Archive for the ‘IEF’ Category

Draghi Drags S&P 500 Over 2000; Potential ECB Easing Boosts Dollar

Monday, September 1st, 2014

NEW YORK (TheStreet) — On this Labor Day, European Central Bank President Mario Draghi is doing the heavy lifting for the S&P 500a . The ECB, not the Federal Reserve, is currently the central bank pushing investors into riskier bets in the U.S. stock and U.S. bond markets. The ECB currency countries constitute the largest economy in the world. A substantial bond buying program from the ECB will boost the dollar further along with the prices of all U.S. assets, including U.S. stocks. The Federal Reserve’s third bond buying program or quantitative easing (QE3) has been much maligned for driving investors into riskier sectors such as the stock market, SPY, , a and . Yet, with the QE3 tapered out, guesses for the start of Fed funds interest rate hikes center around mid-2015. That means the Fed is starting to put the brakes on speculation. U.S. data on unemployment, corporate earnings and growth show a recovery in the U.S. in full swing, and stock prices are reflecting that. Thus, the Fed will be forced to raise rates sooner rather than later, which should be pushing up U.S. Treasury yields. But Treasury yields fellain August and Treasury bonds, or , have been rallying. At the end of August, it was the potential of more monetary stimulusa from the ECB that was driving U.S. bond prices higher. Read More: 10 Stocks George Soros Is Buying in 2014 Europe is still mired in a debt-deflationary spiral. Unemployment rates top out above 20% in many member states in the eurozone, and the overleveraged banks refuse to lend.aDraghi hinted at more stimulus at the central banker’s conference at Jackson Hole, Wyoming, recently. Draghi has talked tough before and failed to act. Nevertheless, it finally seems as though the ECB has no choice but to flood the world with euros to prevent deflation. The last time the S&P 500 first crossed a thousand-point threshold was in 1998 during the Asian crises. In that year, the dollar rallied because of devaluations and weakness in Asia. Investors fled to U.S. markets for safety in 1998. Today, European investors are moving to the U.S. for better yields and have helped boost the S&P 500 index past the 2000-point mark in August. In 1998 as today, the Fed faced little inflationary pressure to raise rates at a faster clip, due in part to the dollar rally. Read More: Will European Central Bank Ease Policy in Wake of Weak GDP? German bonds are the only large safe haven in the euro currency zone. In the last week of August, German 10-year government bonds (bunds) yielded a measly 0.9%awhile investors could get more than 2.3%ayield on the U.S. ten year Treasury. The low bund yields likely reflect both deflationary expectations in Europe and the anticipation of an ECB bond buying program. Either scenario justifies minuscule German bund yields. These low bund yields are spurring the flow of cash out of Europe. That flow makes the dollar more valuable and also moderates U.S. import price inflation. Both the reduced import price inflation pressure and increase in demand for Treasuries pushes down yields and boosts prices of U.S. government bonds. Thus, it seems for now, the U.S. Treasury market can defy the logic that interest rates have nowhere to go but up. At the time of publication, the author was long SPY and VOO.

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Want Yield? Stay Away From Treasury Inflation-Protected Securities

