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: 8100546  Threads: 1  Questions: 3249207  Slow queries: 9  Opens: 160  Flush tables: 1  Open tables: 153  Queries per second avg: 0.401
                                    [sqlstate] => 00000
                                    [protocol_version] => 10
                                    [thread_id] => 294196
                                    [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
                                (
                                    [start] => 780
                                    [limitstart] => 780
                                    [option] => com_legacyinterface
                                    [view] => commentaries
                                    [Itemid] => 616
                                    [layout] => 
                                    [task] => browse
                                    [directionTable] => asc
                                    [sortTable] => published_on
                                    [filter_order] => published_on
                                    [filter_order_Dir] => desc
                                    [savestate] => 1
                                    [base_path] => /var/www/html/apcms/components/com_legacyinterface
                                )

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

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

                                                    [attrArray] => Array
                                                        (
                                                        )

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

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

                                                )

                                            [data:protected] => Array
                                                (
                                                    [start] => 780
                                                )

                                            [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
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                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

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

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [start] => 780
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

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

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

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

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

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

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

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

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

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

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

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

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

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

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

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

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

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

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                    [start] => 780
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

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

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

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

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

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

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

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

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

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

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

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

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

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

                                                                            [options:protected] => Array
                                                                                (
                                                                                )

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

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

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

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

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

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

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

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

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

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [start] => 780
                                                                                                )

                                                                                            [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
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                                                                                                            [3] => base
                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
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                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
                                                                                                            [15] => meta
                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
                                                                                                        )

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

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

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

                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

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

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

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

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

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

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

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

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

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

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

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

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

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

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

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

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

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [start] => 780
                                                                                                    [limitstart] => 780
                                                                                                    [option] => com_legacyinterface
                                                                                                    [view] => commentaries
                                                                                                    [Itemid] => 616
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

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

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

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

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

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

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [HTTP_AUTHORIZATION] => 
                                                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (Windows NT 6.1; WOW64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/33.0.1750.149 Safari/537.36
                                                                                                    [HTTP_CACHE_CONTROL] => no-cache
                                                                                                    [HTTP_PRAGMA] => no-cache
                                                                                                    [HTTP_HOST] => ap.hubtech.tv
                                                                                                    [HTTP_ACCEPT] => text/html, image/gif, image/jpeg, *; q=.2, */*; q=.2
                                                                                                    [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] => ap.hubtech.tv
                                                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                                                    [SERVER_PORT] => 80
                                                                                                    [REMOTE_ADDR] => 165.117.232.82
                                                                                                    [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] => 25694
                                                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                                                    [REQUEST_METHOD] => GET
                                                                                                    [QUERY_STRING] => start=780
                                                                                                    [REQUEST_URI] => /?start=780
                                                                                                    [SCRIPT_NAME] => /index.php
                                                                                                    [PHP_SELF] => /index.php
                                                                                                    [REQUEST_TIME_FLOAT] => 1527229029.178
                                                                                                    [REQUEST_TIME] => 1527229029
                                                                                                )

                                                                                            [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] => 1527229029
                                                                                                            [session.timer.last] => 1527229029
                                                                                                            [session.timer.now] => 1527229029
                                                                                                            [session.client.browser] => Mozilla/5.0 (Windows NT 6.1; WOW64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/33.0.1750.149 Safari/537.36
                                                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                                                (
                                                                                                                    [data:protected] => stdClass Object
                                                                                                                        (
                                                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                                                (
                                                                                                                                    [commentaries] => stdClass Object
                                                                                                                                        (
                                                                                                                                            [limitstart] => 780
                                                                                                                                            [filter_order] => published_on
                                                                                                                                            [filter_order_Dir] => desc
                                                                                                                                        )

                                                                                                                                )

                                                                                                                        )

                                                                                                                )

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

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

                                                                                                                        )

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

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

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

                                                                                                                    [aid] => 0
                                                                                                                )

                                                                                                        )

                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

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

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

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

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

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

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                )

                                                                        )

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

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

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

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

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

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

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

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

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

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

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

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                    [start] => 780
                                                                                    [limitstart] => 780
                                                                                    [option] => com_legacyinterface
                                                                                    [view] => commentaries
                                                                                    [Itemid] => 616
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

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

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

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

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

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

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                    [HTTP_AUTHORIZATION] => 
                                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (Windows NT 6.1; WOW64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/33.0.1750.149 Safari/537.36
                                                                                    [HTTP_CACHE_CONTROL] => no-cache
                                                                                    [HTTP_PRAGMA] => no-cache
                                                                                    [HTTP_HOST] => ap.hubtech.tv
                                                                                    [HTTP_ACCEPT] => text/html, image/gif, image/jpeg, *; q=.2, */*; q=.2
                                                                                    [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] => ap.hubtech.tv
                                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                                    [SERVER_PORT] => 80
                                                                                    [REMOTE_ADDR] => 165.117.232.82
                                                                                    [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] => 25694
                                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                                    [REQUEST_METHOD] => GET
                                                                                    [QUERY_STRING] => start=780
                                                                                    [REQUEST_URI] => /?start=780
                                                                                    [SCRIPT_NAME] => /index.php
                                                                                    [PHP_SELF] => /index.php
                                                                                    [REQUEST_TIME_FLOAT] => 1527229029.178
                                                                                    [REQUEST_TIME] => 1527229029
                                                                                )

                                                                            [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] => 1527229029
                                                                                            [session.timer.last] => 1527229029
                                                                                            [session.timer.now] => 1527229029
                                                                                            [session.client.browser] => Mozilla/5.0 (Windows NT 6.1; WOW64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/33.0.1750.149 Safari/537.36
                                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                                (
                                                                                                    [data:protected] => stdClass Object
                                                                                                        (
                                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                                (
                                                                                                                    [commentaries] => stdClass Object
                                                                                                                        (
                                                                                                                            [limitstart] => 780
                                                                                                                            [filter_order] => published_on
                                                                                                                            [filter_order_Dir] => desc
                                                                                                                        )

                                                                                                                )

                                                                                                        )

                                                                                                )

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

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

                                                                                                        )

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

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

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

                                                                                                    [aid] => 0
                                                                                                )

                                                                                        )

                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

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

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

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

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

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

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                )

                                                        )

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

                                                            [options:protected] => Array
                                                                (
                                                                )

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

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

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

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

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

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

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

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

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

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

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

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

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

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

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

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

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [start] => 780
                                                                    [limitstart] => 780
                                                                    [option] => com_legacyinterface
                                                                    [view] => commentaries
                                                                    [Itemid] => 616
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

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

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

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

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

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

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [HTTP_AUTHORIZATION] => 
                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (Windows NT 6.1; WOW64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/33.0.1750.149 Safari/537.36
                                                                    [HTTP_CACHE_CONTROL] => no-cache
                                                                    [HTTP_PRAGMA] => no-cache
                                                                    [HTTP_HOST] => ap.hubtech.tv
                                                                    [HTTP_ACCEPT] => text/html, image/gif, image/jpeg, *; q=.2, */*; q=.2
                                                                    [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] => ap.hubtech.tv
                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                    [SERVER_PORT] => 80
                                                                    [REMOTE_ADDR] => 165.117.232.82
                                                                    [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] => 25694
                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                    [REQUEST_METHOD] => GET
                                                                    [QUERY_STRING] => start=780
                                                                    [REQUEST_URI] => /?start=780
                                                                    [SCRIPT_NAME] => /index.php
                                                                    [PHP_SELF] => /index.php
                                                                    [REQUEST_TIME_FLOAT] => 1527229029.178
                                                                    [REQUEST_TIME] => 1527229029
                                                                )

                                                            [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] => 1527229029
                                                                            [session.timer.last] => 1527229029
                                                                            [session.timer.now] => 1527229029
                                                                            [session.client.browser] => Mozilla/5.0 (Windows NT 6.1; WOW64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/33.0.1750.149 Safari/537.36
                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                (
                                                                                    [data:protected] => stdClass Object
                                                                                        (
                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                (
                                                                                                    [commentaries] => stdClass Object
                                                                                                        (
                                                                                                            [limitstart] => 780
                                                                                                            [filter_order] => published_on
                                                                                                            [filter_order_Dir] => desc
                                                                                                        )

                                                                                                )

                                                                                        )

                                                                                )

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

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

                                                                                        )

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

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

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

                                                                                    [aid] => 0
                                                                                )

                                                                        )

                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

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

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

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

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

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

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                )

                                        )

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

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

                                                    [attrArray] => Array
                                                        (
                                                        )

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

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

                                                )

                                            [data:protected] => Array
                                                (
                                                )

                                            [inputs:protected] => Array
                                                (
                                                )

                                        )

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

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

                                                    [attrArray] => Array
                                                        (
                                                        )

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

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

                                                )

                                            [data:protected] => Array
                                                (
                                                )

                                            [inputs:protected] => Array
                                                (
                                                )

                                        )

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

                                            [options:protected] => Array
                                                (
                                                )

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

                                                    [attrArray] => Array
                                                        (
                                                        )

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

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

                                                )

                                            [data:protected] => Array
                                                (
                                                )

                                            [inputs:protected] => Array
                                                (
                                                )

                                        )

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

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

                                                    [attrArray] => Array
                                                        (
                                                        )

                                                    [tagsMethod] => 0
                                                    [attrMethod] => 0
                                                    [xssAuto] => 1
                                                    [tagBlacklist] => Array
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                                    [content_type] => market-commentary
                                    [title] => Stock Valuations Remain Near Record High Including in Europe and EM
                                    [slug] => gavekal_102014
                                    [fulltext] => 

Even as stock prices have corrected in recent weeks with only 36% of stocks having positive performance over the last 200 days and the average stock 19% from its one year high, we are reminded that stock valuations are still stretched pretty much everywhere. In the charts below we show the trusty price to cash flow ratio for the median stock in the developed world regions and also in the EMs. We highlight that even in areas of the market that have underperformed dramatically over the last four years (namely EM and Europe) the price to cash flow ratio for the median stock is still quite elevated relative to history. 


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© GaveKal Capital

[description] => Even as stock prices have corrected in recent weeks with only 36% of stocks having positive performance over the last 200 days and the average stock 19% from its one year high, we are reminded that stock valuations are still stretched pretty much everywhere. [author] => Team [legacyinterface_firm_id] => 173 [published_on] => 2014-10-20 [digest_date] => 2014-10-20 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-20 15:53:58 [created_by] => 948 [modified_on] => 2014-10-20 15:54:09 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1733 [hits] => 0 ) [1] => stdClass Object ( [legacyinterface_commentary_id] => 1668 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14907 [apv_conversation_id] => [content_type] => market-commentary [title] => A Treasury Market Disconnect [slug] => franklin_102014 [fulltext] =>

As the US economy continues to show signs of strength and the US Federal Reserve (Fed) continues to wind down its quantitative easing (QE) program, one would think the US Treasury markets would start reflecting a potential rise in inflation, and the eventuality of Fed monetary policy tightening. However, there has been a bit of disconnect in terms of behavior on the long end of the Treasury yield curve. Roger Bayston, senior vice president, Franklin Templeton Fixed Income Group®, breaks down why US 10-year Treasury note and 30-year bond yields aren’t ticking higher this year. He shares his view of the timing of possible Fed policy moves in light of economic data.

The current market consensus is for the Federal Reserve (Fed) to start raising its short-term benchmark interest rate (the federal funds rate) roughly in August of 2015. Our view is that if US economic growth continues at a more robust pace, and we see continued declines in the US unemployment rate, there’s a possibility we could see the Fed act even sooner than the market currently expects. We would expect gradual increases in the Fed funds rate once the Fed does start moving. If you believe the Treasury market should reflect economic activity and inflation rates, you can clearly see the disconnect amid the Fed’s ongoing quantitative easing (QE) programs. The 10-year Treasury note is currently yielding less than 2.5%,1 while real GDP in the second quarter of 2014 increased 4.6% (annual rate)2 and the market expectation for the third quarter is for an increase of 3% or better. Looking further out, the International Monetary Fund (IMF) recently raised its 2015 US GDP growth expectations to 3.1%3 while the Fed is a little less optimistic, with its latest forecast for growth of 2.6%–3% in 2015.4 Despite improvements in the economy, the shape of the Treasury yield curve has flattened since the start of the year. Longer-term Treasury rates have moved lower, while shorter rates have moved up, including Treasury notes along the two- to four-year part of the curve.

1014_YieldCurveFlatter

Positioning for the End of QE 

The most recent Fed communications continue to allow for flexibility in terms of how policymakers will approach the end of QE. The market seems to be anticipating that at the end of the Federal Open Market Committee (FOMC) meeting on October 29, 2014, the Fed will likely announce it will stop adding mortgage-backed securities to its portfolio. The Fed will own about $1.7 trillion of agency mortgages when it is finished with these purchases, representing about a third of the outstanding fixed-rate mortgage market of about $5.7 trillion.5 The Fed’s massive purchase program effectively replaced the role Fannie Mae and Freddie Mac historically have played in mortgage finance. Even when the Fed stops adding to its portfolio, it will likely continue to reinvest principal paydowns from the underlying amortizing residential loans. This means the Fed will likely continue playing a significant role in the market as it may end up buying between $10–$15 billion per month as a result of these paydowns. If and when the Fed does change course and decides to stop reinvesting principal paydowns, it will take quite some time before the giant mortgage portfolio amortizes away at prepayment rates. The $1.7 trillion portfolio would be approximately half of its size in about seven years’ time, so that would likely play out sometime after the year 2020.

Fed officials have been quick to state they do not expect to sell agency mortgage-backed security assets into the market, but we live in unconventional times in terms of central bank monetary activities, and actions are being taken that have not been previously done. In light of this, agency mortgage-backed securities have generally moved just as we might expect; they have risen when we have seen small periods of concern develop in the overall credit markets and then have declined when the credit-sensitive markets have performed better. We expect the trend could continue.

Connecting the Dots

At the moment, the Treasury market seems to be pricing in a lesser amount of tightening than the most current Fed “dots”—the graphical depiction of the forecasts of FOMC voting members for future Fed funds rates—depict. Fed officials are not generally experts at predicting forward economic activity; one would think that they might have a leg up in that pursuit, but that’s not necessarily the case. However, I do think it’s wise to pay attention to where they think short-term rates may go, as they do cast the actual votes on monetary policy actions.

When we analyze what we have heard from the Fed, along with the Franklin Templeton Fixed Income Group’s assessment of the economy, we see short-term rates as likely to adjust higher as we get closer to the time the Fed starts to act. The important issue for us is how that action translates into our strategies. For example, in our multi-sector strategies like Franklin Total Return Fund, we have had less interest rate exposure on the front part of the yield curve.

“A measured look at market shocks and changes in sentiment in the past couple of years seems to imply that the market has been able to find its source of liquidity.”- Roger Bayston

Bond Market Liquidity

I would like to touch on a topic that is currently on the minds of many investors—liquidity in the bond markets. As a result of both industry consolidation, as well as regulatory changes affecting the banking business, there are fewer bond dealers operating today than in the past, and the remaining dealers have reduced the capital they have committed to the bond-dealing business. Bond dealers have historically played a big role in matching buyers and sellers in the market, so the question has been posed about whether this is a great concern for bond investors, including us at Franklin Templeton. We do pay very close attention to these developments and would like to note some important points to bear in mind.

