congress is back in session, and back in the limelight! Investors basically want to avoid a government shutdown. Meaningful tax reform would be a plus, but seems unlikely. The daily stories feature failed compromises, unlikely proposals, and underhanded deals. It is difficult to forecast accurately, but the results could be very important. I am watching closely.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts.  Think of The Lone Ranger. This week’s award goes to Georg Vrba, for an outstanding response to last week’s challenge. Here was the original chart, which was widely circulated and reposted:

tumblr_nfel6euWDb1smq3o4o1_r1_1280

One important problem is that the chart does not take into account the inclusion and compounding of dividends. The dramatic effect of this change is obvious.

Real Price of S&Pcomp 1870-2014

It is too bad that Georg’s work, explained further here, does not get as much attention as the original culprit. His method and more analysis is available here. He raised this point more than two years ago. (Honorable mention to several readers who made great comments, including some who cited the dividend issue and others who questioned the long time frame).

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.

Recent Expert Commentary on Recession Odds and Market Trends

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (three years after their recession call), you should be reading this carefully. This week there is (yet another) change in the ECRI story. See also his regular updates to the “Big Four” economic indicators important for official recession dating. We missed Doug’s updates this week, and hope he is back with us soon!

Georg Vrba: has developed an array of interesting systems. Check out his site for the full story. We especially like his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. Georg continues to develop new tools for market analysis and timing. Some investors will be interested in his recommendations for dynamic asset allocation of Vanguard funds. Georg has a new method for TIAA-CREF asset allocation. I am following his results and methods with great interest.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.”

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting market indicators.

Dwaine has a new post on valuation, refuting some of the arguments about “nosebleed levels.” Check it out. Dwaine concludes:

We have a far better stock market valuation model to manage investment risk, one which can forecast forward two-year returns with a correlation coefficient of 0.65 (amazing for this short span of time), and which is surprisingly adept at warning of bear markets and recessions. This we will cover for subscribers in our December research note in the Research main menu.

A replacement for Dr. Copper? Andrew Thrasher nominates semiconductors.

semi-vs-copper

The Week Ahead

There is a lot of data packed into three days of a holiday-shortened week.

The “A List” includes the following:

  • Initial jobless claims (Th). The best concurrent news on employment trends, with emphasis on job losses.
  • Michigan sentiment (F). A new high in prospect? Good concurrent indicator for spending and employment.
  • Retail sales (Th). Some are looking for big gains to match same-store sales.

The “B List” includes the following:

  • JOLTS report (T). When USA Today headlines the quit rate, the world is finally catching on to the importance of this report.
  • PPI (F). Inflation at the wholesale level. It matters little until it shows a real pop for a few months and starts to bleed into CPI and PCE.
  • Business inventories (Th). October data that will influence perceptions (and ultimately reality) of Q4 GDP.
  • Wholesale inventories (T). Early implications for Q4 GDP.

The speech schedule is pretty light on the Fed front.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix continued the profitable bullish posture for another week. There is reasonable breadth among the strongest sectors. Ratings have continued to drift lower, but are still quite solid in about half of the sectors. Felix does not anticipate tops and bottoms, but responds pretty quickly when there is evidence of a change. The penalty box can be triggered by extremely high volatility and volume. It is similar to a trading stop, but not based only on price. There has been quite a bit of shifting at the top, so we have done some trading.

Felix got interested in China A-Shares this week and still recommends FXI.

You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The recent “actionable investment advice” is summarized here.

Last week brought a rush of scare stories aimed at both the long and short term. I took a closer look at the most recent themes Keeping Investors Scared Witless. If you missed it, please take a look.

Other Advice

Here is our collection of great investor advice for this week:

Stock Ideas

Companies that have the most to lose in the energy space (MarketWatch).

SocGen says it is time to buy Europe. I wonder if they will ever recommend the US.

The most-shorted stocks. (Akin Oyedele at BI).