Thursday, May 29th, 2014

NEW YORK (Fabian Capital Management) — Treasury Inflation-Protected Securities, or TIPS, are an interesting subset of Treasury bonds designed to protect your purchasing power from the effects of rising consumer prices. However, many investors have fallen prey to the misconception that rising TIPS prices means an inflationary environment. TIPS are issued by the U.S. Treasury with a fixed coupon and face amount that fluctuates in accordance with changes in the rate of inflation. The most common and widely accepted inflation indicator is the Consumer Price Index. When the Consumer Price Index is rising, the Treasury pays interest on the adjusted higher face value of the bond which creates a gradually rising stream of interest payments. This increase in coupon payments allows you to protect your purchasing power by receiving additional income when the price of goods and services is increasing. The largest exchange-traded fund in this space is the iShares TIPS Bond ETF , which has nearly $13 billion invested in 39 Treasury inflation-protected securities. Most TIPS are issued with long maturity dates and, therefore, the exchange-traded fund TIP has an effective duration of 7.6 years. This makes its price more sensitive to changes in interest rates than a shorter-maturity Treasury fund. In addition, because TIPS are not issued as often as typical Treasury bonds, the income from TIPS tends to be lumpy. This results in dividend income that rises and falls dramatically from month to month and can produce misleading dividend yield statistics. Right now the trailing 12-month yield on TIPS is listed at a meager 0.98%. This is calculated by summing the prior 12 months of distributions and dividing by the current share price. The price of TIPS responds to changes in intermediate-term interest rates similar to the iShares 7-10 Year Treasury ETF rather than inflationary pressures. The recent collapse in the CBOE 10-Year Treasury Yield has spurred investors to come pouring back into bonds and prompted TIPS to hit new 2014 highs. So far this year, TIPS have gained 5.71% amid frenzied demand for fixed-income assets. If the 2013 interest rate backup taught us anything, it’s that a TIPS is not an effective tool at fighting rising Treasury bond yields in an environment of low inflation. Instead, it can be used as a directional bet on falling interest rates or as a potential income accelerator when the Consumer Price Index is trending higher. With relatively tepid CPI statistics over the last decade, TIPS has yet to show its true colors during a period of deteriorating purchasing power. Source: Bureau of Labor Statistics, Consumer Price Indexes We would not likely see a dramatic increase in the yield of TIPS without inflation breaking out above this long-term sideways trend. While there is some evidence that we are witnessing rising food and energy costs this year, the CPI has yet to reflect a confirmation that inflation is running above average. ETF income investors should be wary that in a low-inflation environment you give up substantial yield by investing in TIPS above a comparable Treasury or investment grade bond fund. This is because the “inflation insurance” component acts as a drag on the distribution yield of the fund. At the moment I do not have any exposure to TIPS for my income clients because I don’t believe the current environment is supportive of an inflationary hedge. I would rather be positioned in fixed-income sectors that are continuing to provide a higher yield with an eye towards managing interest rate risk. The Pimco Income Fund and DoubleLine Total Return Fund are two actively managed funds that have been core holdings of mine for some time. In addition, I have a tactical position in the iShares J.P. Morgan USD Emerging Markets Bond ETF as a diversified value play outside the U.S. I plan on expanding or collapsing my fixed-income sleeve in response to changes in interest rates or credit spreads as a function of risk management. I also plan on keeping a close eye on inflationary statistics in the event that a fund like a TIPS warrants a closer look down the road. At the time of publication the author had a position in EMB. Follow @fabiancapital // 0;if(!d.getElementById(id)){js=d.createElements);js.id=id;js.src=”//platform.twitter.com/widgets.js”;fjs.parentNode.insertBefore(js,fjs);}}(document,”script”,”twitter-wjs”); // ]]> This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff. >>Read more: The Seven Deadly Sins of Biotech Investing

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Reduce Your ETF Risk, not Well-Deserved Rewards