Baby boomers in the US have no doubt increased their allocations to fixed income as many have readjusted their portfolios heading into retirement. We have seen this not only in the retail funds business but in pension assets as well. Many private-defined benefit pension plans have moved to lock in their pension liabilities with matching long-duration, high-quality fixed income assets, leaving them less vulnerable to swings in asset markets. This is a source of demand for high-quality fixed income securities, and this may be a factor to consider when we think about shifting allocations between fixed income and other investment opportunities (in various asset classes) when this period of ultra-short low-interest rates changes.

Another factor to consider is how increased regulatory activity in banking and the de-risking of bank balance sheets has increased the amount of capital that banks are required to hold. Often this capital is in high-quality fixed income assets such as Treasury securities and agency mortgage-backed positions, and this is a trend that continues in Europe as well. On several occasions within the past couple of years, we have encountered market environments where sentiment has changed suddenly and large amounts of money have moved quickly. These situations have not caused major disruptions in terms of liquidity. A change in the credit cycle sentiment would be an important consideration to ponder, but a measured look at market shocks and changes in sentiment in the past couple of years seems to imply that the market has been able to find its source of liquidity.

Roger Bayston’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

What Are the Risks?

Franklin Total Return Fund

All investments involve risks, including possible loss of principal. Interest rate movements and mortgage prepayments will affect the fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in the fund adjust to a rise in interest rates, the fund’s share price may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The risks associated with higher-yielding, lower-rated securities (commonly called junk bonds) include higher risk of default and loss of principal. Investment in foreign securities also involves special risks, including currency fluctuations, and political and economic uncertainty. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio which may result in significant volatility and cause the fund to participate in losses (as well as enable gains) on an amount that exceeds the fund’s initial investment. The fund may not achieve the anticipated benefits, and may realize losses when a counterparty fails to perform as promised. These and other risks are described more fully in the fund’s prospectus.

Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN/342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
 
1. Source: US Treasury Department, as of October 8, 2014.
2. Source: US Bureau of Economic Analysis, September 26, 2014.
3. Source: IMF World Economic Outlook Database, October 2014. © by International Monetary Fund.
4. Source: US Federal Reserve, “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents,” September 2014.
5. Source: US Federal Reserve, Securities Industry and Financial Markets Association, as of June 2014.
 
[description] => As the US economy continues to show signs of strength and the US Federal Reserve (Fed) continues to wind down its quantitative easing (QE) program, one would think the US Treasury markets would start reflecting a potential rise in inflation, and the eventuality of Fed monetary policy tightening. However, there has been a bit of disconnect in terms of behavior on the long end of the Treasury yield curve. [author] => Roger Bayston [legacyinterface_firm_id] => 163 [published_on] => 2014-10-20 [digest_date] => 2014-10-20 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-20 15:56:24 [created_by] => 948 [modified_on] => 2014-10-20 15:56:55 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1734 [hits] => 0 ) [2] => stdClass Object ( [legacyinterface_commentary_id] => 1669 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14908 [apv_conversation_id] => [content_type] => market-commentary [title] => Five Ways to Keep Out of the Bond Liquidity Trap [slug] => bernstein_102014 [fulltext] =>

Bond investors are used to managing interest-rate risk and credit risk. But the financial crisis should have taught us that there are times when liquidity risk can be just as important to manage. Now is one of those times.

Why has liquidity become such a prevalent risk in today’s fixed-income markets?

Simply put: there’s a lot less of it. Stricter regulations that require banks to hold more capital against losses have prodded them into slashing inventories of assets such as corporate bonds. This leaves the banks unable to play the part of willing buyer when investors want to sell.

These liquidity dynamics likely magnified recent sell-offs in high-yield bonds and bank loans. It’s unclear how quickly interest rates will rise in anticipation of tighter Federal Reserve policy next year. But rise they probably will, and any drift upward could intensify selling pressure. In a worst case scenario, today’s trot to the exit could turn into a mad dash—and we doubt that everyone would fit through the door.

The good news is that liquidity risk is manageable—and can even offer attractive opportunities, given the right time horizon. When liquidity dries up in one sector, it can be plentiful in another. If managed properly, it can be an additional source of returns.

Here are five things investors can do to stay afloat:

1) Broaden your horizons with a multi-sector mind-set. Liquidity is episodic and can affect different sectors in different ways. Consequently, segregating one’s allocations into single-sector funds—high yield, emerging markets and so on—can be dangerous; if liquidity dries up in one sector, investors can quickly find themselves trapped. In our view, a holistic and dynamic multi-sector approach that lets investors tap into a broad universe of fixed-income assets offers better protection should liquidity in a specific sector dry up (Display).

2) Don’t skimp on cash and don’t overlook derivatives. Holding too much cash has been a losing proposition for investment returns these past six years, thanks to the Federal Reserve’s successful campaign to drive down the risk-free interest rate. But cash can come in awfully handy when it comes to meeting redemptions in low-liquidity environments. That’s why US mutual funds were allocating 9% of their portfolios to cash on average through August, according to Morningstar. Investors were much less prepared when the global financial crisis hit: the average cash allocation in December of 2008 was just 1.6%. To offset the potential performance drag of cash, investors can potentially improve returns by tapping the derivatives market to get exposure to “synthetic” securities. The liquid derivatives market also gives investors access to additional pools of liquidity.

3) In today’s market, look for “hands-on” trading expertise. Historically, traders at asset management firms mostly executed orders. But as banks have retreated from the bond-trading business, the responsibilities of buy-side traders have grown. The best traders are adept at finding sources of liquidity and making the most of opportunities caused by its ebb and flow. Investment managers who have embraced a more active role for traders stand a better chance, in our view, of managing liquidity risk effectively.

4) Be flexible with your investment horizons. This is especially important when low liquidity makes the trading environment so inflexible. When liquidity is plentiful, it’s easy to exit trades that have achieved their objectives. But in today’s fixed-income markets, investors shouldn’t assume liquidity will be there when needed. That’s why we think it pays to dig deeply into every possible investment. Multiple time horizons, including “holding to maturity,” should be considered when analyzing bonds. And if holding a particular bond to maturity doesn’t look attractive in today’s environment, investors might want to reconsider the security altogether.

5) Consider selective investments in private credit. File this one under the “silver lining” tab: the forces that have been reducing liquidity—increased regulation and stricter capital requirements—are also unlocking attractive opportunities in private credit. As banks originate fewer residential and commercial mortgages and lend less to mid-size companies, asset managers are filling the void. Yields on many private credit assets are on average considerably higher than those on more traditional bonds. The reason, of course, is simple: these investments are not as liquid. But as we’ve seen, liquidity isn’t what it used to be throughout the fixed-income market. In our view, investors with long time horizons may want to consider taking advantage of these “illiquidity premiums.”

We believe that these prudent steps can help investors navigate a less liquid market.

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.

Douglas J. Peebles is Chief Investment Officer and Head of Fixed Income at AllianceBernstein (NYSE:AB).

© AllianceBernstein

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Francis Gannon, Co-Chief Investment Officer and Managing Director of Royce & Associates, offers five statistics we think every investor should know about U.S. small-caps in the current volatile investment environment.

1 – The Russell 2000 Index is now seeing its biggest correction since 2011.

As of October 13, the Russell 2000 was down 12.9% from its 2014 high on July 3. While we have seen a number of corrections in recent times, we have not seen a double-digit correction for almost two years and we have not seen greater than 12% in more than three. The third quarter of 2014, moreover, saw the first negative quarter for the small-cap index in the last nine.

Is this worrying? No. To paraphrase Warren Buffet, we should look at market fluctuations as our friend, not our enemy.

As long-term investors looking for value and high-quality companies, we see the correction as an opportunity to find great businesses at attractive prices.

2 – Half of the companies in the Russell 2000 were down 20% or more through the end of September.

A close look inside the small-cap index reveals that 49% of its constituents are currently down at least 20% from their respective 52-week highs. More than one in 10—11%—are off more than 30% over the last 12 months. To us, this shows the correction has been rotational—in other words, it has been going on, quietly, for a long time.

This is in part attributable to fears over the global economy, with a particular focus on Europe, China, and even Japan. However, one could also call it the "Janet Yellen Correction." After first broaching the topic in May, the Fed Chair called the small-cap market "stretched" in July, thus highlighting for investors how rich many small-cap valuations were.

Since then, of course, they have come down. In early October, the Russell 2000 was trading at 17 times earnings. That is still expensive, but our deep dive into the index suggests that many high-quality small-cap stocks still look undervalued.

One metric that we think is particularly revealing of quality is ROIC—return on invested capital. Interestingly, the highest quality small-cap companies within the Russell 2000, as measured by ROIC, were trading at a discount to the highest quality large-cap companies at the end of September, while companies with the lowest ROIC accounted for virtually the entire small-cap premium (see the chart below).

The upshot is that the small-cap space currently boasts plenty of quality companies—and many look attractively priced to us.

Median LTMEV/EBITDA2 by ROIC Quartile as of 9/30/14

1 Last 12 Months
2 Enterprise value/earnings before interest, taxes, depreciation, and amortization Return on Invested Capital is calculated by dividing a company’s past 12 months of operating income (earnings before interest and taxes) by its average invested capital (total equity, less cash and cash equivalents, plus total debt, minority interest, and preferred stock). The portfolio calculation is a simple weighted average that excludes all non-equity securities, investment companies, and securities in the Financials sector with the exceptions of the asset management & custody banks and insurance brokers sub-industries. The portfolio calculation also eliminates outliers by applying the inter-quartile method of outlier removal.
Source: Russell Investment Group and Bloomberg

3 – A quarter of small-cap companies make no money.

Amazingly, 25% of companies in the Russell 2000 are currently non-earners (of those 25%, 40% are in the Health Care sector). They make no money at all.

This tells us two things. One, the index as a whole might not be as expensive as it looks because it includes such a large number of companies currently earning nothing.

Second, and much more important in our view, is the idea that small-cap investors need to really understand what they own. Active management can make an enormous difference in the small-cap space, more so we think than in other asset classes.

We see quality as paramount both to mitigating risk and achieving above-average long-term returns.

4 – The Russell 2000 has never returned between 6% and 16% in a calendar year.

This is a surprising statistic given that the average return of the index since inception was 11.8% through September 30, 2014. To have never delivered anything close to the most recent average annual total return since inception says a lot to us about the volatility of the index. We believe that after five years of mostly low volatility we are likely to see much more going forward, which has historically been good for active managers.

5 – Small-caps are rarely down when the S&P 500 has a positive year.

Since its inception in 1979, the Russell 2000 has delivered a negative calendar-year return when the S&P 500 has had a positive year only five times.

From the beginning of the small-cap correction that began in early July, the spread between large-cap and small-cap has grown wider. (Year-to-date through September 30, 2014, the Russell 2000 was down 7.4% compared to respective gains of 8.3% and 8.0% for the S&P 500 and Russell 1000.)

Small-caps may rally and end up enjoying positive results for the year. However, it is interesting to note that every time the Russell 2000 has been negative for the year and the S&P 500 positive, small-caps have outperformed the following year.

Important Disclosure Information

Francis Gannon is a Co-Chief Investment Officer and Managing Director of Royce & Associates. His thoughts in this piece concerning the stock market are solely his own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future. The historical performance data and trends outlined are presented for illustrative purposes only and are not necessarily indicative of future market movements.

Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell© is a trademark of Russell Investment Group. The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell 1000 index is an index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 index. The S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor's based on market size, liquidity, and industry grouping, among other factors. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

© The Royce Funds

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When markets get temporarily unruly as they have recently, it tends to drive folks like us to go back and prove to ourselves once again that each and every part of our existing portfolios (the stocks and the hedge positions we own) is as valid to us as it was when we bought it.  And, with many stocks on our watch list getting closer to being viable additions to the mix as their prices drop, we are essentially scouring our investable universe to see if we can either improve our upside potential, strengthen our defenses, or both.  It is a rigorous process, always.

Streettalklive.com 2014

Streettalklive.com 2014

That’s why we owe a special thanks to Lance Roberts and his crew at Streettalklive.com for posting a classic chart on investor emotions in a recent newsletter.  This is one that many financial advisors and their clients are familiar with.  I don’t know who originally created it, but it has been used by scores of professionals to make a very simple point: markets are cyclical, so is human emotion, and if you can appreciate how they are really joined at the hip, it will make investing a less stressful process.  It also makes this week’s blog a very straightforward message: we believe (as I suspect Mr. Roberts does) that the global stock markets are sending an increasingly strong signal that we are in the vicinity of the Anxiety-Denial stage.  As we have suggested in recent commentaries (both public on our blog and private to our clients), recognizing this is half the battle in transitioning our portfolios from a bull market “tilt” to a bear market “tilt” and, as a probable next step, to a stronger and stronger bear market “tilt.”  This is an evolving story and not something that is likely to be resolved any time soon.  For now, we are making you aware that we are aware of it, and that this layman’s view of the stock market and investor psychology has been a key to our past successes in rough markets.  To be continued.

IN THE MEANTIME, WE WOULD TRULY APPRECIATE YOUR OPINION ON WHERE YOU THINK WE ARE ON THIS CHART.  JUST VISIT WWW.HEDGEDINVESTING.COM, AND IN THE “HOW DID YOU HEAR ABOUT US FIELD” ENTER YOUR OPINION. 

IF WE SEE A TREND IN THE RESPONSES, WE WILL DISCUSS IT IN AN UPCOMING BLOG POST. WHILE YOU ARE AT THAT SITE, YOU CAN ALSO DOWNLOAD ONE OF OUR POPULAR INVESTMENT RESEARCH PAPERS.

© Sundgarden Investment Research

[description] => When markets get temporarily unruly as they have recently, it tends to drive folks like us to go back and prove to ourselves once again that each and every part of our existing portfolios (the stocks and the hedge positions we own) is as valid to us as it was when we bought it. And, with many stocks on our watch list getting closer to being viable additions to the mix as their prices drop, we are essentially scouring our investable universe to see if we can either improve our upside potential, strengthen our defenses, or both. It is a rigorous process, always. [author] => Robert Isbitts [legacyinterface_firm_id] => 402 [published_on] => 2014-10-19 [digest_date] => 2014-10-19 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-19 15:29:43 [created_by] => 948 [modified_on] => 2014-10-19 15:29:54 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1724 [hits] => 0 ) [5] => stdClass Object ( [legacyinterface_commentary_id] => 1659 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 0 [apv_conversation_id] => [content_type] => market-commentary [title] => [slug] => -2 [fulltext] =>

The market’s correction has many scratching their heads

In “The Tipping Point,” Malcolm Gladwell tries to describe the evolution of modest notions to megatrends. How and when does the accumulation of small impressions come to change larger perceptions? What makes for that dramatic moment when everything seems to change all at once? While Gladwell offers some clues on how these transitions come about, they remain a matter of some mystery.

From one perspective, the market movements of the past two weeks are based on an understandable accumulation of impressions. Economic performance across the world is very uneven: the United States and the United Kingdom are doing well while China transitions to slower growth and Europe struggles. Geopolitical uncertainty surrounding Russia and the Middle East is a source of concern. Central banks have been challenged to set appropriate policy, creating uncertainty for investors. 

But from another perspective, the corrections and volatility we’ve witnessed recently are somewhat mysterious. None of the factors noted above are new; they’ve all been discussed at some length for many months. Until two weeks ago, markets seemed to acknowledge and accept the risks to the outlook, choosing nonetheless to focus on its many positive aspects. 