Investor Psychology

Individual investors remain very worried (via Schwab). They fear market declines and a possible crash. They are much more bearish than institutional investors, as shown by the chart below. This is why so many stocks, especially cyclicals and financials, are currently inexpensive.

file

Similar results from Yale – lots of good data in their Stock Market Confidence Indices.

Tactical Considerations

Do stock buybacks work? This interview with Todd Sullivan will help you find the winners.

Behavioral biases limit investment performance in many ways. Josh Brown highlights one for each letter of the alphabet from the Psy-Fi Blog.

Market Outlook

Tim Duy – the top Fed watcher – is optimistic about the projected policy course. He has been very accurate (and contrarian).

Former Value Line market expert Sam Eisenstadt has a model based upon his 63 years of experience. He sees 11% stock gains in six months. (Mark Hulbert)

Bill McBride has an excellent update of a post from two years ago: The Future’s so Bright… See the whole post for the charts you would expect, but here is the key conclusion:

Over two years ago I said that looking forward I was the most optimistic since the ’90s. And things are only getting better. The future’s so bright, I gotta wear shades.

I always try to provide a wide range of interesting links. If you only follow one of them this week, check out the most recent strong entry from Morgan Housel. He has a list of predictions that he feels strongly about – all worth considering. Here is my favorite:

Pessimism will overshadow progress. Twenty years from now,someone will be sitting in his or her self-driving car on the way home from a doctor’s appointment that miraculously cured a disease that’s currently a death sentence, and will be complaining about how awful the world is. It’s always this way. The odds are incredibly high that the average American will have a higher standard of living 20 years from now; yet, we’ll look back at untold numbers of books and articles lamenting that everything sucks. Few will notice how much progress we’ve made because it happens slowly; but they’ll pay attention to the doom forecasts because they are repeated day in, day out.

Second place would be his 16 rules for investors to live by. My favorite here?

Don’t check your brokerage account once a day and your blood pressure only once a year.

Constant updates make investing more emotional than it needs to be. Check your brokerage account as infrequently as necessary to prevent you from becoming emotional about market moves.

Final Thought

I avoid making short-term market forecasts, leaving that to Felix!

I also generally eschew the “seasonal” forecasts. The underlying rationale is often weak and/or not applicable. The end of the Presidential cycle, for example is supposed to reflect efforts to support the party in the next election. The current situation – Obama legacy at stake, GOP Congress, possible compromises – do not really fit that pattern. Years ending in “5” seems like data mining.

I prefer to ignore the calendar and follow a process of constantly upgrading price targets on individual holdings. This is consistent with a key precept:

Do not follow the market. Instead take advantage of what the market is giving you.

To do this you need a method for finding underpriced stocks and confidence to stick to your methods, even when the market disagrees. If you think the markets are efficient, you should just buy index funds.

Most people lack confidence and therefore drift from theme to theme, chasing what worked last month or last year. They have a fixation on what they read in the financial news, forgetting that their business model is selling advertising and yours is making money.

Here are three themes that have my attention:

  1. The correlation between oil price declines and economic weakness. Quite a few observers are doing a simple correlation between lower oil prices and (for example) lower consumer spending. While everyone parrots the “correlation does not imply causation” meme, it is often forgotten in practice. What is happening here is that commodity price declines are usually correlated with weak economic growth, so many other data series seem to be correlated as well. In this case oil prices reflect supply as well as worldwide demand. A true statistical test would have a control for situations where the US economy is strong while oil prices declined, perhaps using a variable like employment growth. Failure to do so leads to a spurious relationship.
  2. Oil prices and oil stocks. There are a wide range of forecasts on oil prices (low and high), but many of the stocks already seem to reflect a very bearish case. I am working on a more detailed analysis, especially parts of the energy complex that benefit from lower oil prices.
  3. Russia and the Ukraine. Part of the drag on worldwide growth is the reciprocal sanctions related to the Ukraine. The benefits of decades of trade deals are being lost. A fundamental concept of the linking of nations in the global economy was to reduce “antisocial” behavior. My sense is that progress on the Ukraine situation would provide an immediate spark to the Russian and European economies, improving markets for China and the US. It is in the interest of everyone, suggesting that eventually it will happen. Joe Weisenthal, operating from his new base at Bloomberg Politics, summarizes the pain of Putin in a series of charts. “It is not a good time to be Vladimir Putin.” Picking just one of his excellent charts, here is the value of the Ruble.