Friday, May 16th, 2014

NEW YORK (ETF Expert) — Jonathan Krinsky, chief market technician at MKM Partners, is the latest commentator to add perspective on the trouble with U.S. small-cap stocks. He noted that roughly 80% of large-cap S&P 500 components are currently trading above their long-term trendlines (200-day), while only 40% of small-cap Russell 2000 components are above their 200-day moving averages. According to Krinsky, it marks the widest divergence between the two benchmarks since 1995. A variety of market watchers have been pointing to the poor prospects of an asset class with an aggregate price-to-earnings ratio of 100. On the other hand, investors have been paying a substantial premium to own smaller company growth for several years, irrespective of the price-to-earnings or price-to-sales data. Might the selling pressure be attributable to something other than overvaluation? Perhaps. Consider a number of recent concerns about the U.S. economy. “Core” retail sales fell 0.2% in April, suggesting that the treacherous winter cannot be blamed for why consumers held onto their wallets in the springtime. In the same vein, the Commerce Department originally estimated the U.S. economy expanded ever-so-slightly in the first quarter of 2014 (0.1%). Yet, estimates are being revised dramatically lower to reflect an economy that may have contracted for the first time in three years (0.6%-0.8%). While some investors may choose to look beyond “old information,” other investors may be turning squeamish on the notion of holding onto growth at any price. The shift away from smaller company ownership can be seen in the iShares Russell 2000 : S&P 500 SPDR Trust price ratio. Relative weakness in IWM is evident in the price of IWM:SPY falling below and staying below a long-term 200-day trendline. Equally compelling? The 50-day moving average crossed below the 200-day moving average in late April, suggesting that small-caps may remain out of favor for the foreseeable future. Equally fascinating, interest rates have moved lower in 2014. The overwhelming majority of commentators and economists projected rates would be higher by year-end. (Note: I offered my dissenting opinion in an Against the Herd feature this past January.) Confounded experts are blaming the Russia-Ukraine conflict. Others believe that weak economic growth is a function of unusual weather patterns, and that safety-seekers will abandon the bond market soon enough. Still others attribute bond gains (lower interest rates) to demand by pensions and large institutions, as many may have a greater need to protect principal than swing for the stock fences. That’s not at all. There’s the U.S. Federal Reserve’s explicit promise to keep rates low, long after tapering of quantitative easing ends. There’s even a case to be made that high frequency trading operates largely on technical chart patterns that have been favorable to bond ETF ownership. The iShares 7-10 Year Treasury Bond Fund is hitting year-to-date highs while the 10-year Treasury yield is at year-to-date lows (2.53%). From my vantage point, you’re hearing a whole lot of after-the-fact excuses why interest rates are going down. An explanation that served as the origin of my original thesis on lower interest rates involved the uncertainty that comes with the central bank of the United States exiting from quantitative easing (QE). For five-and-a-half years, the Fed’s “on-again-off-again” unconventional stimulus has bellowed a familiar pattern. Specifically, assets from stocks to real estate surged higher in the early-to-mid stages of stimulus; assets from stocks to real estate faded in the later stages of stimulus and/or perceived stimulus removal. If early birds are scaling back their risk profiles — taking profits on “Nasdaquie” equities, exiting smaller-cap securities, snatching up U.S. investment grade bonds — should you follow suit? For the most part, yes. Consider shifting a portion of your allocation to more favorable trends. For instance, you can reduce small-cap U.S. exposure, while increasing low price volatility exposure in iShares USA Minimum Volatility and/or PowerShares MidCap Low Volatility . Additionally, Europe is gearing up for more stimulus from its central bank and European equities are cheaper on a price-to-earnings (P/E) basis. That should provide a bit of a cushion in selecting assets like iShares MSCI EAFE Value or WisdomTree Hedged European Equity . For those who, like myself, expect the euro-dollar to decline, HEDJ hedges against the currency risk. Follow @etfexpert // 0;if(!d.getElementById(id)){js=d.createElements);js.id=id;js.src=”//platform.twitter.com/widgets.js”;fjs.parentNode.insertBefore(js,fjs);}}(document,”script”,”twitter-wjs”); // ]]> This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff. >>Read more: Buffett’s Berkshire Builds Verizon Stake, No IBM Buying Spree

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Small-Cap ETFs Signal Big Warning Signs Now

Friday, May 9th, 2014

NEW YORK (Fabian Capital Management) — The direction of stocks has been decidedly mixed over the last several months. Large-cap indexes such as the SPDR S&P 500 ETF and Dow Jones Industrial Average ETF have been mostly trading sideways with some slight upward directional bias. The tug of war involving earnings, economic data and interest rates has helped to put a modest floor under larger, cash-rich companies. However, the same can’t be said for small-cap stocks, which have been under more selling pressure recently. The iShares Russell 2000 ETF broke below its 200-day average this week for the first time since November 2012, signaling a pause (and perhaps change) in trend for these growth-sensitive stocks. On the surface, this may seem like a somewhat benign decline of 9% from the 2014 highs in IWM. However, there is some legitimate concern mounting that small-cap stocks may become be a leading indicator of weakness that will spill over into the rest of the market. It would not be surprising to see this index lead a correction lower after being one of the strongest segments during this bull market. Over the past two years, nearly every modest pullback in growth-oriented sectors has been bought with gusto. This has led to the price of small-cap stocks severely outpacing earnings growth and pushing valuations to extreme levels. The concern more recently has been the inability of IWM to mount any convincing push higher when nearly every intraday rally is met with heavy selling pressure. In addition, we have seen dollars shifting from more aggressive areas like biotechnology, solar, and social media stocks to defensive names in utilities, consumer staples, and energy. All of these signs point to an unwinding of risk and shift to value or dividend opportunities as a function of inter-market dynamics. These same forces have been a tailwind for fixed-income as well. Portfolio managers have been aggressively repositioning their asset allocation to account for a scenario where we see additional volatility in stocks and flight to safety in bonds. ETFs such as the iShares Investment Grade Corporate Bond Fund and iShares 7-10 Year Treasury ETF have been trading sharply higher and gaining assets as a function of risk management. From a seasonal standpoint, we’re now exiting the strong growth months and entering a historically lackluster period. That means you should be extra vigilant about positioning your portfolio in the areas that represent the strongest chances for success. I don’t believe it’s time to clear the decks and run to cash, but you should be carefully monitoring your holdings and assessing your risk relative to other opportunities. One of the best strategies this year has been to simply be cautious with a healthy dose of low-volatility large-cap stocks, fixed-income, and even cash on hand to take advantage of new opportunities. Two long-term core equity holdings in my clients’ portfolios right now are the iShares MSCI U.S. Minimum Volatility ETF and First Trust Nasdaq Technology Dividend ETF , which have both exhibited positive momentum year-to-date. Both exchange-traded funds focus on selecting stocks with dividend or value characteristics that make them attractive in this type of market. I believe this theme will continue for the near future, and as such, you should be flexible with your asset allocation to control risks. Patience and discipline will be rewarded with additional tactical themes as a result of shifting trends that you can use to your advantage. Even volatile areas like small caps will once again present an attractive opportunity to capitalize on under the right circumstances. At the time of publication the author had a position in USMV and TDIV. Follow @fabiancapital // 0;if(!d.getElementById(id)){js=d.createElements);js.id=id;js.src=”//platform.twitter.com/widgets.js”;fjs.parentNode.insertBefore(js,fjs);}}(document,”script”,”twitter-wjs”); // ]]> This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff. >>Read more: Tesla Takes on Missouri >>Read more: Puma Wins Big at NFL Draft With Jadeveon Clowney