 

If there is a tipping point for the market’s retreat, it might be the minutes of the September Federal Open Market Committee meeting, which were released on October 8. The narrative reflected a heightened sense of concern about global risks; some may have taken this citation as an indication that policy-makers had grown darker on the outlook. 

Viewed through a darker lens, all incoming news seemed to suggest the worst. A single month’s decline in retail sales was taken as a major warning sign, while robust year-over-year spending gains were ignored. Falling energy prices were seen as reflecting economic weakness, not as a boost to consumers in advance of the holidays. In the minds of the markets, Mario Draghi’s effort to revive the eurozone economy is now depicted as futile, not fruitful. Ebola morphed from an isolated pathogen to something which might be broadly contagious to commerce. 


Associated with this wholesale re-evaluation of economic prospects was a significant shift in expectations for the Federal Reserve. This is a surprising development, given the dearth of economic data received since its last meeting. And among the data we have received is a very strong employment report. 

 

The abrupt change of psychology made for a dizzying decline. Computer trading was blamed for making the problem worse: there was a “flash crash” in the market for 10-year U.S. Treasury bonds on Wednesday morning. Yields collapsed by 15 basis points in less than five minutes, only to regain most of that distance in the next five. Others cited the lack of liquidity in markets (discussed in our July 25 commentary) as another impediment to stability. 

There were certainly some technical things going on, but one ignores market signals at one’s own peril. It could well be that asset values were a bit stretched relative to fundamentals and needed to be reset, but I’ll leave it to my partners in our Asset Management group to comment on that. Fundamentally, here is our take on things.

  • We do not anticipate making any changes to our forecasts unless the correction persists and creates a feedback loop on economic activity. It is worth noting that equity values are still considerably higher than they were two, three and four years ago. Much of the wealth created remains in place and serves as a strong backdrop for spending and credit. The sheer momentum of job creation is also a powerful tailwind for the United States.

  • One Fed president came out this week with a call to extend quantitative easing, but we think it is premature to contemplate a change of strategy. Our call on the timing of an initial interest rate increase has not wavered for some time: September 2015 remains our most-likely case. Falling inflation, perhaps more than labor market slack, will support accommodation for some time to come.

  • We will continue to watch the eurozone closely. Results of the European Central Bank’s bank asset quality review (AQR) will be released on October 26, and we’ll analyze them carefully. Our international team will also focus on the European Commission’s debate over the French and Italian budgets and the evolving posture of Germany toward economic stimulus.

Being an economist at times like this is frustrating. Clients become more anxious for answers at the same time that standard modes of analysis are less useful. The best tonic for all would be swift stabilization and (dare we say it?) a rapid restoration of lost value. If the rout continues, though, I might contemplate a long vacation.

The Russian Bear Market 

Among the geopolitical uncertainties cited as contributing to the recent market correction, Russia’s aggression in Ukraine stands toward the top of the list. Ben Trinder, our analyst following the situation, reports.

Over the past couple of months, the Russian ruble has been in free-fall. The currency recently traded above 40 to the U.S. dollar for the first time, prompting central bank intervention, a shift in the targeted trading corridor and fears of capital controls. The last time Russia was under this much market pressure was 1998, an era which resulted in a sovereign debt default. 

This begs the question: will history repeat? How long can Russia survive the ongoing standoff with Ukraine and its associated repercussions before it is in real financial distress? The answer: quite a while. For while there are some modest similarities between today’s conditions and those of 15 years ago, differences dominate. 

A quick re-cap of what happened in the late ‘90s helps provide perspective. After the breakup of the Soviet Union, Russia became saddled with huge debts from the former USSR. At the same time, the economy was transitioning from the communist era to that of a free market. Tax collection was weak, government revenue was low and the price of Russia’s main export (oil) was falling, forcing the current and fiscal accounts into deficit. 

Toward the end of 1997, the Asian crisis erupted, prompting a speculative attack on the ruble. The Central Bank of Russia (CBR) defended its currency by using its foreign reserves to intervene in markets; 23% of total reserves were spent in the last quarter of 1997 alone. Interest rates were hiked to 150% in June 1998 in an attempt to stem capital outflows. 

Unfortunately, investors were spooked beyond the point of reassurance. By August 1998, the Moscow Exchange (MICEX) stock index had lost more than 70% of its value. Investors realized Russia’s fundamentals were poor and believed a devaluation of the ruble and default was imminent. By mid-August 1998, both events had come to pass. 

There are some parallels between today’s situation and that of 16 years ago, but many more important distinctions. Vladimir Putin’s incursions into Ukraine have led to a civil war in that country, and Western sanctions against Russian corporates were imposed as punishment. This has had the same effect of shifting investor sentiment as the Asian Crisis did. Capital has been heading out of the economy; worryingly, the exodus includes many domestic investors who have lost confidence in their own country. 

 


The CBR has once again been utilizing its reserves to support the ruble; they are down US$60 billion so far this year. But Russian reserves, buoyed by massive oil revenues, are 57 times bigger now than they were during the previous crisis. There is plenty of dry powder at hand. 

The fall in Russian stock prices has been much less pronounced than it was in 1998; the MICEX is down just 7.8% down year-to-date at this writing. The CBR has raised the one- week repo rate twice this year – to 7.5% in April and then to 8% in July – to help steady inflationary pressures (a by-product of the falling currency). This is a far cry from the 1998 experience. 

So it appears that Putin and friends have the depth to hold out for some time. The hardest question is where will the crisis go from here? The falling oil price adds another twist to the story. The new budget assumed a price of more than $100 per barrel, and with the price currently below $90, revisions to spending in the coming months are highly likely. Should pressure start building on the budget, sentiment toward Russia could rapidly sour further. Therefore, if oil prices remain low for an extended period, we may see a quicker Russian pullback than previously expected. 

Ultimately, though, it’s very unlikely Russia will experience a crisis of the same magnitude seen at the end of the last century. Interestingly, Russia’s current challenge stems from trying to rebuild the same Soviet spirit whose demise created such problems not long ago. That is an irony that Tolstoy would have appreciated. 

The U.S. Federal Budget Deficit: Healthier but Not Healthy 

The federal government’s 2014 fiscal year ended September 30, and it brought good news: the federal budget deficit is significantly smaller compared with 2013. Although this is a legitimate reason for celebration, we should be mindful of the durability of this improvement and recognize that long-term challenges remain unresolved. 

The U.S. federal budget deficit declined to $483 billion in fiscal year 2014, down $197 billion from the gap registered in fiscal year 2013 and the smallest deficit in six years. The budget deficit is 2.8% of gross domestic product (GDP), which is meaningfully smaller than the 10.2% mark of 2009. 

The Congressional Budget Office (CBO) estimates that the budget deficit is likely to shrink slightly in 2015 but widen thereafter in absolute terms and begin to climb again as a percentage of GDP from 2019. Consequently, publicly held debt is estimated to touch nearly 80% of GDP by 2024. 

 

The nearly steady federal budget deficit as a percent of GDP in the next few years is a welcome development, as it implies reduced pressure on interest rates as the Federal Reserve contemplates normalizing monetary policy. 

Long-term implications of a persistent and widening deficit are the central concern. An extended period of deficits and growing national debt eventually reduces private-sector investment and erodes productivity and the nation’s standard of living. 

This gloomy prognosis is preventable only if federal government expenditures are contained in the future. Of the major components of government outlays, health care spending is the largest and fastest-growing item. There is encouraging news on the health care front. Growth of health care costs stabilized in the last few years after exceeding inflation by a large margin for an extended period. The key question is what factors brought about the decline in Medicare costs and whether it is sustainable. 

Containing health care costs is critical to putting the federal budget on a sustainable path. Some combination of natural forces and legislation will be needed to achieve this outcome. 

Speaking of legislation, the upcoming election on November 4 may shift control of the Senate, but we will continue to have a divided government. At times in the past, power- sharing has paved the way to compromise, but few are expecting much legislative movement next year. 

Pulling the strands together, it has been well-known for several years that the federal budget’s trajectory is unfavorable and short-term Band-Aids are inadequate. It remains to be seen if the new Congress will take this opportunity to address the challenge while there is room to navigate.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

© Northern Trust

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The market’s correction has many scratching their heads

In “The Tipping Point,” Malcolm Gladwell tries to describe the evolution of modest notions to megatrends. How and when does the accumulation of small impressions come to change larger perceptions? What makes for that dramatic moment when everything seems to change all at once? While Gladwell offers some clues on how these transitions come about, they remain a matter of some mystery.

From one perspective, the market movements of the past two weeks are based on an understandable accumulation of impressions. Economic performance across the world is very uneven: the United States and the United Kingdom are doing well while China transitions to slower growth and Europe struggles. Geopolitical uncertainty surrounding Russia and the Middle East is a source of concern. Central banks have been challenged to set appropriate policy, creating uncertainty for investors. 

But from another perspective, the corrections and volatility we’ve witnessed recently are somewhat mysterious. None of the factors noted above are new; they’ve all been discussed at some length for many months. Until two weeks ago, markets seemed to acknowledge and accept the risks to the outlook, choosing nonetheless to focus on its many positive aspects. 

 

If there is a tipping point for the market’s retreat, it might be the minutes of the September Federal Open Market Committee meeting, which were released on October 8. The narrative reflected a heightened sense of concern about global risks; some may have taken this citation as an indication that policy-makers had grown darker on the outlook. 

Viewed through a darker lens, all incoming news seemed to suggest the worst. A single month’s decline in retail sales was taken as a major warning sign, while robust year-over-year spending gains were ignored. Falling energy prices were seen as reflecting economic weakness, not as a boost to consumers in advance of the holidays. In the minds of the markets, Mario Draghi’s effort to revive the eurozone economy is now depicted as futile, not fruitful. Ebola morphed from an isolated pathogen to something which might be broadly contagious to commerce. 


Associated with this wholesale re-evaluation of economic prospects was a significant shift in expectations for the Federal Reserve. This is a surprising development, given the dearth of economic data received since its last meeting. And among the data we have received is a very strong employment report. 

 

The abrupt change of psychology made for a dizzying decline. Computer trading was blamed for making the problem worse: there was a “flash crash” in the market for 10-year U.S. Treasury bonds on Wednesday morning. Yields collapsed by 15 basis points in less than five minutes, only to regain most of that distance in the next five. Others cited the lack of liquidity in markets (discussed in our July 25 commentary) as another impediment to stability. 

There were certainly some technical things going on, but one ignores market signals at one’s own peril. It could well be that asset values were a bit stretched relative to fundamentals and needed to be reset, but I’ll leave it to my partners in our Asset Management group to comment on that. Fundamentally, here is our take on things.

  • We do not anticipate making any changes to our forecasts unless the correction persists and creates a feedback loop on economic activity. It is worth noting that equity values are still considerably higher than they were two, three and four years ago. Much of the wealth created remains in place and serves as a strong backdrop for spending and credit. The sheer momentum of job creation is also a powerful tailwind for the United States.

  • One Fed president came out this week with a call to extend quantitative easing, but we think it is premature to contemplate a change of strategy. Our call on the timing of an initial interest rate increase has not wavered for some time: September 2015 remains our most-likely case. Falling inflation, perhaps more than labor market slack, will support accommodation for some time to come.

  • We will continue to watch the eurozone closely. Results of the European Central Bank’s bank asset quality review (AQR) will be released on October 26, and we’ll analyze them carefully. Our international team will also focus on the European Commission’s debate over the French and Italian budgets and the evolving posture of Germany toward economic stimulus.

Being an economist at times like this is frustrating. Clients become more anxious for answers at the same time that standard modes of analysis are less useful. The best tonic for all would be swift stabilization and (dare we say it?) a rapid restoration of lost value. If the rout continues, though, I might contemplate a long vacation.

The Russian Bear Market 

Among the geopolitical uncertainties cited as contributing to the recent market correction, Russia’s aggression in Ukraine stands toward the top of the list. Ben Trinder, our analyst following the situation, reports.

Over the past couple of months, the Russian ruble has been in free-fall. The currency recently traded above 40 to the U.S. dollar for the first time, prompting central bank intervention, a shift in the targeted trading corridor and fears of capital controls. The last time Russia was under this much market pressure was 1998, an era which resulted in a sovereign debt default. 

This begs the question: will history repeat? How long can Russia survive the ongoing standoff with Ukraine and its associated repercussions before it is in real financial distress? The answer: quite a while. For while there are some modest similarities between today’s conditions and those of 15 years ago, differences dominate. 

A quick re-cap of what happened in the late ‘90s helps provide perspective. After the breakup of the Soviet Union, Russia became saddled with huge debts from the former USSR. At the same time, the economy was transitioning from the communist era to that of a free market. Tax collection was weak, government revenue was low and the price of Russia’s main export (oil) was falling, forcing the current and fiscal accounts into deficit. 

Toward the end of 1997, the Asian crisis erupted, prompting a speculative attack on the ruble. The Central Bank of Russia (CBR) defended its currency by using its foreign reserves to intervene in markets; 23% of total reserves were spent in the last quarter of 1997 alone. Interest rates were hiked to 150% in June 1998 in an attempt to stem capital outflows. 

Unfortunately, investors were spooked beyond the point of reassurance. By August 1998, the Moscow Exchange (MICEX) stock index had lost more than 70% of its value. Investors realized Russia’s fundamentals were poor and believed a devaluation of the ruble and default was imminent. By mid-August 1998, both events had come to pass. 

There are some parallels between today’s situation and that of 16 years ago, but many more important distinctions. Vladimir Putin’s incursions into Ukraine have led to a civil war in that country, and Western sanctions against Russian corporates were imposed as punishment. This has had the same effect of shifting investor sentiment as the Asian Crisis did. Capital has been heading out of the economy; worryingly, the exodus includes many domestic investors who have lost confidence in their own country. 

 


The CBR has once again been utilizing its reserves to support the ruble; they are down US$60 billion so far this year. But Russian reserves, buoyed by massive oil revenues, are 57 times bigger now than they were during the previous crisis. There is plenty of dry powder at hand. 

The fall in Russian stock prices has been much less pronounced than it was in 1998; the MICEX is down just 7.8% down year-to-date at this writing. The CBR has raised the one- week repo rate twice this year – to 7.5% in April and then to 8% in July – to help steady inflationary pressures (a by-product of the falling currency). This is a far cry from the 1998 experience. 

So it appears that Putin and friends have the depth to hold out for some time. The hardest question is where will the crisis go from here? The falling oil price adds another twist to the story. The new budget assumed a price of more than $100 per barrel, and with the price currently below $90, revisions to spending in the coming months are highly likely. Should pressure start building on the budget, sentiment toward Russia could rapidly sour further. Therefore, if oil prices remain low for an extended period, we may see a quicker Russian pullback than previously expected. 

Ultimately, though, it’s very unlikely Russia will experience a crisis of the same magnitude seen at the end of the last century. Interestingly, Russia’s current challenge stems from trying to rebuild the same Soviet spirit whose demise created such problems not long ago. That is an irony that Tolstoy would have appreciated. 

The U.S. Federal Budget Deficit: Healthier but Not Healthy 

The federal government’s 2014 fiscal year ended September 30, and it brought good news: the federal budget deficit is significantly smaller compared with 2013. Although this is a legitimate reason for celebration, we should be mindful of the durability of this improvement and recognize that long-term challenges remain unresolved. 