Weisenthal Ruble

The economic data provide a good guide for the long-term investor, but the reward might not come from this year’s Santa.

© New Arc Investments

http://dashofinsight.com/

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Investors need to prepare for lower returns in the next few years, with a focus on capital preservation appearing prudent in the current environment.

We end 2014 with almost every asset class offering investors scant potential return for their risk. Five years into a period of unprecedented interest rate suppression, this should come as no surprise. The returns generated from every mainstream asset since 2009 have been striking. Those returns are now in the past. We believe the next few years will be characterised by lower returns, more volatility and greater risk.

The backdrop

We're going to cop out here and leave politics to one side for the purposes of this outlook. The economic backdrop is foggy enough! Suffice to say we will comment throughout the year on this particular risk factor.

To try and summarize consensus expectations for growth in 2015, we would say that investors are very optimistic about the US (yet still don’t believe the Federal Reserve (Fed) will raise rates) and to a lesser extent the UK, are willing to give Japan and much of Asia the benefit of the doubt for now (but are skeptical of China), and hate Europe full-stop.

Starting as we often do at the bottom, for our sins, we think the combination of an expanding European Central Bank balance sheet, a gradual pick-up in credit growth due to record low funding costs for corporates and consumers, and the disposable income boost from lower oil prices has the potential to confound very low expectations for Europe next year.  

Momentum in the US looks sustainable at least into 2015, meaning the Fed should follow through and begin raising rates. We’ll defer to our 2016 outlook for a judgment of how the economy absorbs what will likely be baby steps towards a tighter policy backdrop.  

If US rate hikes don’t occur next year, the likely scapegoat will be a deflationary impulse emanating from China – the elephant that never leaves the room. The risks to China and other emerging markets will correlate highly with the strength of the US dollar in our view. Dollar bulls need to be careful what they wish for. A strong US currency, all else being equal, is not bullish for emerging market liquidity.

Not banking on bonds

Almost irrespective of one’s economic outlook, the margin of safety in fixed income markets is wafer thin. Aggregate yields globally are as low as they have ever been. Spreads are also closing in on their all-time tights. As a result, correlations within fixed income have picked up worryingly. Traditionally fixed income does not do well in a rising rate environment. If US rates do rise in 2015 as the Fed is telling us they are likely to, every fixed income asset class will take a hit.  In spite of this, judging by the scale of continued inflows, the majority of investors appear comfortable with the risk/reward set-up. We’re not, and therefore have only limited exposure. By definition, prospective returns today are pretty much as low as they have ever been, risks are high and liquidity is terrible. Investors need to tread carefully here.  

We have a healthy cash balance across our portfolios at present, with some diversification into US dollars. Cash is currently considered an inferior asset as it generates a zero return. We believe it will become more desirable as the market sets about discounting higher US interest rates.

Expensive equities 

Assuming global aggregate demand can continue to expand in 2015, we would have sympathy with the view that equities offer a greater short-term prospective return than fixed income. Nevertheless, we judge equity valuations from a longer-term perspective, particularly in the US, to be on the expensive side at present. This tells you next to nothing about their potential for 2015, but does indicate their vulnerability to disappointment. Like fixed income, from a positioning standpoint, investors appear very comfortable with the risk/reward trade-off in US equities.  Once again, we’re less sanguine.  What equity risk we are taking is predominantly outside of the US, favoring Europe and Japan particularly. Both markets have relative value on their side and the potential for a catch-up in profitability. In contrast, US equities trade at historically high multiples of historically high earnings. The emerging market complex also strikes us as vulnerable to disappointment and we have next to no exposure there.

Fertile ground for alternatives

Fortunately, we believe the environment is becoming ever more fertile for short-selling, allowing us to generate uncorrelated returns in what may otherwise prove a difficult backdrop for investors.  This opportunity set extends beyond equities, to bonds and foreign exchange markets also. The faith investors have placed in the Fed this cycle has made shorting a largely unprofitable exercise.  We expect this to change.

