Archive for the ‘IEF’ Category

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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