The U.S. federal budget deficit declined to $483 billion in fiscal year 2014, down $197 billion from the gap registered in fiscal year 2013 and the smallest deficit in six years. The budget deficit is 2.8% of gross domestic product (GDP), which is meaningfully smaller than the 10.2% mark of 2009. 

The Congressional Budget Office (CBO) estimates that the budget deficit is likely to shrink slightly in 2015 but widen thereafter in absolute terms and begin to climb again as a percentage of GDP from 2019. Consequently, publicly held debt is estimated to touch nearly 80% of GDP by 2024. 

 

The nearly steady federal budget deficit as a percent of GDP in the next few years is a welcome development, as it implies reduced pressure on interest rates as the Federal Reserve contemplates normalizing monetary policy. 

Long-term implications of a persistent and widening deficit are the central concern. An extended period of deficits and growing national debt eventually reduces private-sector investment and erodes productivity and the nation’s standard of living. 

This gloomy prognosis is preventable only if federal government expenditures are contained in the future. Of the major components of government outlays, health care spending is the largest and fastest-growing item. There is encouraging news on the health care front. Growth of health care costs stabilized in the last few years after exceeding inflation by a large margin for an extended period. The key question is what factors brought about the decline in Medicare costs and whether it is sustainable. 

Containing health care costs is critical to putting the federal budget on a sustainable path. Some combination of natural forces and legislation will be needed to achieve this outcome. 

Speaking of legislation, the upcoming election on November 4 may shift control of the Senate, but we will continue to have a divided government. At times in the past, power- sharing has paved the way to compromise, but few are expecting much legislative movement next year. 

Pulling the strands together, it has been well-known for several years that the federal budget’s trajectory is unfavorable and short-term Band-Aids are inadequate. It remains to be seen if the new Congress will take this opportunity to address the challenge while there is room to navigate.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

© Northern Trust

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The United States is doing better than it has in years. Jobs growth is up, unemployment is down, our manufacturing sector carries the rest of the world on its shoulders like a wounded soldier and the World Economic Forum named the U.S. the third-most competitive nation, our highest ranking since before the recession.

As heretical as it sounds, there’s a downside to America’s success, and that’s a stronger dollar. For the 12-month period, our currency has seen a 1.1-standard deviation move, which has put pressure on two commodities that we consider our lifeblood at U.S. Global Investors: gold and oil.

It's worth noting that we’ve been here before. In October 2011, a similar correction occurred in energy, commodities and resources stocks based on European and Chinese growth fears. But international economic stimulus measures helped raise market confidence, and many of the companies we now own within these sectors benefited. Between October 2011 and January 2012, Anadarko Petroleum rose 58 percent; Canadian Natural Resources, 20 percent; Devon Energy, 15 percent; Cimarex Energy, 15 percent; Peyto Exploration & Development, 15 percent; and Suncor Energy, 10 percent.

Granted, we face new challenges this year that have caused market jitters—Ebola and ISIS, just to name a couple. But we’re confident that once the dollar begins to revert to the mean, a rally in energy and resources stocks might soon follow. Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), notes that he’s been nibbling on cheap stocks ahead of a potential rally, one that, he hopes, mimics what we saw in late 2011 and early 2012.

A repeat of last year's abnormally frigid winter, though unpleasant, might help heat up some of the sectors and companies that have underperformed lately.

September Was the Cruelest Month

On the left side of the chart below, you can see 45 years’ worth of data that show fairly subdued fluctuations in gold prices in relation to the dollar. On the right side, by contrast, you can see that the strong dollar pushed bullion prices down 6 percent in September, historically gold’s strongest month. This move is unusual also because gold has had a monthly standard deviation of ±5.5 percent based on the last 10 years’ worth of data.

Strong-contrast-in-2014-gold-and-dollar-changes-vs-historic-averages
click to enlarge

Here’s another way of looking at it. On October 3, bullion fell below $1,200 to prices we haven’t seen since 2010, but it quickly rebounded to the $1,240 range as the dollar index receded from its peak the same day.

A-Strong-US-Dollar-Keeps-Gold-and-Oil-Prices-Low
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There’s no need to worry just yet. This isn’t 2013, when the metal gave back 28 percent. And despite the correction, would it surprise you to learn that gold has actually outperformed several of the major stock indices this year?

Gold-is-Outperforming-All-but-the-SP-500-Index
click to enlarge

As for gold stocks, there’s no denying the facts: With few exceptions, they’ve been taken to the woodshed. September was demonstrably cruel. Based on the last five years’ worth of data, the NYSE Arca Gold BUGS Index has had a monthly standard deviation of ±9.4, but last month it plunged 20 percent. We haven’t seen such a one-month dip since April 2013. This volatility exemplifies why we always advocate for no more than a 10 percent combined allocation to gold and gold stocks in investor portfolios.

Oil’s slump is a little more complicated to explain.
Since the end of World War II, black gold has been priced in U.S. greenbacks. This means that when our currency fluctuates as dramatically as it has recently, it affects every other nation’s consumption of crude. Oil, then, has become much more expensive lately for the slowing European and Asian markets. Weaker purchasing power equals less overseas oil demand equals even lower prices.

What some people are calling the American energy renaissance has also led to lower oil prices. Spurred by more efficient extraction techniques such as fracking, the U.S. has been producing over 8.5 million barrels a day, the highest domestic production level since 1986. We’re awash in the stuff, with supply outpacing demand. Whereas the rest of the world has flat-lined in terms of oil production, the U.S. has zoomed to 30-year highs.

In a way, American shale oil has become a victim of its own success.

Domestic-Crude-Oil-Production-Riding-Sharply-as-the-Rest-of-the-World-Has-Flat-Lined
click to enlarge

At the end of next month, members of the Organization of the Petroleum Exporting Countries (OPEC) are scheduled to meet in Vienna. As Brian speculated during our most recent webcast, it would be surprising if we didn’t see another production cut. With Brent oil for November delivery at $83 a barrel, a four-year low, many oil-rich countries, including Iran, Iraq, Venezuela and Saudi Arabia, will have a hard time balancing their books. Venezuela, in fact, has been clamoring for an emergency meeting ahe ad of November to make a plea for production cuts.      

Producer-country-budget-breakeven-prices
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Although not an OPEC member, Russia, once the world’s largest producer of crude, is being squeezed by plunging oil prices on the left, international sanctions on the right. This might prompt President Vladimir Putin to scale back the country’s presence in Ukraine and delay a multibillion-dollar revamp of its armed forces. When the upgrade was approved in 2011, GDP growth was expected to hold at 6 percent. But now as a result of the sanctions and dropping oil prices, Russia faces a dismally flat 0.5 percent.

Volatility Has Returned

The current all-in sustaining cost to produce one ounce of gold is hovering between $1,000 and $1,200. With the price of bullion where it is, many miners can barely break even. Production has been down 10 percent because it’s become costlier to excavate. As I told Kitco News’ Daniela Cambone, we will probably start seeing supply shrinkage in North and South America and Africa.

 

The same could happen to oil production. Extraction of shale oil here in the U.S. costs companies between $50 and $100 a barrel, with producers able to break even at around $80 to $85. If prices slide even further, drillers might be forced to trim their capital budgets or even shelve new projects.

Michael Levi of the Council on Foreign Relations told NPR’s Audie Cornish that a decrease in drilling could hurt certain commodities:

[I]f prices fall far enough for long enough, you’ll see a pullback in drilling. And shale drilling uses a lot of manufactured goods—20 percent of what people spend on a well is steel, 10 percent is cement, so less drilling means less manufacturing in those sectors.

At the same time, Levi places oil prices in a long-term context, reminding listeners that we’ve become accustomed to unusually high prices for the last three years.

"People were starting to believe that this was permanent, and they were wrong,” he said. “So the big news is that volatility is back.”

On this note, be sure to visit our interactive and perennially popular Periodic Table of Commodities, which you can modify to view gold and oil’s performance going back ten years.

A Penny Saved Is a Billion Dollars To Spend and Invest

With fresh volatility in oil production comes the fear that the most price-sensitive states will be hurt the most. Exceptionally vulnerable states include Oklahoma, Wyoming and North Dakota. Texas, the nation’s leading oil producer—one of the world’s top producers, in fact—is diversified well enough to not feel the pain as much.

What’s bad for oil producers, though, turns out to be good for American consumers, who are already benefiting from lower gasoline prices. According to AAA’s Daily Fuel Gauge Report, the national average for a gallon of gas is $3.16, down more than 6 percent from $3.35 a year ago.

As a result, American consumers are looking at huge savings—$40 billion this year alone. According to Deutsche Bank’s Joe LaVogna, every penny that’s saved at the pump equates to a billion dollars in household energy consumption that can be put back into the economy in other ways.         

every-one-cent-change-in-gas-prices-impacts-consumptions-by-1-billion
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I like to think of this as an unexpected and very welcome tax break. Automobile sales are already up from 2009. Lower gas prices might encourage some families to spring for that Suburban instead of a Prius.

Vehicle-Sales-in-the-US-Have-Accelerated-Steadily-Since-2009
click to enlarge

Klondex Turning Heads and Profits

As I said earlier, gold stocks have been hurting lately. One mining company that’s managed to not only survive in this uncertain climate but actually thrive is Klondex Mines which has complete ownership and control of the Fire Creek Project and Midas Mine, both in Nevada.

The chart below, based on our own research, shows Klondex’s relative strength to its peers and why we find the company so attractive in the long term. The y-axis indicates profit margin, the x-axis, enterprise value. The size of the spheres represents the amount of revenue generated by each one of these companies in the second quarter of 2014, Klondex’s first quarter of full commercial production.

Klondex-mines-looks-attractive-against-peers-in-second-quarter
click to enlarge

What the chart conveys is that, in relation to its peers, Klondex has a significantly higher profit margin than companies with a market cap two to three times its size.

“This is going to be very positive for Klondex shareholders as we go into the year-end,” portfolio manager Ralph Aldis said during our webcast. “The third quarter should be another great quarter, and that’s when people will say, ‘Hey, that second quarter report wasn’t a fluke.’ They’re going to start buying the stock and get it moving.”

Indeed, Klondex has managed to stay above the Market Vectors Junior Gold Miners ETF for the 12-month period, delivering a positive return of 7 percent versus the ETF’s -7.5 percent.

Klondex-Mines-Outperforms-the-market-Vectors-Junior-Gold-Miners-ETF
click to enlarge

On numerous occasions I’ve written about our research on the typical lifecycle of a mine, most recently in my whitepaper “Managing Expectations: Anticipate Before You Participate in the Market.” Below you can see the relationship between a mine’s lifecycle and the company’s share price.  

Life-cycle-of-a-mine
click to enlarge

As experts in mining stocks, it’s imperative for us to know which production stage the mine is in to manage our exposure to the company.
In the case of Klondex, its price action mimics the movements in share price based on the chart above, confirming our research.

Klondex-Mine-Moves-in-Tandem-with-Mine-Life-Cycle
click to enlarge

It also supports the benefits of active management.

“When you buy an indexed fund, you’re basically just buying the market capitalization of those companies,” Ralph said. “You’re not getting the benefit of active management where we go out, meet the company’s management team and know its history. We’re familiar with the lifecycle of the mine in question, the money, the burn rate and the minerals the company is involved in.”

I couldn’t have said it better myself.

Speaking of Active Management…

Last week, I expressed my concerns about how the European Union is handling (or not handling) its fiscal and monetary mess. Because the EU is such an important region for the global economy, investors have become impatient with the bickering that’s stalled any clear solution to its slowdown.

This week I’ve been in Italy meeting with other global business leaders, while U.S. Global’s Director of Research John Derrick has been visiting and assessing Greek and Turkish companies such as Tsakos Energy Navigation, Jumbo, Turk Telecom and Turkcell.

Watch for our firsthand accounts of and insights on the European situation next week.

Index Summary

  • Major market indices finished lower this week.  The Dow Jones Industrial Average fell 0.99 percent. The S&P 500 Stock Index dropped 1.02 percent, while the Nasdaq Composite declined 0.42 percent. The Russell 2000 small capitalization index rose 2.75 percent this week.
  • The Hang Seng Composite declined 0.61 percent; Taiwan fell 5.06 percent while the KOSPI lost 1.78 percent.
  • The 10-year Treasury bond yield fell 373 basis points to 2.20 percent.

Domestic Equity Market

The S&P 500 index declined for a fourth straight week and set a new year-to-date low.  Equity market weakness centered on global growth concerns, Ebola fears, and policy inaction by global central banks.  However, the S&P 500 staged an impressive intraday turnaround on Wednesday that helped fuel positive gains in Friday’s trading.  Additionally, the market fell below its 200-day moving average, more than 9 percent off its recent September all-time high, but managed to recoup some of the losses as it neared the 200-day moving average, setting a positive tone for next week’s trading.

S&P 500 Economic Sectors
click to enlarge

Strengths

  • The Industrials sector, mainly transportation, outperformed in volatile trading. CSX Corp. was the top performer in the S&P 500 on the week, up 13.09 percent following a better-than-expected earnings report. United Rentals was another top gainer, up over 10.17 percent in the period. 
  • The utilities sector continued to do well as gas utilities and pipeline stocks outperformed. Plains GP and Targa Resources benefited from a strong sector rebound, which ended the week higher by 1.45 percent.
  • Positive September retail auto sales and building permits all beat expectations midweek, which helped fuel a positive turnaround for the oversold cyclical sectors of the S&P 500.

Weaknesses

  • Technology was the worst performing sector this week, mainly on weak news flow from the semiconductor industry and a weak third-quarter earnings report from Netflix.
  • Health care also underperformed as defensive sectors lagged in the late week rally. Also with the AbbVie-Shire deal in question, many hedge funds likely unwound tactical positions, which may have increased volatility within the sector. 
  • Netflix was the worst performer in the S&P 500 this week, falling by 21.01 percent. This was caused by a shortfall in subscriber growth, despite beating revenue and earnings forecasts, pushing the stock down to May 2014 levels.

Opportunities

  • The Fed remains accommodative and other global central banks even more so, and rumors this week on a possible delay of the end of quantitative easing furthered this thought process. This could help provide a strong momentum for equities.
  • Consumer Price Index and existing home sales numbers will be released next week, with both expected to be positive from last month’s results.
  • Even though the equity market dropped below the 200-day moving average, the S&P 500 has not fallen more than 10 percent from its peak in September, and made a meaningful recovery by the end of this week.

Threats

  • Market volatility was extremely high this week with Wednesday’s trading opening down more than 3 percent before recovering 2 percent later in the day. These high swings could prove detrimental for an immediate market recovery.    
  • Even though there is a potential for positive economic news releases, the Empire State Manufacturing Survey came in 20 percent lower than the prior period and 15 percent lower than expected. Poor results for future economic indicators could hurt the market.
  • With Ebola, active military conflict, and European recession fears, global markets remain somewhat tenuous which could result in excessive volatility.
The Economy and Bond Market

The two-year Treasury yield fell sharply to near-August lows of 0.24 percent by midweek before recovering to 0.37 percent by Friday’s close. The main driver of the decline was a global slowdown fear and a stronger dollar posing a potential risk to the U.S. economy. The 10-year bond fell Wednesday to the lowest level since June 2013.