Raging bull market enters new phase

The bull market that began in March 2009 has been one of the most rewarding in history, yet the economic recovery to date has been one of the weakest.  With the US economy now on a firmer footing, the Fed should intervene less in asset markets in 2015.

Not for the first time we have been premature in moving to emphasize capital preservation within the portfolios (will we ever learn?!) while this new investment environment unfolds. However, such is the unbalanced set-up within markets in our view, when (not if) investors decide to become temporarily more risk-averse, the likely re-pricing will be swift.

We remain very optimistic about future investment opportunities, just not present ones. For the time being we consider capital preservation the most prudent strategy for the portfolios. This will change as the opportunity set evolves.

© Schroders Investment Management

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​​​Benchmarks have long served as a starting point, or ‘anchor’, for investors, representing the neutral point for an investment decision. They serve as the basic ingredients that combine to form an investor’s asset allocation and result in a desired risk/return profile.

A market-capitalization approach to benchmark construction has been the norm for decades – for both equity and fixed income markets. In the equity markets, this means an investor’s neutral allocation will have the most exposure to the companies with the highest market capitalization and the least exposure to companies with the smallest market capitalization. In the debt markets, a similar approach prevails; investors allocate more capital to the countries and companies that have the most debt outstanding.

But is this the best way to think about investing? At PIMCO, we believe investors may be better served by adopting a slightly different approach to benchmarking – using a ‘smarter beta’ – one that disentangles price or debt levels from the index construction process.

Market capitalization weighting
Let’s start by examining indices in the equity markets. In a traditional benchmark, each company’s weighting is a function of its shares outstanding times the price per share. However, an investor cannot know at a given point in time whether that price is the ‘correct value’. If markets are perfectly efficient, then the price is assumed to be ‘correct’, but markets may not always be perfectly efficient.

For example, the technology sector became more than 44% of the global equity market’s value in early 2000, so that a neutral allocation based on a traditional index would have put almost half of an investor’s capital into this narrow sector − even as many companies had yet to show positive cash flows or pay dividends!

Similarly, in 2006 the financial sector became more than one-third of the global equity market, and in the late 1980s, Japan represented 44%. In each case, an investor using traditional indices was making the implicit bet that these segments would contribute the same share of global profits in the coming years. Sadly, in all three cases, the respective markets declined by 45%−50%.

The same phenomenon occurs when looking at individual equities; Research Affiliates has shown that the highest market-capitalization stock in the MSCI World Index has underperformed the MSCI World Index 73% of the time over subsequent three-year periods and 91% of the time over subsequent 10-year periods. So, in fact, the performance of ‘high-flying’ stocks historically has not kept pace with what has been implied by starting valuations.

Smart beta alternatives: equities
One alternative approach to market-cap weighting takes price out of the equation and replaces it with measurable economic fundamentals such as sales, dividends, cash flow and book value when determining index weights. By using this approach, an investor can often avoid introducing pro-cyclical tilts, which allocate increasing capital to equities that move up in price.

PIMCO has found that a smart beta approach using economic fundamentals rather than stock prices helps to reduce these pro-cyclical risks. One reason: Fundamentals don’t change as frequently as stock prices; therefore, a natural sell discipline ensures that stocks that have posted strong recent performance are automatically reduced in weighting during index rebalancing (unless the underlying fundamentals have commensurately improved).

To implement a smart beta strategy, investors can passively invest in the basket of stocks represented in the smart beta index. While this offers simplicity, it leaves potential ‘alpha’, or excess returns, on the table. An alternative is to combine aspects of passive management with the benefits of active management: specifically, by obtaining equity exposure to a ‘smart beta’ index passively via total return swaps and, at the same time, investing the cash collateral for the swap in an actively managed, high-quality bond portfolio.

