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Thursday, September 19, 2013
ECONOMIST: 'Why The Chinese Central Bank Is Doing More Harm Than Good' (FXI, EWH)
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This Is Turning Into A Pretty Stunning Comeback In The Stock Market
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The Only Thing Worse Than An Actively Managed Fund Is A Portfolio Of Actively Managed Funds
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BMO Capital Markets
Diversifying Among Actively Managed Funds Within An Asset Class Isn't The Smartest Bet (Rick Ferri)
"Diversifying actively managed mutual funds within an asset class is a bad thing because it decreases the already low probability for outperforming a comparable portfolio of all index funds," according to Rick Ferri. "If you can’t buy index funds, then pick one active fund per asset class and hope for the best."
Ferri and Alex Benke of Betterment looked at thousands of actively managed mutual funds portfolios. They compared the performance of actively managed fund portfolios to that of index fund portfolios with the same asset allocation over the same time frame. In one scenario they look at portfolios holding more than once actively managed fund in three asset classes, U.S. stocks, international assets, and U.S. Investment-grade bonds.
"The three-fund index fund portfolio had an 82.9% probability of outperforming the actively managed fund portfolios when only one fund was selected in each of the three asset classes. The odds increased in favor of index funds when two active funds were selected for each of the three asset classes (a total of six funds). When three actively managed funds were selected for each of the three asset classes (a total of nine funds), the odds reached 91.0% in favor of index fund. The study has a margin of error of ±1.0%."
Brian Belski: Putting The Stock Market Rally In Perspective (BMO Capital Markets)
"This has been one of the strongest stock market recoveries to date, yet it has also been one of the weakest economic recoveries. For instance, stocks are up about 144% from their March 9, 2009 low, almost double the average of 83% for all other bull markets up to this point in the cycle. In fact, no other post WWII bull market has shown such strong performance 53 months into the bull market (although the mid-1980s bull market was close).
"On the other hand, economic data has been disappointing up to this point into the expansion (Exhibit 6). Sooner or later, the macros are going to have to improve sharply in order to justify recent stock gains, in our view. For our part, we continue to believe that the economy will continue to grow at a moderate pace in the coming years – and significantly better than other major and emerging economies on a relative basis. But near term, we think stock prices have gotten a bit too far ahead of themselves."
BMO Capital MarketsThe Brazilian Bond Market Massacre In One Huge Slide (Bond Vigilantes)
We've recently seen a rout in emerging market bonds. Bond Vigilantes put together a slide that shows just how hard the Brazilian bond market has been hit.
SEC Approves FINRA Plan To More Widely Publicize Actions Against Brokers (The Wall Street Journal)
The SEC has approved the Financial Industry Regulatory Authority's (FINRA) plan to publish in more complete forms cases that it brings against brokers and firms, according to The Wall Street Journal. A securities attorney told the WSJ that this will likely cause more brokers to challenge FINRA than settle with them and that the information that will now go up will be one-sided.
Three Ways To Make Sure Clients Hear The Message (Advisor Perspectives)
Clients often fail to or misremember what their advisors have said. Dan Richards says there are three key ways in which to get what they say to stick with their clients. 1. Wrap up meetings by listing the top three takeaways. 2. Send follow up emails after every meeting highlighting the most salient points from what was discussed. 3. Send emails with next steps and an audio clip thanking clients and that repeats the most important takeaways.
CITI: We're 'Shocked' By The Surge In Negative Earnings Preannouncements
The S&P 500 closed at 1,573 today, which is down over 6% from its recent all-time highs.
Many have attributed much of the pullback to the hawkish tone that the Federal Reserve has recently adopted.
However, stock market fundamentals have been deteriorating lately too. Specifically, earnings expectations have come down sharply. And earnings are arguably the most important driver of stocks.
In his latest note to clients, Citi's Tobias Levkovich says he is "shocked" by how negative these trends have been.
The Street had become a bit too happy of late and then got upended by the Fed and the likely tapering of QE amidst some prior hopes of a delay in ending such accommodative policy, almost without spending any time looking at earnings estimates or trends less than a month before second quarter results are released. Such a thought process seems ill-founded since earnings matter the most for equities, in our opinion, and there is relatively robust statistical evidence to back up that contention. In this respect, we have been a tad shocked by the surge in negative-to-positive preannouncement trends that make 2009’s surge appear less worrisome in retrospect (see Figure 1). Upward earnings guidance has dipped as well (see Figure 2) and there has been little consternation or discussion about it.
Citi ResearchLevkovich may be exaggerating a bit by saying "there has been little consternation or discussion about it." Indeed, plenty of people have warned about asset prices dislocating from fundamentals. They just couldn't be heard over the deafening stock market rally.
Looking forward, Levkovich doesn't think this ugly trend of negative earnings expectations to improve in the near-term.
"[W]e suspect some additional estimate cuts may be in the making when company management teams provide more realistic 2H13 outlooks in the latter part of July during earnings related conference calls," he wrote.
"While we envision an improving US economic backdrop assisting estimates, we are more concerned about international activity trends, with Europe, China and Brazil potentially generating disappointment, alongside commodity-driven economies that may have been banking on better business activity as well."
Central Banks Are Pulling Back From The Brink, And Markets Are Liking It
Over the last several days, fears have grown that the world's central banks were going on strike.
China was letting overnight liquidity dry up.
Bernanke was signaling that the march towards the exit would begin.
The Bank for International Settlements (the central bankers central bank) said in its annual report that the age of excessively easy monetary policy had to come to an end, and that it was time for fiscal authorities and governments to do their part to fix the economy.
But today we're getting reminders that central banks are still here.
The People's Bank of China came out with a statement indicating that would ease liquidity concerns.
And this morning, ECB executive board member Benoît Cœuré gave a speech in which he said this line:
Let me state quite clearly that I do not intend to drop any hints about a change in the monetary policy stance in the euro area in the near future. A reversal would not be warranted by current economic conditions. Economic growth is projected to remain weak this year and inflation is expected to remain clearly below 2% for the euro area as a whole. The various non-standard measures that have been introduced by the ECB to support monetary policy transmission in certain market segments will stay in place as long as necessary, and there are other measures, standard and non-standard, that we can deploy if warranted. Therefore, at the current juncture, there should be no doubts that our “exit” is distant and our monetary policy is and will remain accommodative.
That's not that specific, but the idea of there being more the ECB can do to ease policy if warranted (which they almost certainly are) is an important message.
Meanwhile, there are more Fed speeches coming up this week, and potentially there will be an opportunity to help soften some of Bernanke's words from last Wednesday.
So perhaps the strike is over for now.
Markets are liking it. China made a comeback from its lows of the day, and Europe is at its highs of the morning.
3 Reasons Why US Home Prices Are Going To Cool Off (ITB, XHB)
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