10-Year-Treasury-Yield
click to enlarge

Strengths

  • Treasury yields recovered along with the broader equity market towards the end of the week after falling to new lows on Wednesday.
  • The National Federation of Independent Business (NFIB) posted better-than-expected Small Business Optimism Index numbers, highlighting the resilience of the American economy in spite of fears of a global slowdown and the Ebola outbreak.
  • Initial jobless claims continue to drop, fueling the notion of a continuously growing U.S. economy. Claims, in fact, are at their lowest number since 2000.

Weaknesses

  • The U.S. dollar had its second down week since early July, ending at 0.80 percent versus the top ten major global currencies.
  • The Empire State Manufacturing Survey was dramatically lower than expected, down more than 20 percent from last month and more than 15 percent worse than expected. This might not bode well for the growth trajectory and the end of quantitative easing (QE) at the end of this month.
  • U.S. five-year notes fell 7.29 percent this week, furthering doubts about the global economy and the measures being taken to improve growth.

Opportunities

  • With two-year Treasuries dropping this week, investors might reach further down the yield curve to secure higher returns.
  • New home sales data is scheduled to be released next week. Although this number is expecting to be worse than the previously released data, it could be overlooked given the recent lower mortgage rates. 
  • With key global central banks back into easy policy mode and inflation trending lower in many parts of the world, the path of least resistance for bond yields likely remains flat to down.

Threats

  • Federal Reserve Chairwoman Janet Yellen discussed income inequality in a speech, with many speculating that the Fed could push out the next rate hike or continue its QE program to enhance economic growth.
  • The U.S. bond yields fell sharply this week to lows unseen in more than a year. If they remain low, it could signal a recession. 
  • Geopolitical unrest in Ukraine, Iraq and Syria, Greece’s shaky economy and now Ebola fears have heightened investors’ anxiety.

 

Gold Market

For the week, spot gold closed at $1,238.54 up $15.45 per ounce, or 1.26 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 0.21 percent. The U.S. Trade-Weighted Dollar Index fell 0.70 percent for the week.

DateEventSurveyActualPrior
Oct 15 Germany CPI YoY 0.8% 0.8% 0.8%
Oct 15 US PPI Final Demand YoY 1.8% 1.6% 1.8%
Oct 16 Eurozone CPI Core YoY 0.7% 0.8% 0.7%
Oct 16 US Initial Jobless Claims 290K 264K 287K
Oct 17 US Housing Starts 1008K 1017K 956K
Oct 20 China Retail Sales YoY 11.7% -- 11.8%
Oct 22 US CPI YoY 1.6% -- 1.7%
Oct 22 HSBC China Manufacturing PMI 50.2 -- 50.2
Oct 23 US Initial Jobless Claims 284K -- 264K
Oct 24 US New Home Sales 470K -- 504K

Strengths

  • Standing at just over $2 billion in August, gold imports in India surged 450 percent year-over-year in September to reach $3.75 billion. India’s trade deficit widened the most in 18 months as a result. The surge in demand was triggered by the festival season in the country.
  • Concern over global growth peaked this week causing a selloff in global equities and spurring gold purchases. The precious metal’s appeal as a safe haven rewarded gold investors this week.
  • According to Bloomberg, gold traders are the most bullish they’ve been in 10 weeks. Seventeen out of 27 traders hold a bullish outlook on gold, citing global growth fears as justification.

Weaknesses

  • Platinum declined to a level below gold for the first time since April 2013 this week. The precious metal is widely used for automotive catalytic converters. With roughly 50 percent of usage related to industrial production, fears of a global growth slowdown are weighing on platinum.
  • Senior gold-producing companies are cutting costs amid declining bullion prices. However, despite cost-cutting, third-quarter earnings are expected to decline by 27 percent. Silver producers are estimated to report a 33-percent decline in earnings per share due to falling silver prices.
  • The U.S. 5-year breakeven inflation rate reached its lowest point since 2011 on Wednesday. Deflationary fears appear to have peaked however, as yields have shown a significant bounce to the upside since Thursday. As global growth slowdown fears seem overplayed, and the European Central Bank (ECB) prepares for its asset-backed purchasing program, it seems likely that inflation will rebound.

Five-Year-Breakeven-Inflation-Rate-Reveals-Deflation-Fears
click to enlarge

Opportunities

  • Despite the bounce in gold prices this week, silver remains subdued. The relative lag of silver to gold is unusual, implying silver prices may rally soon if gold stays positive.
  • The Market Vectors Global Junior Gold Miners Index will now allow larger index companies to qualify for the index. The buffer zone used in the index methodology has been expanded to include companies ranking between 75 and 100 percent of the eligible universe, as opposed to the current range of 80 and 100 percent.
  • The ECB announced this week that it will begin its asset-backed purchasing program within days in order to respond to declining global growth. Stimulus out of the eurozone should help relieve the deflationary pressures permeating through the region and consequentially the rest of the world.

Threats

  • Switzerland’s National Bank is moving to block the motion that would require it to hold at least 20 percent of its assets in gold. The “Save our Swiss Gold” initiative should be voted down according to the Swiss Federal Council, as well as both houses of parliament.
  • Barclays stated in a report that it expects the gold rally to be short-lived. It argues that macroeconomic headwinds will outweigh the increased demand from gold in India, leading to an overall decline in gold prices in the future.
  • Natixis Commodities Research set a gold price forecast for $1,170 per ounce in 2015. On top of the predication for a decline in the price of gold, Natixis expects the current outflows out of gold exchange-traded products (ETPs) to continue into the new year.
Energy and Natural Resources Market

Incremental-Oil-Demand-Through-2019
click to enlarge

Strengths

  • Iron and steel stocks outperformed this week, bouncing back from recent declines. Specifically, Fortescue Metals Group rallied on opportunities in the merger and acquisition (M&A) space as well as on expectations for stronger fundamentals. The Bloomberg World Iron and Steel Index and Fortescue were up 0.93 percent and 5.52 percent, respectively.
  • Silver stocks, along with other precious metals climbed back this week. The Global X Silver Miners ETF closed up 2.27 percent this week. Among the outperformers in the silver space, Silver Wheaton was up 0.41 percent on the week.
  • Paper and forest product stocks had a productive week, as they tend to outperform in a strong dollar environment. Western Forest Products was up 3.90 percent this week.

Weaknesses

  • Oil refining stocks were down again for the fourth-straight week. The S&P Oil & Gas Refining and Marketing Index fell 3.2 percent this week.
  • With the global growth scare fueling more volatility in the commodity space, small cap stocks underperformed this week. The S&P/TSX Venture Composite Index fell 2.06 percent this week.
  • Base metals underperformed as poor economic data from Europe and China continue to negatively influence global growth outlooks. The S&P/TSX Capped Diversified Metals and Mining Index was down 2.01 percent this week.

Opportunities

  • Although the decline in oil prices has weighed on producers, many are shrugging off the effects as simply an overreaction to short-term oversupply. In fact, Baker Hughes Inc. stated that oil would have to fall much more, to $75 a barrel and stay there for an extended period of time, before energy companies had to consider cutting back spending. Likewise, Schlumberger said it still holds its long-term view on earnings.
  • Schlumberger proved to have a strong quarter as the company saw growth in reservoir production, increased international margins in almost every region and an increase in its buybacks to $1.5 billion. The company maintained its long-term outlook outlined in June, which reported and expected earnings per share of between $9 and $10.
  • Anadarko Petroleum and other partner companies are investing $2.2 billion next year to drill wells in Ghana’s Jubilee and Tweneboa-Enyenra-Ntomme oil fields. The projects should prove productive for the company.

Threats

  • The lower oil prices have increased the probability that the Colombian government will have to sell down part of Ecopetrol. The government is concerned the budget could be short of the Ministry of Finance’s projections for 2015, which could have repercussions for the tax and royalty regimes in the country.
  • Saudi Arabia is assumed to be content with the current depressed level of oil prices. The world’s largest oil exporter is determined to maintain its global market capitalization and will continue to produce in order to do so. Inaction from Saudi Arabia serves as a headwind for the oil-sensitive space of the energy sector.
Emerging Markets

Strengths

  • Easing geopolitical tensions in Eastern Europe boosted Ukrainian stocks this week. Oversold conditions in Ukraine had been extreme in the months of August and September. However, stocks rallied this week as Russia’s Putin and Ukraine’s Poroshenko met on Friday to discuss the terms of a gas deal between the two countries.
  • South African materials stocks rallied with precious metals this week. Global diversified and precious metals and minerals stocks had been depressed recently amid global growth and deflation scares. The bounce in metals and mining companies boosted the FTSE/JSE Africa All Shares Index this week, causing it to rise 1.58 percent.
  • Indonesia was the best performing Asian market this week, as local investors turned buyers on Friday after president-elect Joko Widodo met with opposition leader Prabowo Subianto ahead of presidential inauguration on October 20 for the first time since the July election.

Weaknesses

  • Global growth scares couple with falling oil prices led Middle Eastern stocks to underperform this week. Qatar, United Arab Emirates, and Egypt were down 6.43, 6.09 and 10.03 percent respectively.
  • Concerns over the stability of the Greek financial system spiked this weak as Greek equities and bonds declined substantially. Yields on 10-year Greek government bonds rose roughly 150 basis points this week to over 8 percent, the highest levels since January. The Athens Stock Exchange Index reached a 52-week low this week and closed down 7.27 percent.
  • Taiwan was the worst performing Asian market this week, as Intel’s quarterly report revealed a third-quarter overbuild in notebook computer shipments by Taiwanese makers which may lead to a correction in the fourth quarter orders.  UBS also lowered its year-end index target for Taiwan.

Opportunities

  • This week will mark the second week in a row that the dollar has depreciated. The falling dollar has alleviated many of the pressures facing commodity sensitive emerging markets. If the trend continues, we can safely expect more tailwinds for emerging markets and their currencies.
  • European stocks rebounded on Friday as the European Central Bank announced it will start buying assets within days. Recent growth and deflation scares have spurred the ECB to be more proactive. The provided stimulus should boost European growth and fuel import demand, which should be good for emerging markets.
  • Upgrade demand is set to gradually replace first-home demand as the primary driver for the Chinese housing market in the next 10 years, as the country’s first “only-child” generation, a boomer demographic, reaches 35-45 years of age when their first mortgage is paid off.  Looser government policies aimed at promoting higher mortgage adoption for this credit-worthier group, given China’s overall underutilization of mortgages compared with developed countries, should bode well for the property and banking sectors.

Home-Upgrade-Demand-from-Chinas-first-only-child-generation-may-be-unleashed-by-looser-mortgage-policy
click to enlarge

Threats

  • The Chinese government’s recent push to promote breastfeeding through education programs and such initiatives as adding more lactation rooms in public buildings could further dampen investor sentiment towards infant formula makers.
  • Saudi Arabia, the world’s largest oil exporter, is keeping production steady in order to preserve global market share. In doing so, the country is preventing any stimulation for oil prices. If oil prices remain depressed, oil leveraged emerging markets will continue to suffer.
  • Despite the positive turnaround in global equities on Friday, market behavior this week highlighted the extent to which investors are concerned about a deflationary, low-growth environment. The U.S. government’s 5-year breakeven inflation rate fell to its lowest level since 2011 this week. If deflationary pressures persist and global growth declines, clearly all markets will face serious problems.

Leaders and Laggards

The tables show the weekly, monthly and quarterly performance statistics of major equity and commodity market benchmarks of our family of funds.

Weekly Performance
IndexCloseWeekly
Change($)
Weekly
Change(%)
DJIA 16,380.41 -163.69 -0.99%
S&P 500 1,886.76 -19.37 -1.02%
S&P Energy 606.90 -6.83 -1.11%
S&P Basic Materials 293.66 +1.98 +0.68%
Nasdaq 4,258.44 -17.80 -0.42%
Russell 2000 1,082.33 +29.00 +2.75%
Hang Seng Composite Index 3,160.27 -19.25 -0.61%
Korean KOSPI Index 1,940.92 -35.24 -1.78%
S&P/TSX Canadian Gold Index 162.66 +0.06 +0.04%
XAU 77.08 -0.18 -0.23%
Gold Futures 1,238.90 +15.60 +1.28%
Oil Futures 82.97 -2.55 -2.98%
Natural Gas Futures 3.76 -0.10 -2.51%
10-Yr Treasury Bond 2.20 -0.09 -3.73%

Monthly Performance
IndexCloseMonthly
Change($)
Monthly
Change(%)
DJIA 16,380.41 -776.44 -4.53%
S&P 500 1,886.76 -114.81 -5.74%
S&P Energy 606.90 -81.18 -11.80%
S&P Basic Materials 293.66 -22.87 -7.23%
Nasdaq 4,258.44 -303.75 -6.66%
Russell 2000 1,082.33 -71.57 -6.20%
Hang Seng Composite Index 3,160.27 -332.01 -14.83%
Korean KOSPI Index 1,940.92 -108.49 -5.29%
S&P/TSX Canadian Gold Index 162.66 -17.15 -9.54%
XAU 77.08 -13.35 -14.76%
Gold Futures 1,238.90 +14.80 +1.21%
Oil Futures 82.97 -11.01 -11.72%
Natural Gas Futures 3.76 -0.25 -6.18%
10-Yr Treasury Bond 2.20 -0.43 -16.22%

Quarterly Performance
IndexCloseQuarterly
Change($)
Quarterly
Change(%)
DJIA 16,380.41 -596.40 -3.51%
S&P 500 1,886.76 -71.36 -3.64%
S&P Energy 606.90 -112.97 -15.69%
S&P Basic Materials 293.66 -19.51 -6.23%
Nasdaq 4,258.44 -105.01 -2.41%
Russell 2000 1,082.33 -51.28 -4.52%
Hang Seng Composite Index 3,160.27 -78.56 -2.43%
Korean KOSPI Index 1,940.92 -79.98 -3.96%
S&P/TSX Canadian Gold Index 162.66 -39.07 -19.37%
XAU 77.08 -25.37 -24.76%
Gold Futures 1,238.90 -81.50 -6.17%
Oil Futures 82.97 -20.78 -20.03%
Natural Gas Futures 3.76 -0.20 -5.09%
10-Yr Treasury Bond 2.20 -0.25 -10.26%

Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

The Emerging Europe Fund invests more than 25 percent of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5 percent to 10 percent of your portfolio in these sectors.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. The Near-Term Tax Free Fund may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.

Investing in real estate securities involves risks including the potential loss of principal resulting from changes in property value, interest rates, taxes and changes in regulatory requirements.

Past performance does not guarantee future results.