When combined, this ‘portable alpha’ approach is designed to provide a portfolio with broad equity market exposure and a volatility profile similar to a pure passive portfolio, but with the potential to deliver equity market outperformance should the bond portfolio outperform money market rates. At PIMCO, we have used this approach since 1986.

Smart beta in bonds
The same principles of designing benchmarks and ‘beta’ based on fundamentals rather than market capitalization can be applied to the bond markets. In traditional bond indices, weightings are based on the par value outstanding times the price of a bond. This typically results in a potentially perverse situation: A bond investor lends the most money to the most heavily-indebted countries or companies. An extreme example might be Japan: The country has a debt-to-GDP ratio of more than 200% and is one of the largest economies in the world, which means it has a large amount of outstanding debt. As a result, its weighting in a broad investment grade bond index today is more than 16%, but it currently offers yields of less than 0.50% for 10-year government bonds.

An alternative approach that PIMCO has adopted for some clients uses GDP, rather than debt outstanding, to determine benchmark representation. In this way, an investor moves towards a portfolio that is more representative of global economic output and more forward-looking in nature. For example, emerging market economies now represent about 50% of global GDP, according to the IMF, and yet they have significantly less debt outstanding than their developed world counterparts. A GDP-weighted approach to bond investing would allocate more capital to this segment of the world, which, in many cases, also offers higher yields, albeit with the potential risk inherent in developing/emerging markets.

As with equities, a smart beta approach to fixed income can be achieved through either passive or active investment strategies. Passive approaches may offer simple implementation, but here again, potentially valuable alpha – especially in a world of low interest rates – may be left behind. Over time, skilled active managers can take advantage of structural inefficiencies in the bond market, including: (1) “clientele effects”, whereby certain investors must focus on bonds with certain ratings or maturities, (2) dislocations between derivatives and physical bonds, which help allow managers to arbitrage differences in pricing on an unleveraged basis, (3) intervention by central banks and other official institutions that may distort values in segments of the market like government bonds, mortgage-backed bonds and asset-backed securities, and (4) ETFs, which may use narrowly defined indices, creating arbitrage opportunities on individual securities amidst heightened inflows or outflows.

As a result of these inefficiencies, we believe investors should try to get the most from their fixed income allocation by combining a ‘smart beta’ approach to indexing based on economic footprint with the benefits of an active management approach designed to take advantage of the ample opportunities for generating alpha in the bond market.

Smarter investing
All investing involves a tradeoff between risk and return, but thinking about the index is critical. Smart beta, or an approach to indexing based on economic fundamentals, is gaining traction in the marketplace. This innovative approach to capital allocation offers the potential for a better risk/return profile and may enhance returns in portfolios that are oriented to more backward-looking approaches to capital allocation, such as those based on stock prices and historical debt issuance.

Whether investors pursue a pure passive approach or a portable alpha strategy that combines passive investing with active management, a smarter benchmark may provide a better starting point for investment decisions.

A word about risk: Past performance is not a guarantee or reliable indicator of future results. 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. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. 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. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Swaps are a type of derivative; swaps are increasingly subject to central clearing and exchange-trading. Swaps that are not centrally cleared and exchange-traded may be less liquid than exchange-traded instruments. All investments contain risk and may lose value.

This material contains the opinions of the manager 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.

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The price of oil is the overriding economic theme at the moment. Oil prices have declined to their lowest level in more than four years and I believe they could continue to tumble. The market implications are positive in the near term, but there is a dark side to the decline in oil prices that is beginning to negatively impact a number of countries around the world and which could ultimately come home to roost in the United States.

First, the positive: falling oil prices and the subsequent decline in gasoline prices act like a tax cut, transferring cash into the pockets of consumers, leaving more money for discretionary spending. The combined benefit of declining gas prices and lower interest rates is likely to provide American consumers, and subsequently the U.S. economy, with a boost as we head into the all-important holiday shopping season.

The darker side to falling oil prices is that they signal that the global economy isn’t growing fast enough to absorb the growth in oil production. The slump in oil prices has led to a weakening in the currencies of some major oil-exporting nations. Russia, for example, has witnessed a 24 percent decline in the value of the ruble against the dollar since the beginning of November. Russia needs oil at $100 a barrel to support its economy, and many other oil-dependent economies rely on oil prices well north of current levels. Over time, as foreign currency reserves run dry, the likelihood is that we will see economic contraction and possibly recession in these countries.