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Against the Herd: Lower, Not Higher, Rates in 2014

Saturday, January 18th, 2014

NEW YORK (ETF Expert) — Bloomberg News surveyed banks and securities companies on where the 10-year Treasury yield would finish 2014. Economist forecasts averaged 3.41%. With 2013 closing near 3.01%, perceived strength in the underlying U.S. economy, and the Federal Reserve reining in its controversial bond buying program (“QE3″), the predictions are hardly outlandish. On the other hand, where in the media will you find bond bulls who believe that interest rates will go significantly lower? Does anyone think that rates could tumble back towards 2%, or even 1.5%, sending bond prices surging back to record highs? It is worth noting that gains for Treasuries in the first few weeks of January are the strongest that they’ve been in four years. In fact, income exchage-traded funds of all flavors are seeing capital appreciation and seven of 10 have climbed back above respective long-term (200-day) trendlines; only the three Treasury bond ETFs remain below respective moving averages. Could Income ETFs Be Signaling Lower Rates Ahead?                               Approx YTD %   Above 200-Day                 Vanguard Extended Duration (EDV)   4.7%   -3.4% iShares 20+ Treasury (TLT)     3.0%   -2.4% PowerShares Preferred (PFF)     2.9%   1.3% Market Vectors High Yield Muni (HYD)   2.6%   -0.9% SPDR Barclay Muni (TFI)     1.8%   1.5% PowerShares Emerging Market Sovereign (PCY) 1.5%   0.0% iShares 7-10 Year Treasury (IEF)   1.5%   -1.3% SPDR Barclay High Yield Bond (JNK)   0.7%   3.6% PIMCO 0-5 Year High Yield Corp (HYS)   0.4%   3.4% PowerShares Senior Bank Loan (BKLN)   0.4%   1.8%                 S&P 500 SPDR Trust (SPY)     -0.3%   9.6%                 Perhaps ironically, the gains for income ETFs in the first part of 2010 is eerily reminiscent of the way that the bond markets anticipated the end of the first round of quantitative easing (“QE1″) six months in advance. At the start of 2010, it was well known that QE1 would be coming to a close in June. Yet, a “soft patch” in the economy sent stocks reeling for a 15%+ correction in the summertime. Then the U.S. stock market welcomed July’s announcement of a second round of quantitative easing to commence in August (“QE2″). The news fueled stock gains throughout the second half of that year. I am not “predicting” a first-half correction for stock assets in 2014. Nevertheless, if earnings guidance turns out to be weak, or if income ETFs continue to march higher on price gains, or if incoming jobs data are poor for several months, do not be shocked by any hesitation on the part of investors to purchase riskier assets on the dips. Instead, lower stock prices combined with higher bond prices (lower bond yields) might force Chairwoman Janet Yellen to suspend a tapering increment; if a stock correction is severe enough, Yellen’s colleagues may vote to increase its monthly bond purchasing activity. Since I did begin this discussion with the average forecast for the 10-year yield at the close of 2014 (i.e., 3.41%), I will venture an educated guess on where it will finish. I expect a slight flattening of the yield curve to keep longer-dated Treasuries (e.g., 10-year, 30-year, etc.) in check, regardless of month-to-month volatility in lengthy maturities. Couple a modest flattening of the yield curve with a historically probable shock to the “risk on” mentality, and I am offering 2.75% for the end of the year. In essence, I expect it to finish rather close to where it is right this minute. Follow @etfexpert // 0;if(!d.getElementById(id)){js=d.createElements);js.id=id;js.src=”//platform.twitter.com/widgets.js”;fjs.parentNode.insertBefore(js,fjs);}}(document,”script”,”twitter-wjs”); // ]]> This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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When to Taper Your Exposure To U.S. Stock ETFs