Some link(s) above may be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

These market comments were compiled using Bloomberg and Reuters financial news.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings as a percentage of net assets as of 9/30/2014:

Anadarko Petroleum Corp.: Global Resources Fund, 2.11%
Canadian Natural Resources Ltd: Global Resources Fund, 1.59%
Devon Energy Corp.: Global Resources Fund, 1.82%
Cimarex Energy Co.: Global Resources Fund, 1.80%
Peyto Exploration & Development Corp.: Global Resources Fund, 1.31%
Suncor Energy, Inc.: Global Resources Fund, 2.13%
Klondex Mines Ltd: Gold and Precious Metals Fund, 7.76%; World Precious Minerals Fund, 7.51%; Global Resources Fund, 1.22%
Argonaut Gold: 0.0%
Alamos Gold, Inc.: World Precious Minerals Fund, 0.04%
Primero Mining Corp.: Gold and Precious Metals Fund, 0.05%; World Precious Minerals Fund, 0.02%
AuRico Gold, Inc.: Gold and Precious Metals Fund, 1.85%; World Precious Minerals Fund, 0.41%
B2Gold Corp.: 0.0%
Detour Gold: 0.0%
Market Vectors Junior Gold Miners ETF: Gold and Precious Metals Fund, 0.16%; World Precious Minerals Fund, 0.17%
Tsakos Energy Navigation:
Jumbo SA: Emerging Europe Fund, 1.79%
Turk Telecom: 0.0%
Turkcell: Emerging Europe Fund, 1.79%
CSX Corp.: 0.0%
United Rentals, Inc.: All American Equity Fund, 1.92%; Holmes Macro Trends Fund, 2.23%
Plains GP Holdings LP: Global Resources Fund, 1.44%
Targa Resources Corp.: Global Resources Fund, 0.99%
Netflix: 0.0%
AbbVie: 0.0%
Shire: 0.0%
Fortescue Metals Group Ltd: Global Resources Fund, 1.68%
Global X Silver Miners ETF: Gold and Precious Metals Fund, 0.01%; World Precious Minerals Fund, 0.01%
Silver Wheaton Corp.: Gold and Precious Metals Fund, 1.10%; World Precious Minerals Fund, 0.35%
Western Forest Products, Inc.: Global Resources Fund, 0.83%
Baker Hughes, Inc.: 0.0%
Schlumberger Ltd: All American Equity Fund, 1.75%; Holmes Macro Trends Fund, 1.84%
Ecopetrol SA: 0.0%

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
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The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.
The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.
The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.
The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.
The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.
The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.
The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.
The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.
The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.
The Empire State Manufacturing Index is based on the monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. The index is based on survey responses to a questionnaire sent out on the first day of each month to an unchanged pool of about 200 top manufacturing executives. The questionnaire seeks their opinion on the change in a number of business indicators from the previous month, and also the likely direction of these indicators six months into the future.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
The National Federation of Independent Business’s (NFIB) Index of business optimism is based on responses from 1221 member firms.
The Market Vectors Junior Gold Miners Index is a market-capitalization-weighted index. It covers the largest and most liquid companies that derive at least 50 percent from gold or silver mining or have properties to do so.
The Bloomberg World Iron/Steel Index is a capitalization-weighted index of the leading iron/steel stocks in the world.
S&P Oil & Gas Refining and Marketing Index tracks the market performance of downstream oil and gas companies.
The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index.
S&P/TSX Capped Diversified Metals and Mining Index is an index of companies engaged in diversified production or extraction of metals and minerals.
The FTSE/JSE Africa All Shares Index is a market capitalization-weighted index. Companies included in this index make up the top 99% of the total pre-free float market capitalization of all listed companies on the Johannesburg Stock Exchange.
The Athens Stock Exchange General Index is a capitalization-weighted index of Greek stocks listed on the Athens Stock Exchange.

© U.S. Global Advisors

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Was that the bottom? Nearly everyone is trying to time the market, so the financial media will focus on remaining risk versus signals of a bottom.

We have a little economic news next week, but plenty of earnings reports. Despite the news flow, the market reaction itself will be the main theme.

I expect the question of the week to be: Is the stock market correction over?

Prior Theme Recap

In my last WTWA I predicted that we would be asking whether corporate earnings strength could reverse the stock market decline. That was definitely the right question, but the answer is still in doubt. For most of the week it seemed like a resounding “No”, but buy Friday’s close losses had been trimmed. The issue remains in doubt.

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

Financial news is basically reactive – and usually not helpful for investors. For the first part of last week it was all about the reasons for the biggest market decline in three years. I was keeping a collection of links, but they are all very similar. Even some of the finest journalists were tasked with “reporting on the correction.” This produced disappointing stories with a laundry list of well-known problems from around the world. (For an explanation, see Josh Brown below).

There is never a discussion about which of these facts might already be reflected in market prices, nor the suggestion about the need for investors to look forward. Even the best sources cater to losing market timing.

The news flow this week will include plenty of corporate earnings reports. Once again these will be more important than the official economic data. In this context I anticipate more attention to the market rather than to the data. In particular, expect constant repetition of these questions:

Was that the bottom? Is the correction really over?

Here are some key takes on the potential for a market bottom:

Doug Short’s charts are worth more than 1000 words! Here is the story of the week. See the full post for longer term data, context and analysis of past drawdowns over the last few years.

dshort market week

Some attribute the Wednesday rebound to comments from St. Louis Fed President Bullard that the last cut in QE3 perhaps should be delayed because of continuing low inflation expectations. Here is a blog from an anonymous twenty-something that explains this viewpoint, which is implied in some mainstream sources as well.

Jim Cramer shifted positions during the week. He began by unveiling a list of ten tests for finding the bottom. By Friday he concluded that there had been enough progress on each to create an “investable bottom.”

The ECRI reports that global growth is weakening and that they made this prediction in July in one of their proprietary reports.

Brian Gilmartin does not typically engage in bottom calling, but he does note the increase in forward earnings estimates, suggesting that “Wednesday’s low could be the end…of this correction.” Brian’s work is always interesting, but especially so during earnings season. He covers many specific companies, and he does it well.

Dana Lyons notes the volume spike in inverse ETFs, but warns that it might be part of a “bottoming process.”

tumblr_ndl7ggaVJN1smq3o4o1_1280

Josh Brown covers all of the bases with his post on “correction Twitter.” I especially like his point #4, with the laundry list of correction causes.

Before turning to my own conclusions, 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

There was not much news. The US economic picture remains solid, while China is a bit weaker and Europe at near-recession levels.

  • Jobless claims remain strong. The 264,000 report was the lowest in 14 years. (Eddy Elfenbein).
  • European car sales up 6.4%. (Geoffrey Smith at Fortune)
  • The early earnings reports have been good. 68% have beaten on earnings and 63% on sales (FactSet’sEarnings Insight).
  • Putin sees problems for the global economy if oil is $80/barrel. (Tomas Hirst at BI). Why is this good news? Unwinding the reciprocal Ukraine sanctions is the single largest current market factor. My guess is at least 10%. The first step is recognition by the participants.
  • Rail traffic remains close to all-time highs. Todd Sullivan has the story. He also provides charts and analysis of other economic indicators. Good stuff.
  • Plunging oil prices create stimulus. We often hear that the cure for high energy prices is high prices. The process works both ways. Citigroup estimates a $1.1 trillion stimulus impact.
  • Housing starts and building permits moved higher. Calculated Risk reports it as an ‘OK’ report. Much of the gain is still coming from multi-family construction. Here is the chart showing that comparison:

StartsSept2014

  • Industrial production beat expectations. See Eddy Elfenbein for charts and analysis of the acceleration in this series.

The Bad
Most of the bad news was not about the economy. It was about the stock market reaction.

  • Oil geopolitics. The story has many cross-currents, but the path to progress is challenging. Startfor (via GEI) has a great report.
  • Forward earnings guidance has been weaker. FactSet analyzed the conference calls to see what factors have been cited:

FactSet Forward Guidance Q314

  • Builder confidence decreased to 54, missing expectations of 59. Still positive, but disappointing. Calculated Risk has the complete story.
  • The Beige Book showed little increase in economic growth. I always enjoy the detailed analysis from GEI.
  • Retail sales declined even more than expected, 0.3%, the worst economic news of the week. So far there did not seem to be a pickup from lower fuel prices. Calculated Risk has comparisons including the core and year-over-year data. Here is the long-term chart:

RetailSept2014

The Ugly

This week’s ugly news is the continuing Ebola story. The need for treatment in West Africa and international issues are now both commanding attention. It is a sad commentary that the story got traction only when there were cases in the US. I have been writing about this for months, noting that the economic effects are still relatively modest overall, but include concentrated effects in some sectors. Some astute observers (including Jim Cramer) have attributed plenty of selling to Ebola fears. One morning there was a nine-handle decline in the pre-market SPU’s (S&P futures) based on the announcement of one additional US case. I track this story closely, so I am just hitting the highlights here:

  • Cuba is cooperating, sending 460 doctors to West Africa.
  • It has become the biggest story on the campaign trail, with arguments rapidly falling to the lowest common denominator.
  • Inside the beltway politics also looms. Health leaders disagree on how much spending commitments have affected progress toward the best treatments.
  • Cam Hui provides perspective on the market effects. Hint: More modest than most think, including a provocative comparison.
  • Did bureaucracy at the WHO contribute to the crisis? (Jason Gale and John Lauerman at Bloomberg).
  • Ebola is even scarier than you think, according to these five myths. The “airborne” point is especially worrisome.
  • Your risk is greater in driving home from the airport than flying on a plane with one of the Ebola nurses.
  • Airline stocks remain under pressure. Perception is more important than reality.

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.

No award this week, although I see plenty of good candidates deserving sharp analysis and refutation.

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.

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

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 also is working on methods to improve performance from low-volatility stocks. 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.”

A continuing strength of Barry Ritholtz’s blog, The Big Picture, is the embrace of a wide variety of viewpoints. This week he highlighted an article from the Cleveland Fed on labor market slack, assuring that many more people would see it. This is wonkish stuff, but very important. Labor market slack is the reason that Chair Yellen gives for relaxing the prior unemployment guideline for the start of tightening rates. If you want to forecast the Fed, you need to understand this argument. The conclusion has the normal couching of the research, but suggests that “the unemployment rate has reached its long-run level.”

The Week Ahead

We have a more normal week for economic data and events.

The “A List” includes the following:

  • Initial jobless claims (Th). The best concurrent news on employment trends.
  • New home sales (F). Better housing growth would be an encouraging economic sign.
  • Leading indicators (Th). Despite some changes in the series, it remains a popular forecasting tool. Hale Stewart illustrates and concludes that the economy is in “decent shape.”

The “B List” includes the following:

  • CPI (W). No sign of inflation so far, so interest is secondary.
  • Existing home sales (T). Less direct economic relevance than new sales and construction, but still a useful indicator.
  • Chinese economic data (T). This includes GDP, industrial production, and retail sales.

The speech calendar is greatly reduced in front of the upcoming FOMC meeting.

The big stories of the week should come from corporate earnings announcements.

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 has continued the bearish call initiated three weeks ago. Most sectors have a negative rating and the broad market ETFs are all negative. The Felix trading accounts were completely invested inverse ETFs and some Latin American ETFs. Since Felix uses a three-week time horizon, the recent move has been timely. Felix does not anticipate tops and bottoms, but waits for evidence of a change.

90% of British retail forex traders lost money. This is in line with most results I see, despite the advertisements that make it all seem so busy. You really need to have a well-tested system if you intend to do short-term trading.

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” issummarized here.

Whenever there is a market decline, we are bombarded with “explanations” and predictions of disaster. To keep perspective I wrote a section last week covering these three points:

  • What is not happening;
  • Factors most often linked to major market moves; and
  • The best strategy for the current market.

If you missed this section last week, I urge you to check out the Investor Section of last week’s WTWA.

I also wrote a section about value investing last week.

If you are a value investor, it is up to you to determine what your investments are worth. If your methods are sound and the market disagrees, then you can use volatility to add more to your most attractive holdings. If you have made a mistake in your choices, you need to re-evaluate and move on. Price is what you pay; value is what you get.

I decided that I could make this point better and with a little humor in Why Investors Must Understand Value(with an apology to Mr. Buffett).

We continue to use market volatility to pick up stocks on our shopping list. We do this because we also sell positions when they reach our (constantly updated) price targets. Being a long-term investor does not require you to “buy and hold.” Taking advantage of what the market is giving you is always a good strategy.

Other Advice

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

Please read and enjoy the piece from Henry Blodget at Business Insider on 16 meaningless phrases that will make you seem smart on CNBC. This is one of the reasons that we use TIVO and mute while watching! If you are a regular viewer of financial TV, you will recognize all of these. The “easy money has been made” is a good example. Henry says that it implies “wise, prudent caution and that you bought or recommended the stock a long time ago.” You can waffle between further upside and the potential for risk. The other fifteen are nearly as good.

Ignoring the commentary noise is also a theme from Carl Richards at the NYT. See the great sketch! He quotes one of our favorites, Art Cashin, who accurately reflects the pulse of the market:

Of course, it’s led to some entertaining headlines and predictions. I think my favorite might be from theveteran trader Art Cashin, who told CNBC last week that “the S&P 500 index needs to stay above the 1,950 level to avoid further declines.”
After hearing that comment, a friend sent me his own explanation. Unless the market doesn’t go down, it will go down. If it stays up, it will not have gone down. Unless it goes down later, which will only happen if it doesn’t stay up.
Such precise predictions are a part of the noisy industry of forecasters and gurus that’s grown up around investing. Sometimes, they get it right, at least temporarily. The S&P 500 did indeed fall below 1,950 and is around 1,900 as of this writing. But it would only need a 3 percent gain to be back above that level again, which could happen in just a couple of days.

David Rosenberg (via Business Insider) has earned respect through willingness to change his opinions along with the evidence. His Tuesday note described a problem in market-timing, an excessive focus on the trees rather than the forest.

Prof. Robert Shiller’s CAPE ratio is the foundation of many bearish arguments. Jason Zweig eschews the usual media approach of trying to coax him to predict a crash. Instead, he produces a balanced explanation of how Shiller uses his own method. For his own portfolio he is still 50% in stocks, something I have frequently reported before. He does not find current readings to be extreme, and even muses about whether something might have changed. He likes health care and industrials.

25iq covers a dozen lessons learned from Guy Spier. It is a great read with good sources. Here is one example:

1.”The entire pursuit of value investing requires you to see where the crowd is wrong so that you can profit from their misperceptions.”  A value investor seeks to find a significant gap between the expectations of the market (price) and what is likely to occur (value). To find that gap the value investor must find instances where the crowd is wrong. Michael Mauboussin writes: “the ability to properly read market expectations and anticipate expectations revisions is the springboard for superior returns – long-term returns above an appropriate benchmark. Stock prices express the collective expectations of investors, and changes in these expectations determine your investment success.”
Value investing is buying assets for substantially less than they are worth and, says Seth Klarman “holding them until more of their value is realized.” Klarman describes the value investing process as “buy at a bargain and wait.”  It is critical that the value investor not try to time the market but rather make the market their servant. The market will inevitably give the gift of profit to the value investor, but the specific timing is unknowable in advance. If there is a single reason people do not “get” value investing it is this point. The idea of giving up on trying to time the market is just too hard for some people to conceive. For these people, timing markets is a hammer and everything looks like a nail. That you can determine an asset is mispriced now relative to intrinsic value does not mean you can time when the asset will rise to a price that is at or above its intrinsic value. So value investors wait, rather than try to time markets.

Here are the fifteen most-hated stocks based upon short interest. (Philip Van Doorn at MarketWatch) I am not recommending short selling, but you might want to do some extra research if you own any of these.

And here are some stock ideas from Ben Levisohn at Barron’s, who notes that the selling has been indiscriminate.

If you are stuck in gold, you might consult us about our gold bug methadone treatment. If you are out of the market completely, you might want to reconsider your approach. The current economic cycle is in the fifth inning. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. You can get our report package with a simple email request to main at newarc dot com. Also check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

I do not have a short-term market call. For the longer term, the headline risk is well-known and the potential for solutions are not newsworthy. This provides opportunity.