A recession in countries such as Russia will have significant knock-on effects, particularly for European exporters, creating another headwind for beleaguered euro zone economies. An oil-price-induced negative feedback loop would stifle global growth and could even lead to political instability in any number of oil-dependent nations.

Beginning as early as the first quarter of 2015, investors should be wary of the potential for a setback in U.S. equities as the adverse impacts of lower growth and weaker foreign currencies begin to show through in the results of leading multinational companies.

In Europe, it doesn’t seem likely the European Central Bank is going to be able to reach the necessary consensus to begin quantitative easing through the purchasing of sovereign debt until the end of the first quarter or possibly into the second quarter, and perhaps never. ECB President Mario Draghi is running into roadblocks with the German Bundesbank over the sovereign bond-buying option, which will probably end up in the European courts. The problem is, the longer this situation drags on, the worse the situation in Europe is going to get. The clock is ticking and policymakers are running out of time.

One option the ECB still has left is to buy gold. If European inflation data comes in weaker and the European economy continues to sputter, I think we could see the ECB consider gold purchases, but if we do it will be an act of desperation. Gold may prove the ultimate hedge against a financial crisis in Europe should the ECB fail to act quickly.

Chart of the Week

The Bright Side: Cheaper Gas, Rising Consumer Confidence Should Boost U.S. Holiday Spending

Despite the drop in consumer spending during the Black Friday weekend, the outlook for consumption remains solid heading into the holiday shopping season. Historically, Black Friday sales have had little predictive value for total holiday season sales. A more important relationship is between gasoline prices and consumer confidence, and then between consumer confidence and holiday sales. With gas prices at their lowest levels since 2010, consumer confidence has jumped to seven-year highs, and higher consumer confidence predicts higher holiday sales. Increased consumer confidence, combined with additional discretionary income freed up by falling gas prices, should provide a boost to economic growth in the fourth quarter.

GAS PRICES AND CONSUMER CONFIDENCE

Gas Prices and Consumer Confidence

Source: Bloomberg, Haver, Guggenheim Investments. Data as of 11/28/2014. Note on methodology: The estimated change in consumer confidence is based on monthly retail gasoline prices and University of Michigan consumer confidence. The holiday sales estimate is based on the average reading of the University of Michigan consumer confidence index in November and December and retail sales excluding autos, gas, and building materials in November and December. All data since 1994.

Economic Data Releases

ISM Readings Signal Continued Strength in U.S. Economy
  • The ISM manufacturing index continued its strong expansion in November, although the reading ticked down to 58.7 from 59.0.
  • The ISM non-manufacturing index jumped to 59.3 in November, a three-month high.
  • Durable goods orders beat expectations in October, rising 0.4 percent. However, the less volatile component of non-defense capital goods orders, excluding aircraft, dropped 1.3 percent, the same decline as the previous month.
  • New home sales inched up in October, increasing 0.7 percent to an annualized pace of 458,000. The prior two months were revised downward.
  • Pending home sales decreased 1.1 percent in October, following September’s 0.6 percent gain.
  • Construction spending rose 1.1 percent in October, a five-month high.
  • University of Michigan consumer confidence was revised down slightly in the final November reading to 88.8, but remained at a post-recession high.
  • Initial jobless claims jumped to 313,000 for the week ended Nov. 22, up from 292,000.
  • The core Personal Consumption Expenditures deflator, the Fed’s preferred inflation gauge, ticked up to 1.6 percent in October after five months at 1.5 percent.
Euro Zone Disinflation Continues, Chinese Data Is Mixed
  • The euro zone manufacturing Purchasing Managers Index decreased to 50.1 in the final November reading, a 17-month low.
  • The euro zone services PMI was revised lower in the second November estimate, falling to an 11-month low of 51.1.
  • Euro zone economic confidence improved for a second consecutive month in November, inching up to 100.8 from 100.7.
  • Euro zone retail sales increased 0.4 percent in October, slightly under expectations.
  • The euro zone-wide Consumer Price Index ticked back down to 0.3 percent in November, while core prices remained at 0.7 percent.
  • Germany’s manufacturing PMI was revised into contraction in the final November estimate at 49.5, the lowest level since June 2013.
  • Germany’s GfK consumer confidence continued to rebound in the December reading, ticking up to 8.7.
  • Retail sales in Germany surprised to the upside in the October reading, up 1.9 percent.
  • Germany’s CPI fell to 0.5 percent in November, the lowest since February 2010.
  • U.K. third-quarter GDP rose in line with expectations at 0.7 percent. Consumer spending had the best quarter in over four years, while exports and investment fell.
  • China’s official manufacturing PMI fell to 50.3 in November, the second consecutive slowdown.
  • China’s non-manufacturing PMI ticked up to 53.9 in November from 53.8, following two months of declines.
  • Japan’s CPI fell for a fifth straight month in October, down to 2.9 percent from 3.0 percent. Prices excluding food and energy fell to 2.2 percent.
  • Japanese industrial production beat estimates in October, rising 0.2 percent after a 2.9 percent gain in September.