Saturday, December 14th, 2013

NEW YORK (ETF Expert) — Long-time readers and clients already know how I feel about the current U.S. stock market bull. For example, the absence of revenue growth at corporations (e.g., average sales growth for Dow components in 2013 is -0.7%) and the exceptionally high cyclically-adjusted P/E (i.e., 25) do not matter right now. And that’s okay. Pending home sales have dropped for five straight months and mortgage applications have declined for five consecutive weeks, placing a potential damper on the real estate recovery. That’s okay, too. Not to be outdone, bearish sentiment by investment advisers, a well-tracked contrarian indicator, has plunged to its lowest level in a quarter century (14.3%). That’s fine as well. In other words, as long as the investment community believes Federal Reserve maneuvers will benefit equity risk-taking, it is sensible to participate in the easy-to-identify uptrends. On the other hand, let me present a hypothetical scenario whereby the Dow at 16,000 rises to 20,000 over the next 12-24 months. Should the 25% price gains occur, even the most strident bulls would recognize the historical probability of a stock bear emerging after six to seven years of upward movement. It follows that those 25% gains would be wiped out in a buy-n-holders account if a 20% bear came to the picnic table. Moreover, with the average bearish erosion at 30%, a Dow Industrials stock that reaches 20,000 might see 14,000 before it sees 24,000. The point here is not to discourage advocates of exchange-traded funds from participating in the Fed-fueled rally. Rather, the point is to drill home the notion that, at this point in the cycle, you cannot afford to buy-n-hold your stock assets. Fortunately, there are a number of simple ways to determine whether it is time to lighten up. One of the most basic methods? Bolster your cash account if the price of the SPDR S&P 500 Trust breaches its 200-day on the downside and fails to bounce back quickly. You could sell a small portion, a large portion or the whole kit-n-kaboodle. Just be certain to be consistent with your personal discipline for reducing risk. Decisions based solely on trendlines are far from perfect. Nevertheless, they’d have helped you avoid the bulk of the 2000-2002 bear, the panicky portion of the 2008-2009 collapse as well as provide a measure of comfort during the extreme price swings in the 2011 eurozone crisis. Recognizing that bull markets differ, however, it is worthwhile to examine the current bull rally in the context of Federal Reserve intervention. In fact, the last two years’ worth of gains are primarily attributable to the Fed’s ultra-accommodative approach. That is why I look to several influential ETFs for additional clues. For instance, the Fed’s orchestration of the wealth effect with the phenomenal rise in home prices now increases the importance of watching the homebuilder ETFs. The iShares DJ U.S. Home Construction is already flashing a warning sign, whereas SPDR Homebuilders has been a bit more resilient. Some emerging-market ETFs can also assist investors identify if they might need to reduce U.S stock exposure. This is because a number of emergers are particularly dependent on foreign capital to help fund their deficits. It follows that if the Fed signals an ongoing plan for reducing its money printing, as opposed to a one-time, data-dependent gesture of lowering the dollar creation from $85 billion to $75 billion, I would expect WisdomTree India Earnings to fall back below its 200-day trendline. Right now, though, EPI’s momentum is a sign that cheap money may be around for quite some time. Last, but hardly least, keep an eye on the iShares 7-10 Year Treasury Bond Fund . A price movement below the September lows would likely correspond with a 10-year yield closing well above the 3% mark. The U.S. stock market is currently pricing in a 10-year between 2.5% and 3.0%, and not much more. Follow @etfexpert // 0;if(!d.getElementById(id)){js=d.createElements);js.id=id;js.src=”//platform.twitter.com/widgets.js”;fjs.parentNode.insertBefore(js,fjs);}}(document,”script”,”twitter-wjs”); // ]]> This article was written by an independent contributor, separate from TheStreet’s regular news coverage.