In WTWA I often share conclusions in an effort to be timely. Some of these eventually get a separate article and other spark a useful discussion in the comments. In that spirit, here are a few thoughts from last week:

  • I am amazed by Cramer’s list of problems. When he first produced it (Monday), I suggested to our team that these things were far from solution. By Friday it had all changed. I also dislike the combination of market data and fundamentals. People need to decide whether to trade or to invest.
  • Early week selling did not relate to data, despite the popular stories. No one cares about the Empire Index and a lower PPI is basically good. If you just looked at the retail sales data, the worst news of the week, you would find it disappointing, but not a disaster. It would be amusing to tell a group of “experts” in advance what the data will be for the day or the week and then let them guess the market result.
  • The Schlumberger conference call (transcript helpfully available on Seeking Alpha, a great resource for those watching earnings) provided helpful fresh information on global energy supply and demand providing an upbeat forecast. The selling in energy stocks has been indiscriminate, even though some (refiners?) may benefit from lower prices.
  • GE’s report also showed strength in several relevant sectors. These are not “one-off” companies, so I am paying some attention.
  • And finally, it is a continuing mistake to interpret every market move in terms of the Fed. The remaining QE is small. The exact timing of the end is of little consequence. Do not expect any more QE. The key Fed policy is the pace of interest rate increases and forward guidance. Whether the market likes it or not, that will remain “data dependent.”

© New Arc Investments

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After 27 months, SPX experienced its first 10% correction this week.

As we have detailed many times, this was an exceptionally long and uncorrected rise. Since its last 10% correction in mid 2012, SPX has risen an exceptional 59%.

Bulls will contend that the 2003-07 market was completely devoid of 10% corrections. This is misleading. That bull market struggled to break-even into the third quarter every year. It was a slow grind higher, completely unlike the pace of the past two years.

The big question is whether the correction is over and stocks will now rally into year end.

There were several indications that this week produced a wash out low. The most impressive of these is breadth.

SPX breadth became more washed out than at any time since the 2011 lows. By mid-week, just 40% of SPX stocks were trading above their 200-dma. Throughout the 2003-07 bull market, that level marked significant lows (lower panel). It also marked lows in 2010, 2011 and 2012 (green arrows).



The one caveat is that this is how bear markets begin (red shading). Even so, the initial low in 2007 was followed by a bounce to retest the prior high. A bear market without a bounce higher first would seem to be very unlikely.

The same breadth wash out occurred for the market leading Nasdaq. This week, just 20% of Nasdaq stocks were above their 200-dma, equivalent to lows in 2004 and 2011 (green lines). The only other times it was lower was during bear markets. Just looking at the percent of stocks above their 50-dma (middle panel), stocks were similarly oversold at least 10 other times in the past 10 years and each one resulted in a move higher over the next month.



Note, the move was net higher, but that doesn't mean that the ultimate low was in.  2011 is one example were the initial low was undercut. The same occurred in early 2008 before a strong bounce that ultimately led straight to a bear market.

There was a deterioration in participation at the September high, as fewer stocks remained in an uptrend while the indices moved up. That negative divergence has now been reset. The lows this week may be undercut in the weeks ahead, but the odds suggest net upside into year end, even if the overall market is ultimately heading into a bear market.

Volatility also spiked this week to 3 year highs. In a bull market, those spikes usually correspond to relative lows. There might be higher volatility ahead, but history suggests that volatility first subsides before spiking to a higher high: examples are both 2007-08 and 2010-11.



Volatility earlier this year reached historically low proportions (read further here). That led many to conclude that volatility would remain subdued for a multi-year period. 2004-07 and the 1990s were cited examples. This was flatly wrong. The spike in volatility this week was exactly the same pattern seen in both of those prior bull markets. Shown below are the 1990s.



Both 1994 and 1996 are similar to today. Both times, volatility spikes became more frequent and the advance in SPX became choppier; the prior years, like 2013, had been an uninterrupted and low volatility rise. Current markets may well be setting up for more volatility and greater undulation than most market participants expect. Nonetheless, the main point is the initial spike in volatility likely aligns with a relative low in SPX.

There are two more elements that we like to see at a low.

The first is for sentiment to become bearish. The evidence is very mixed, and for good reason. US equities were at all time highs less than a month ago, and time is an important element in washing out sentiment. The last wash out in sentiment occurred in 2012 and followed a pullback that was equal to the current one but lasted more than twice as long (chart from Charlie Bilello).



Fund managers have reduced their equity exposure in the past month but it is not at levels associated with a major low in the market. Fund managers are 34% overweight equities after reaching record high exposure this summer. A washout low would be under 20%; in 2012, funds were underweight equities (green shading; data from BAML; for more on this, read further here).



Among the weekly sentiment surveys, Investors Intelligence has the longest history. As we have pointed out before, investment advisors have been more bullish for longer than any period since 1987. Sentiment is only just beginning to move lower; if the past is a guide, it will take at least one month to become washed out (below 1.4x the number of bulls to bears).



But, the sentiment evidence is mixed. Last week, we showed that the Daily Sentiment Indicator was at a low (post). This week, NAAIM reached a low where only 10% of active investment advisors are net long. Put/call ratios (total and equity-only) have spiked to levels associated with near lows in SPX.



Equity fund flows are inconclusive. On the one hand, outflows over the past several weeks reached a minor extreme (squares). On the other hand, for a 10% fall, the outflows were small relative to February and August this year. And, stunningly, flows this week were positive (circle). In other words, investors were buying into weakness. Look closely and you can see that also happened in August 2013 and August 2014 on the way to the ultimate lower low in SPX (chart from SentimentTrader).



There's no clean conclusion from sentiment. One way to reconcile the differences is this: a temporary low in SPX has been reached but that it is part of a larger correction that will continue after a bounce higher. We have been discussing this scenario over the past several weeks: the A wave (down) completed this week, the B wave (up) is now underway and a C wave (down) will follow. That would allow sentiment (and asset allocations) to reach durable lows. It also implies a longer correction than what investors have become accustomed to (time).

Neither the breadth nor the volatility studies shown above would be in conflict with a retest of this week's low in the week(s) ahead.

The last element of a durable low is a loss of downward momentum. Into a low, momentum normally bottoms before price. That means the fall is rapid, then decelerates and bases. As an example, below is the 17% fall in mid-2010 compared to the current fall. Some sort of basing should ideally take place before the next move higher (chart from McClellan).



In the chart above, the rally within the green box is the B wave after which  the C wave completes the decline. In 2010, that phase of the correction lasted about one month.

Which bring us to the current market. The decline accelerated Monday thru Wednesday. The momentum low was on Wednesday, the same day as the price low. Even the more minor declines in the past 18 months showed a separation of momentum and the low in price (lines in the upper panel).



In comparison, during the 2011-12 period when SPX last dropped by 10%, the lows showed decelerating momentum in either or both RSI (top panel) or MACD (bottom). Price chopped at the low as momentum dissipated.



The same was true after corrections of 10% or more in 2009-10.



The weekly pattern is the same. The lows after 10% corrections since 2010 have created a divergence in momentum each time. One possibility is that SPX moves up this week before moving lower; since January 2009, SPX has dropped 4 weeks in a row 6 times; on 5 of those it moved up the following week. The one exception was in May 2011 but most of the weekly declines in that stretch were very minor.



SPX had closed last week on its 200-dma for the first time in two years. The pattern has been for SPX to bounce on the first touch of the 200-dma without losing more than ~2% (more on this pattern here). This week was one of those few times in the past 20 years that the closing low was 2% below the 200-dma. What happened next in similar cases?

Perhaps the most relevant comparison is from July 1996. Recall that 1995 and 2013 are the only years when the 200-dma was not visited at least once. When the 1995 streak ended, SPX made a long pierce, bounced, returned below the 200-dma, based and then moved higher.  That process took several weeks. Note in particular the hammer candle; the same candle formation occurred this past week. Note also the loss of downward momentum at the low in price.



Although the streaks above the 200-dma were much shorter, the breaks lower in 2005 are also relevant. Both times, price oscillated near the 200-dma, working off the downward momentum and shaking off longs before moving higher.



In none of these cases was the break of the 200-dma on its own significant. In each, the trend ultimately resumed higher. We will be looking specifically at the MACD and the slope of the 13-ema (arrow in the lower panel in the two charts above). A crossover in both will provide confirmation that the downtrend has likely ended.

Trend, as you would expect, is unattractive. None of the indices in the US or abroad are above their 50-dma or their 13-ema. In the US, 7 of 9 SPX sectors are also in short and intermediate downtrends. Again, on strength, we will be looking at crossovers in the MACD and 13-ema to confirm that the downtrend has ended.

The bounce in SPY at the end of the week retraced 38% of the fall from the September high. It also stopped below the August pivot low. Above 189-90, there is the potential to run all the way to the 196 area: that would be a 62% retracement, weekly R2 as well as the current 50-dma. That would be a typical B wave.



Much attention was paid to the relative strength in RUT this week. More than anything, that had to do with the large fall in the prior week that broke what had been support for one year; this week's gain retraced only a portion of that fall. RUT also landed on a long term support line, and bounced. It remains in a downtrend, especially so long as it is under the key 1080-90 level (blue line). Note how downward momentum and basing has not yet taken place as it did at prior lows (circles).



NDX both broke a long trend line and undercut the August low. This was the first time that a prior pivot low was decisively broken in two years. That signifies a change in market character. Friday's bounce ended under both of these key levels. Note also the yawning MACD and declining 13-ema (bottom panels; circles). We will be watching these as a confirmation of trend continuation or reversal.



Seasonality this coming week is neutral. There is no consistent pattern of gains or loses overall or in years (like this one) where an election is two weeks away. The election is likely to be a positive influence the week after: more often than not, stocks rise into an election, something to keep in mind on weakness this week (chart from Stock Almanac).



In summary, breadth and volatility measures are consistent with a low in price, but sentiment and momentum are not. We think the market is likely to work on forming a base, and a B wave higher followed by a C wave lower could be part of that. We are very cognizant that the November-January time period is typically the strongest of the year and believe, at least for the time being, that the current weakness is part of a long overdue correction as opposed to the beginning to a more serious bear market. 

Our weekly summary table follows.


© The Fat Pitch

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  • Inflation expectations have fallen sharply in recent weeks, driven by European disinflation, lower energy prices, and overall growth concerns.
  • The persistence of low inflation expectations may intensify the “lower for longer” theme via lower growth expectations and delays to potential Federal Reserve (Fed) interest rate hikes.

Inflation expectations have dropped sharply and helped to drive bond strength in recent weeks. All else equal, lower inflation, or the expectation of lower future inflation, helps boost bond prices as inflation risks fades. Market-implied inflation expectations, as measured by Treasury Inflation-Protected Securities (TIPS), declined to one of the lowest levels of the past five years [Figure 1].

A number of factors have worked to push U.S. inflation expectations lower, but the dominant driver has been disinflation in Europe. Eurozone annualized consumer prices are rising only 0.3%, the slowest pace since the end of the Great Recession of 2007–2009. Many countries, Italy being one, are experiencing outright deflation with local prices registering year-over-year declines.

Additional drivers of lower inflation expectations include:

  • Weak economic data in Europe. Aside from lower prices, Europe is flirting with its third recession of the past six years, raising fears about global economic growth.
  • Global unrest. Conflict in the Middle East, protests in Hong Kong, simmering tensions in Ukraine, and concerns over the spread of the Ebola virus are being viewed as potential disrupters to global economic growth.
  • Lower energy prices. Related to weaker growth expectations, the notable decline in oil prices since the end of June 2014 may reduce a key consumer expenditure.

In the bond market, the decline in oil prices may be having an outsized impact. TIPS’ inflation compensation is based on the increase in the overall Consumer Price Index (CPI), of which energy prices represent a significant component. Historically, oil price changes and implied inflation on TIPS have been closely correlated [Figure 2]. When inflation expectations change, TIPS’ prices can adjust quickly. Therefore, the path of oil prices can have a heavy influence on TIPS’ prices over the short term. In 2013, the two diverged as the taper tantrum sell-off prompted investors to demand a greater inflation-adjusted, or real, yield (essentially a higher risk premium) to compensate for increasing Fed rate hike risks and better economic growth. But the relationship is generally very tight. 

Growth Scares

The drop in oil prices and inflation expectations tends to coincide with growth scares—fears of an economic downturn. Aside from 2013, the last two times inflation expectations dropped quickly occurred in mid-2010 and the latter half of 2011, as Figure 1 illustrates. Both of these latter instances coincided with fears over Europe, similar to today’s environment. In all three cases, oil prices were hovering near their lows. In mid-2010, oil prices were approximately $75/barrel, and in both 2011 and 2012, they dropped to $80/barrel—briefly coinciding with the drop in inflation expectations. Crude oil closed Monday, October 13, 2014, at $85/barrel.

Therefore, whether the recent increase in high-quality bond prices and drop in yields are sustained depends upon whether economic conditions  deteriorate. Earnings season may provide a clue, and the release of top-tier economic data such as monthly jobs and the Institute for Supply Management’s (ISM) Manufacturing Index may provide additional insight during the week of November 3, 2014. We expect fundamental evidence to show that domestic economic expansion continues.

Lower for Longer

Two knock-on effects of low inflation may work in the favor of bonds: lower growth expectations and delays to the timing of Fed interest rate hikes. Declining inflation expectations usually reflect a slower pace of economic growth. Better economic growth generally boosts inflation expectations as strength is reflected in higher prices. The Fed’s favorite inflation measure, the personal consumption expenditures, is already running 0.5% below target. Stubbornly, low inflation is likely to restrain the Fed from raising interest rates. The release of minutes of the September Fed meeting reflected Fed officials’ concerns over low inflation, which was reinforced by recent U.S. dollar strength.

Not Time for TIPS

The recent underperformance of TIPS, a result of falling inflation expectations, does not warrant exposure to the sector in our view. TIPS may benefit from the ongoing stock market pullback, which is boosting demand for high-quality bonds, but TIPS still share the expensive valuations of their conventional Treasury counterparts. Unless confirmed by deteriorating domestic economic data, the October lift in prices may prove temporary; and TIPS, when purchased in exchanged-traded fund (ETF) or mutual fund form, possess greater interest rate risk than conventional Treasuries or a diversified portfolio of intermediate bonds.  

IMPORTANT DISCLOSURES

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

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.

This research material has been prepared by LPL Financial.

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

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

Tracking # 1-318448 (Exp. 10/15)

© LPL Financial

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For those that may not have noticed, stock market volatility has been on the rise in October, with more up and down 1-2% days and powerful intraday moves than we’ve seen since the Great Recession.  Weak overseas economies, fears over what rapid declines in energy prices could mean, and Ebola are just a few of the factors that have been used to explain the disappointing action.

Our take continues to be a more constructive one.  While October has almost always been a generally poor performing month for the stock market, historically, the fourth quarter has generally been a kinder one, suggesting that better things could be in store for November, December and beyond.  But before you become fearful that we’re putting too much blind faith in technical trends, let’s discuss some of the more fundamental drivers for our view.

As we’ve repeatedly stated in the past, weak overseas economies, be it China or Europe, are generally good for the United States, at least in the current dynamic.  Why?  Because it implies weak pricing in the commodity complex and thus a boost to our consumers’ disposable income.  It is no secret that China has overbuilt residentially and commercially, with far more than its share of global ghost towns and neighborhoods.  While they will likely work through this oversupply, it should remain a structural overhang and a headwind to the commodity complex on a longer term basis.