© Guggenheim Partners

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Tax-exempt income historically has been the main reason why investors buy municipal bonds. As a result of newer tax laws, including several provisions that expired at the end of 2013, tax bills for high-income earners have increased in recent years. Some of the significant changes to tax law include:

 

• A top marginal rate of 39.6%, up from 35%

 

• A 20% tax on long-term capital gains and dividends, up from 15%

 

• A new 3.8% tax on investment income, from which municipal income is exempt

 

We believe that these higher tax rates increase the incentive for taxpayers to seek tax-exempt income using municipal bonds. Municipals have the potential to offer a broad range of investment options that are exempt from federal income tax and, potentially, from state and local income taxes. In addition to those considerations, investing in this market has several other potential benefits that are often overlooked, including:

 

1.    Attractive yields on a before- and after-tax basis, with relatively low volatility

 

The gap between perception and reality that was created in 2013 represents an opportunity for long-term investors who have a focus on after-tax income. As shown below, yields on municipal bonds, particularly high yield, are attractive relative to other fixed income asset classes — even on a before-tax basis. There is no guarantee that low-volatility stocks will provide low volatility.

 

 

2.    Relatively lower default risk

 

Contrary to popular belief, the vast majority of municipal bond issuers remain creditworthy, and municipal default rates have remained relatively low, especially when compared with US corporate bonds. As shown in the chart below, when the credit structure decreases, the odds of a default rise. However, the percentages are much higher for investment-grade corporates compared with municipals. Since 1970, there has never been an Aaa-rated municipal bond default. Similarly, in the same time frame, only 0.01% have defaulted with an Aa-rating. By contrast, Aa-rated -corporate issuances have had a nearly 1% default rate since 1970.1

 

 

3.    Diversification potential

 

Diversification can potentially increase opportunities for growth and reduce overall portfolio volatility. Because municipal bonds, more specifically high yield municipal bonds, have historically had very low correlation to other asset classes, including equities and Treasuries, they can be effective portfolio diversifiers.

 

Over the last 10-year period, ending Oct. 31, 2014, the Barclays High Yield Municipal Bond Index has exhibited a low 28% correlation with the S&P 500 Index. This is in contrast to the Barclays U.S. Corporate High Yield Index, which has had a much higher 73% correlation with the S&P 500 Index over the same time period.  This lower correlation demonstrates that high yield municipal bonds have not moved to the same degree as their corporate counterparts when the equity market rises or falls. We believe that this low correlation can potentially enhance a portfolio’s diversification benefits.

 

 

Talk to your advisor

 

While municipal bonds are rightly renowned for generating tax-exempt income, there are several other reasons to consider them as well, including their relatively attractive yields, low default risk and diversification benefits.  Talk to your advisor to get more information about the benefits and risks of using municipal bonds in your portfolio.