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Don’t Wait to Bail on Bonds

Friday, October 4th, 2013

Four Trends to Watch in the Fourth Quarter

Wednesday, October 2nd, 2013

NEW YORK (Fabian Capital Management) — The first days of October bring with them a combination of chilly temperatures, a frozen federal government and a cooling commodity complex. On the flip side, we are seeing a renewed surge in the fixed-income sector combined with resilient momentum in stocks that is restoring confidence in the markets.

As we turn the calendar to the fourth quarter, I think it is prudent to key in on four trends that will play a pivotal role through the balance of the year. By analyzing these factors, we set the stage for making prudent and balanced portfolio decisions that will allow you to safely reach your investment goals.

1. Political Turmoil: We have seen how the media likes to play up the importance of every potential conflict in the political arena. CNBC is relentlessly counting down to the next crisis — whether it is the budget impasse shutting down the federal government or the debt ceiling debate forcing the hand of our policy makers. Everyone loves a little drama in their lives. …

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Four Trends to Watch in the Fourth Quarter

Wednesday, October 2nd, 2013

NEW YORK (Fabian Capital Management) — The first days of October bring with them a combination of chilly temperatures, a frozen federal government and a cooling commodity complex. On the flip side, we are seeing a renewed surge in the fixed-income sector combined with resilient momentum in stocks that is restoring confidence in the markets.

As we turn the calendar to the fourth quarter, I think it is prudent to key in on four trends that will play a pivotal role through the balance of the year. By analyzing these factors, we set the stage for making prudent and balanced portfolio decisions that will allow you to safely reach your investment goals.

1. Political Turmoil: We have seen how the media likes to play up the importance of every potential conflict in the political arena. CNBC is relentlessly counting down to the next crisis — whether it is the budget impasse shutting down the federal government or the debt ceiling debate forcing the hand of our policy makers. Everyone loves a little drama in their lives. …

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ETFs for the Fed’s Effect on Housing

Sunday, September 15th, 2013

NEW YORK (ETF Expert) — Take a quick walk with me down Flashback Lane. The year is 2004. Homes, by most measures, are no longer affordable. Yet home prices did not peak until two years later in the early months of 2006.

The stock market, a forward-looking beast, tends to recognize bad (and good) trends roughly six months in advance. Not surprisingly then, one of the premier home builders, Toll Brothers , catapulted roughly 200% from $20 per share to $60 per share between the start of the bubble in 2004 and mid-2005. Toll Brothers then spent the next six months depreciating 50% in value as it dropped back down to $30 per share. It made it to $20 and below by the end of the real-estate collapse in late 2008.

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Investors Betting on ‘Taper Lite’

Sunday, September 15th, 2013

NEW YORK (ETF Expert) — U.S. Treasury bonds via iShares 7-10 Year Treasury have gotten off the mat and moved higher over the course of five days. The SPDR Gold Trust has resumed its downtrend by falling below a 50-day trend line, and WisdomTree Dreyfus Emerging Currency has rallied strongly in September.

Meanwhile, most of the beneficiaries of a Federal Reserve commitment to the suppression of lending rates — homebuilders, timber producers, real estate investment trusts — have headed the leader board over the last week. Taper Lite: Markets Believe That The Fed Will Barely Rein In Its Bond Buying Approx 5 Day % Real Estate Related SPDR Homebuilders (XHB) 6.0% Guggenheim Global Timber (CUT) 4.4% SPDR DJ REIT (RWR) 4.1% Precious Metals Related Market Vectors Gold Miners (GDX) -6.8% iShares Silver Trust (SLV) -4.3% SPDR Gold Shares (GLD) -2.8% Currency Related WisdomTree Dreyfus Emerging Currency (CEW) 2.2% CurrencyShares British Pound (FXB) 1.5% PowerShares DB Dollar Bullish (UUP) -1.5% Bond Related Market Vectors Intermediate Muni (ITM) 1.5% PIMCO 25+ Year Zero Coupon Treasury (ZROZ) 1.3% iShares Barclays 7-10 Year Treasury (IEF) 1.1%

Frankly, I think investors have mostly interpreted the likelihood of Fed action (or inaction) correctly. Supposedly, the Fed is responsible for two things — steady employment and modest inflation. The worst labor force participate rate since 1978 is indicative of employment woes, not vibrant job growth, while exceptionally flat wages stoke the debate over whether inflation or deflation is the primary concern; either way, inflation is below Fed targeted levels. Topping it all off, budget standoffs in Washington mean there is zero chance of fiscal stimulus, leaving the monetary authorities to do any of the heavy lifting. …

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Foreign Stock ETFs for Income and Growth

Monday, September 9th, 2013

NEW YORK (ETF Expert) — PowerShares DB U.S. Dollar Bullish traded near $22.25 per share at the beginning of September, 2012. One year later, UUP trades near the same share price. In other words, over the course of the last 12 months, the U.S. dollar has not changed much against a basket of world currencies.

Courtesy of StockCharts.com Why is the dollar’s ability to hold its value a venerable topic? For one thing, the Federal Reserve’s aggressive policy of quantitative easing 3.0 had been expected to devalue the greenback. Indeed, it was one year ago when Chairman Ben Bernanke explained that the U.S. central bank would buy $85 billion in U.S. bond obligations with electronically printed dollars every month. In spite of the existence of an additional $1 trillion today, wage inflation did not accelerate dramatically and the dollar did not depreciate significantly. In its upcoming decision on whether or not to slow the electronic printing press, then, the Fed may not be forced to press ahead with actual “tapering ” in September. That said, investors are selling income investments first and asking questions later. Over the last five days, iShares 7-10 Year Treasury , Vanguard Utilities and iShares Residential REITs are down 1.4%, 1.5% and 1.9%, respectively. In other words, the prospect of military action in Syria has not been enough for investors to seek shelter inside of income investments. In contrast, the prospect of de facto tighter monetary policy in the U.S. has encouraged investors to seek income and growth abroad. For example, the European Central Bank does not appear to be transitioning to a higher rate environment; “Mum” is the world at the Bank of England as well. It follows that momentum can be seen in places like iShares Global Telecom rather than in its domestic counterpart, Vanguard Telecom . The IXP:VOX price ratio shows a noteworthy shift in interest to the global asset. …

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Interest Rates and the Yield Curve

Thursday, August 1st, 2013

NEW YORK (TheStreet) — The Federal Reserve was perceived by markets as dovish when it announced its interest rate policy decision Wednesday. This incited a quick rally and a subsequent fall for a modest gain on the day. The wild price swings can be attributed to the contradiction inherent in the press release. The current tone remains accomodative, but nothing has happened over the past few weeks to cause analysts to reassess the September meeting as the start date to tighter policy. The chart below of the U.S. Yield curve is an example of the market’s current outlook on monetary policy. The pair below is of iShares Barclays 1-3 Year Treasury Bond over iShares Barclays 20+ Year Treasury Bond . Read: U.S. to Become A Nation of Renters: Morgan Stanley The yield curve has been gradually steepening as investors continue to view improving economic data as a means to an end for accommodative monetary policy. The trend is still higher, but as more dovish comments have been released by Fed officials, the pair has broken below its multi-month uptrend. If economic data begin to deteriorate, such as with employment data on Friday, the price action should correct considerably lower.

The next chart is of iShares iBoxx $ High Yield Corporate Bond over iShares Barclays 7-10 Year Treasury . This pair measures the relative strength of junk bonds versus an intermediate U.S. treasury bond. This pair increases in value when the economic climate is deemed healthy for supporting lower grade companies. The price action has moved higher as strong economic data have pushed up both rates and riskier assets. The piercing of its trend line in mid-July, however, signals that investor sentiment may be shifting. Equity indexes look overbought at record highs, and with the Fed’s target tightening date for monetary stimulus fast approaching, markets could correct lower in the near term.

The last chart is of SPDR S&P Regional Banking ETF over Guggenheim S&P 500 Equal Weight . This pair measures the relative strength of regional banks over an equal weight equity index. Read: How to Manage Your Life Like a Fortune 500 Company Regional banks have had an impressive run higher as the yield curve has steepened, allowing profit margins to expand. These banks are better able to borrow at short-term rates and lend at long-term rates, thus capturing the widening spread. As the yield curve has pulled back and flattened slightly, regional banks have lost the strong bid higher they had a few months ago. Risks that they may face ahead are a flatter yield curve as well as a declining equity market. If this were to unfold, this pair would lead the market lower. …

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Global Macro: Economic Strength Bodes Well for the Dollar

Monday, July 22nd, 2013

NEW YORK (TheStreet) — Ben Bernanke spoke last week in front of Congress and made the case that the Federal Reserve would remain flexible and continue to act in reaction to economic currents.

This leaves the dollar in a vulnerable position. He did not explicitly say which way the Fed was biased, which is currently reflected in the dollar’s price action.