 

Source 1: Moody’s Investors Service, US Municipal Bond Defaults and Recoveries, 1970-2013, May 7, 2014

 

Important Information

 

Correlation indicates the degree to which two investments have historically moved in the same direction and magnitude.

 

Yield-to-Worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting.

 

Diversification does not guarantee a profit or eliminate the risk of loss.

 

Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/ or interest.

 

Most senior loans are made to corporations with below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid.

 

High yield bonds invest in noninvestment-grade bonds and are therefore subject to greater volatility than investment-grade bonds.

 

Securities which are in the medium- and lower-grade categories generally offer higher yields than are offered by higher-grade securities of similar maturity, but they also generally involve more volatility and greater risks, such as greater credit, market, liquidity, management, and regulatory risks.

 

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

 

The tax information contained herein is general and is not exhaustive by nature. It is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer under U.S. federal tax laws.

 

The Barclays U.S. Corporate High Yield Index is an unmanaged index considered representative of fixed-rate, non-investment-grade debt. The Barclays High Yield Municipal Bond Index is an unmanaged index considered representative of noninvestment grade bonds. The S&P/LSTA Leveraged Loan Index is a weekly total return index that tracks the current outstanding balance and spread over Libor for fully funded term loans. The Barclays Municipal Bond Index is an unmanaged index considered representative of the tax-exempt bond market. The Barclays U.S. Corporate Investment Grade Index is an unmanaged index considered representative of publicly issued, fixed-rate, nonconvertible, investment-grade debt securities. The Barclays U.S. Aggregate Bond Index in an unmanaged index considered representative of the US investment-grade, fixed-rate bond market. The S&P 500 Index is an unmanaged index considered representative of the US stock market. The MSCI EAFE Index is an unmanaged index considered representative of stocks of Europe, Australasia and the Far East. The index is computed using the net return, which withholds applicable taxes for non-resident investors. The MSCI Emerging Markets Index is an unmanaged index considered representative of stocks of developing countries. The index is computed using the net return, which withholds applicable taxes for non-resident investors. The Russell 2000 Index is an unmanaged index considered representative of small-cap stocks. The Russell 2000 Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co. The Barclays U.S. Government Bond Index is an index that measures the performance of all public U.S. government obligations with remaining maturities of one year or more.

 

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

 


Before investing, investors should carefully read the
prospectus and consider the investment objectives, risks, charges and expenses. 

 

All data provided by Invesco unless otherwise noted.

 

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd.

 

©2014 Invesco Ltd. All rights reserved.

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The minutes of the October 28-29 Federal Open Market Committee meeting suggested that there is still no consensus opinion among senior officials regarding when the Fed will begin raising short-term interest rates. There is strong agreement that monetary policy moves will be data-dependent. However, policymakers differ in their views on the amount of slack in the job market. Only “a few” Fed officials expressed concerns that inflation might persist below the Fed 2% target. However, while survey-based measures of long-term inflation expectations had remained stable, “market-based measures of inflation compensation had declined somewhat.” While this bears watching in the U.S., it’s a much bigger worry for the euro area.

“Indicators of labor market conditions continued to improve over the intermeeting period, with a further reduction in the unemployment rate, declines in longer-duration unemployment, strong growth in payroll employment, and a low level of initial claims for unemployment insurance. Business contacts reported employment gains in several parts of the country, with relatively few pointing to emerging wage pressures, although one participant indicated that larger wage gains had been accruing to some individuals who switched jobs. Labor market conditions indexes constructed from a broad set of indicators suggested that the underutilization of labor had continued to diminish, although a number of participants noted that underutilization of labor market resources remained. A couple of participants judged that the large number of individuals working part time for economic reasons and the continued drift down in the labor force participation rate suggested that the unemployment rate was understating the degree of labor market underutilization.” 
– FOMC Minutes (October 28-29)

The labor market slack debate has grown in recent weeks. One issue is how to weigh the various measures. The Kansas City Fed’s Labor Market Conditions Index provides a handy summary. The LMCI suggests that slack is bein