The chart below is of PowerShares DB US Dollar Index Bullish over CurrencyShares Swiss Franc Trust . This pair measures the true strength of the U.S. dollar, as it is compared to the franc, a traditional safe haven currency. …

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3 Income-Oriented ETFs That Will Hold if Rates Creep Higher

Saturday, July 13th, 2013

NEW YORK (ETF Expert) — An overwhelming majority of commentators seem convinced that interest rates will remain elevated. Some have suggested that 2.72% on a 10-year yield is merely a pit stop on the way to a year-end close of 3.25%. I believe that global economic uncertainty coupled with disappointing corporate guidance will push the 10-year back down to 2.25% by year’s end. For that matter, I believe the Federal Reserve will wait to slow its bond-buying program until 2014. At the moment, I appear to be in the minority. Still, there are a great many individuals who require an income stream from their investments, whether rates fall, settle in at their current levels or creep higher. For that reason, I think it is important to identify income-oriented ETFs that are less sensitive to spikes or long-term changes in Treasury bond yields. The first income-oriented possibility is PowerShares Senior Bank Loan . In the bond swoon that has seen 10-years rise 100 basis points, BKLN has only forfeited 1.6% in price appreciation. The iShares 7-10 Year Tresury Bond ETF is down 7.5%. While losing 1.6% on price may not be desirable, one is picking up roughly 4.4% in annualized income. In fact, if you haven’t purchased BKLN yet, even if the 10-year rose to 3.25% by year’s end, the annualized income of the remaining months in the year could still wind up generating 1.5% in income over the six months. If the 10-year holds flat, one might expect 2.2% in the 6 months. If the 10-year reverts to 2.25% as I suspect, BKLN would likely garner 3% in total return over a half-year, which is similar to the 6% annualized that many income seekers pursue. Senior bank loans are floating-rate securities from below-investment grade companies. Unlike “junk bonds,” these debts have seniority over other creditors and the debts have been secured by collateral (e.g. real estate, etc.). Better yet, since the debt “floats” over short time periods, prices and yields can rise alongside interest rates. What makes BKLN particularly attractive include distributions that occur monthly as well as diversification across 135 holdings. The second income-oriented ETF is actually an exchange-traded note, UBS E-TRACS Alerian MLP . While it is widely assumed that energy pipeline partnerships are interest rate-sensitive (and in truth, they often are), there are plenty of instances when these high-yielders have stood their ground. For example, the folks at Credit Suisse pointed out that when rates had been rising and the Fed had been tightening between mid-2004 and mid-2007, MLPs managed to outperform aggregate bond indexes as well as the S&P 500. Similarly, over the last two months of rapidly rising interest rates, Vanguard Total Bond Market logged -3.6% while the S&P 500 SPDR Trust registered 1.2%. Yet, MLPI picked up 1.8%. In truth, domestic demand for natural gas as well as other products pushed through pipelines in the U.S. is growing. It follows that the dividends that pipeline partnerships have to pay out can go up over time; price appreciation does not necessarily kill a reliable yield. And while there may be a variety of Alerian pipeline partnership ETFs and ETNs to choose from, the one with the best relative strength today is MLPI.

A third income-oriented ETF with potential in the current environment is Guggenheim BulletShares 2018 High Yield Corporate . While short-term high yield may be a popular way to deal with rising rates, many worry about fund premiums and discounts in volatile markets. Perhaps the best solution for an ETF enthusiast is a fund that is diversified and has an actual maturity date. BSJI may be situated on the tail end of the 0-5 year horizon, but investors that purchased BSJI have less desire to trade than other ETF investors; they want to hold to maturity and this exchange-traded tracker should succeed in representing a held-to-maturity portfolio (100+ securities) with effective maturities in 2018. …

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Global Macro: Yield Curve Takes a Breather

Friday, July 12th, 2013

NEW YORK (TheStreet) — Investors took profits on the U.S. dollar and reassessed their currency outlook on Thursday as minutes from the Federal Reserve’s June meeting hinted at indecision over the initial start date for slowing bond purchases. Most economists still believe September will be the start of a slowdown, but the Fed made it clear that employment targets must be hit for that to be the case.

The first chart below is of iShares Barclays 1-3 Year Treasury Bond over iShares Barclays 20+ Year Treasury Bond. This pair represents the Treasury yield curve. When the price rises, the curve steepens. A steeper yield curve is usually bullish for the economy and equity sectors such as bank stocks.

The pair pulled back yesterday and looks to be overbought with regards to both of its uptrend lines. A pullback in the curve could signal further dollar weakness and commodity market strength. …

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