Geopolitical concerns have also boosted the value of the dollar, which has likely led to further declines in commodities which are often priced in dollars.  As bizarre as it sounds, we read this morning that Russia is concerned that its supply of dollars may be too low and may become a bigger buyer of dollars to help stabilize its weakening economy.

In addition to weaker international demand for commodities, our increasing domestic supplies of energy are also a net positive for US consumers.  While Saudi Arabia’s recent move to defend its global share of the oil markets could mean that oil prices fall to levels that make further gains in US production less economical, the fact remains that lower oil prices are good for our consumers, regardless of the source.

Recent high frequency macroeconomic data remain positive for the US economy.  New unemployment claims fell to 264,000 this morning, a level that hasn’t been seen since the year 2000.  Industrial production was up 1% for September, ahead of expectations.  Earnings season has just gotten started and while there have been a few disappointments from the likes of Juniper and Microchip, the bulk of results have been just fine.  From financials to technology, nothing would appear to signal an imminent recession in the United States.

As some of you know, we categorize our holdings in several different ways and then put them in baskets to get a picture about what our portfolio of holdings and others we follow might be telling us about the overall economic climate.  In general, we classify our holdings’ primary influences as either economic in nature, innovative in nature, or credit driven in nature.  The action of the innovator basket often provides a key signal to the nature of corrections, as innovators usually hold up well in most economic environments (other than recessions) since their product markets are often far from mature and thus not as prone to the ebb and flow of the overall economy.

While we hope we don’t jinx ourselves, our innovator basket of stocks has held up very well in this recent downturn, consistent with a fear and liquidity driven market more than one concerned about an imminent recession.  We’ve taken our share of lumps to be sure, but thanks to our innovators, we’ve held our own and remain among the top large cap growth performers on a year to date basis.

Another indicator that things may be getting ready to turn could be the action in small cap stocks in recent days.  The small cap area has been clobbered more than most this year, perhaps due to concerns over Fed rate hikes.  We suspect that weakness overseas likely means the Fed will remain more dovish than hawkish in the coming months, wanting to be sure that our domestic recovery remains intact.  Over time, this should be good for small cap stocks, which also tend to be more exposed to our domestic economy than our multinational, large cap corporations.

The arrival of Ebola to our shores has certainly heightened anxiety levels in the population at large, but like geopolitical flare-ups, it is the type of risk factor that’s not only hard to measure but also very difficult to time as an investment decision input.  Fortunately, the United States may have a potential cure which should be of some comfort to the families of those facing the disease as well as another reminder of our country’s many blessings.

In summary, the month of October is usually an ugly time for the stock market and this one, so far, is no different.   The recent declines in commodity prices should prove to be a positive influence on leading economic indicators reported early next year, a continued positive tailwind for the markets.  Our economy continues to improve, with solid earnings, improving employment, and favorable inflation trends.

In short, we’re in a moody market, one which isn’t nearly as bad as it may feel.   While we may tweak things here and there as we always do, we see no need to make wholesale changes.

Better days yet lie ahead.

Kindest Regards,                                                                 

Doug MacKay, Bill Hoover

© Broadleaf Partners                                                    

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Given the history of miracle cures, magic potions, sure things, and can’t misses, you will forgive our skepticism as “Smart Beta” entered the financial lexicon over the past 3 years. Things promising to be “smart” often look very dumb in retrospect.  But we were intrigued, if only because humility and competition demand an open mind.

For those unfamiliar with it, the concept behind Smart Beta is to take a market capitalization-weighted passive index, such as the S&P 500 or the Russell 2000, and make it “smart” by screening for stocks with a desirable characteristic, such as low volatility, or high momentum, or less leveraged, or low Price-to-Book, etc.  The stocks which pass the screen, which can vary in number from 100 to upwards of 1000, are then purchased in equal amounts for the fund, with the screen being re-run and the portfolio adjusted on a monthly, quarterly, or yearly basis.  

It is probably no accident that Ben Graham did not name his most popular book The Smart Investor, instead choosing the more measured “intelligent” to describe the human ideal to which we should aspire as investors: to consistently use our cognitive skills and real world experience to achieve satisfactory returns over the long run. Indeed, throughout The Intelligent Investor, Graham generally uses the terms “smart” and “smart investors” in the context of giving examples of failed investments and speculators getting their “come-uppance.”  

It is argued by proponents of Smart Beta that this allows investors to take advantage of “anomalies” in stock markets wherein cheaper, higher quality, lower volatility, etc. companies outperform over certain periods and in certain conditions.  Twenty years ago this was known as “factor indexing,” though the means for accomplishing it were much more limited in the pre-ETF era. To our mind this also looks suspiciously like the portfolios created by the asset management firm LSV Asset Management, which has been running its 500-1000 stock “value equity” portfolios by solely screening for low price-to-book and other indicia of value since their inception in 1994. 

The only two aspects of Smart Beta which are truly “new” are the term itself and the use of a low-cost ETF vehicle to deliver it. Those advocating Smart Beta assert that the decisions to overweight and/or underweight particular characteristics in their funds are not active investing, but merely “less passive” than the pure market cap weighted index funds in days of yore. Some go so far as to drive their point home by trademarking their products as “Passive Smart Beta”.  While we applaud the potential for lower cost delivery of investment services to the public, we disagree with the characterization of Smart Beta as a passive strategy because we believe it to be materially misleading.   

Perhaps we are blinded by our own adherence to a very active form of investing and we cannot therefore grasp why advocates of Smart Beta should be so adamant about its classification as a passive form of investing. In Ben Graham’s day, what we call “passive,” he and others called “defensive” and cast no aspersions upon it in the least.  Indeed, we can think of almost no active equity manager, Value, Growth, Momentum, Long/Short, and all stops in between, who does not begin their process by screening. Yet, for the most part, sales and academic literature on the topic of Smart Beta go to great lengths to highlight the passive aspects of this method, while downplaying the very active aspect of weeding out undesirable companies 

Why should this be so? Perhaps it stems from the fact that passive fund firms such as Vanguard or Invesco have been hammering active managers for the past several decades for periods of underperformance versus the “unmanaged” indices.  It is not as though “dumb” Beta market cap weighted indices were not themselves tainted with the possibility of human folly: their criteria, categories, and constituents are vetted and chosen by humans as well. There are subjective judgments that must be made in the construction of even the most passive of indices. They are not ordained nor is their construction a law of nature: some human, somewhere, is actively making a decision about index criteria. 

In addition, tilting the construction of indices towards the performance “anomalies” that fly in the face of the Efficient Markets Hypothesis (“you can’t outsmart the market, so give up”) is an admission that the markets might not be so efficient after all. This should be obvious since markets are nothing but people, and, as amply displayed on modern “reality” TV, people may be highly irrational and serial utility minimizers.  So why should the collective be any “smarter” than its constituent parts? 

Admitting that Smart Beta is either “passively active” or “actively passive” would seem the more candid route for this investing methodology.  Just as it is hard to be a “little bit pregnant,” it is also hard to be a “little bit active” if the purpose of the exercise is to produce performance different enough (presumably better) than the more purely passive index fund alternative.   

We are not alone in our skepticism over Smart Beta: none other than the Father of Beta and the Capital Asset Pricing Model, holder of a Nobel Prize for his creation, Bill Sharpe declared that “Smart Beta makes me sick” at a May 5 CFA Conference in Seattle. Whereas the whole concept of market efficiency and its offspring, Beta, make us queasy, what apparently nauseates Sharpe is the idea that Smart Beta will only stay smart as long as the mass of investors do not adopt it. 

If we understand Sharpe correctly, it might be more accurate to call this investment approach “Temporarily Smart Beta” since once enough investors crowd into a particular flavor of Smart Beta products, prices for those flavors of stocks will become fairly priced and the “anomaly” will disappear.  

We think this is a fair criticism, as it is obvious that stocks, industries, and sectors do come into and out of favor.  The extra twist of irony regarding Sharpe’s view on Smart Beta is that over the past 8 years, numerous Smart Beta ETFs have won the William F. Sharpe Award for Indexing Achievement from The Journal of Indexing and the Information Management Network.

Even MSCI admits that they “haven’t come across anyone who likes the term ‘smart beta,’ and this unfortunate phrase is clouding the discussion” as well as creating “a lot of noise on this topic which is not constructive,” according to MSCI Managing Director and Head of Index Business, Baer Pettit in a June PI Online supplement.

But we at Neosho can’t be too critical of Smart Beta, screening for liquidity, returns, lack of leverage, and arguably value pricing is Step One of our own portfolio construction process.  The presence of some portion of all these four criteria is needed to form the basis for an intelligent investment decision, based on our study of the history of markets and economies, as well as a few decades of practical experience, provide the basis for an intelligent investment, but they alone do not tell the entire story. 

Yet, there are more subtle factors at play in the longer term prospects of a company which do not reveal themselves in simple quantitative screening. Regulation, opaque accounting methods, management motivation, the pace of change, geo-political issues,  competitive dynamics within an industry, national monetary and trade policies, and commodity cycles are but a few of the factors which do not easily lend themselves to simple numeric cut-off points. And so it is at that point that we move on to Step Two of our process and attempt to apply our intelligence and experience to cull our list further, often to zero, in pursuit of a higher probability of satisfactory returns.     

Besides the fact that raw screens may flag many false positives, it should go without saying that while history may give us clues as to the future, it is not the future itself and that Joseph Schumpeter’s theory of capitalism as “creative destruction” holds true more often than not and that, to quote the great man himself, “[T]he process of industrial mutation … incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

Or, more simply, things change and last year’s or last decade’s success does not make next year a certain thing. Therefore, screening and selecting solely on the basis of historic data will miss trends obvious to the human eye, such as the demise of the IBM Selectric Typewriter or the Sony Walkman. 

Therefore, while we are fans of both being selective about stocks and low fees, as exclusively active managers we do not believe that Smart Beta will consistently live up to the promise in its name thanks to market cycles and inherent flaws with mechanical formulations which eschew tinkering by mere mortals.  No investing strategy can be “smart” in all environments, or through all circumstances, whether active or passive in nature. We may not always be smart, but we can always strive to be intelligent. 

© Neosho Capital

[description] => Given the history of miracle cures, magic potions, sure things, and can’t misses, you will forgive our skepticism as “Smart Beta” entered the financial lexicon over the past 3 years. Things promising to be “smart” often look very dumb in retrospect. But we were intrigued, if only because humility and competition demand an open mind. [author] => Chris Richey [legacyinterface_firm_id] => 310 [published_on] => 2014-10-17 [digest_date] => 2014-10-17 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-17 16:02:21 [created_by] => 948 [modified_on] => 2014-10-17 16:02:29 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1716 [hits] => 0 ) [13] => stdClass Object ( [legacyinterface_commentary_id] => 1651 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14891 [apv_conversation_id] => [content_type] => market-commentary [title] => Seasonal Factors Ready to Turn Positive [slug] => guggenheim_101714 [fulltext] =>

After a volatile week in markets, U.S. equities are now oversold and investors should be alert for seasonal factors that should soon turn positive.

The yield on 10-year U.S. Treasury notes this week broke below 2 percent intraday for the first time since June 2013, fulfilling a view I expressed in commentaries published in September 2013 and again in August. With this yield achieved, I don’t see an imminent rise in rates and view market talk about possible continuing quantitative easing by the Federal Reserve as overblown.

The recent decline in yields has less to do with U.S. economic fundamentals, which remain sound, and more to do with technical forces driving rates lower as a result of capital flows out of Europe. With inflation expectations falling, U.S. 10-year Treasury yields still look attractive even at close to 2 percent, relative to comparable German bunds at around 80 basis points and Japanese sovereign debt at around 50 basis points. In reality, U.S. long-term yields should continue to be well supported, with limited room to rise higher and the possibility that they could move lower.

In U.S. equities, the market is going through its usual seasonal gyrations and now appears to be oversold. The seasonal patterns of higher volatility in September and October that we anticipated have largely been fulfilled and seasonal factors should shift dramatically over the next two months. The buy signal for stocks normally coincides with the first game of baseball’s World Series (Oct. 21 this year), and between then and year end we will likely get a U.S. equities market rally.

The S&P 500 Index today reminds me of 2003, when stocks fell 4.2 percent in September before strong data pushed stocks 15 percent higher by June of 2004. The S&P then lost about 7 percent between June and August of 2004, when the Fed hiked interest rates, before gaining more than 15 percent in the next year.

In the coming months, a number of indicators will offer signals about how long the rally in U.S. stocks and bonds that began in 2009 can continue. One such indicator will be the so-called Santa Claus rally. As the old adage goes, “If Santa Claus should fail to call, bears may come to Broad and Wall.” While it is too early to say, the coming rally in U.S. equities may be the one to sell into.

Seasonal Factors Suggest Upside for U.S. Equities

October’s sharp sell-off in U.S. stocks has raised concerns that the bull market, in place since 2009, may soon come to an end, with the S&P 500 Index down over 7 percent since September’s peak. However, seasonal factors suggest a strong fourth-quarter rebound. Over the last 68 years, the S&P 500 has averaged monthly gains of 0.9 percent in October, followed by even stronger increases of 1.2 percent and 1.8 percent in November and December, respectively. The coming months will be key in determining how much further the bull market can run.

AVERAGE PERCENTAGE CHANGE IN S&P 500 BY MONTH SINCE 1946

Source: Haver, Guggenheim Investments. Data as of 10/16/2014. Note: Data since 1946.

 This material is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.

©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

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LAGUNA BEACH – There were quite a few disconnects at the recently concluded Annual Meetings of the International Monetary Fund and World Bank. Among the most striking was the disparity between participants’ interest in discussions of inequality and the ongoing lack of a formal action plan for governments to address it. This represents a profound failure of policy imagination – one that must urgently be addressed.

There is good reason for the spike in interest. While inequality has decreased across countries, it has increased within them, in the advanced and developing worlds alike. The process has been driven by a combination of secular and structural issues – including the changing nature of technological advancement, the rise of “winner-take-all” investment characteristics, and political systems favoring the wealthy – and has been turbocharged by cyclical forces.

In the developed world, the problem is rooted in unprecedented political polarization, which has impeded comprehensive responses and placed an excessive policy burden on central banks. Though monetary authorities enjoy more political autonomy than other policymaking bodies, they lack the needed tools to address effectively the challenges that their countries face.


Click here to read more

© Project Syndicate

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To infinity and beyond!” is the catchphrase of Buzz Lightyear, the popular character from Disney’s Toy Story franchise. The phrase is both whimsical and paradoxical. The character of Buzz was inspired by Apollo 11 astronaut Buzz Aldrin; but the phrase may be a tribute to Stanley Kubrick’s 2001: A Space Odyssey, in which the concept of “Jupiter and beyond the infinite” was introduced.

The world’s financial markets have been bolstered by a series of extraordinary measures taken by central banks generally but led by the U.S. Federal Reserve (theFed). The Fed’s actions, known as quantitative easing (QE), have been grouped into phases (QE1, QE2) culminating in QE Infinity. The name “QE Infinity” implied that this extraordinary policy would last a very long time. However, financial markets are now dealing with their own paradox: What is the time limit on an infinite policy and what lies beyond its expiration? Transition points are often the source of market volatility as the certainty of the previous focus is replaced by the uncertainty of the new focus. In addition to increased volatility, we may also experience a correction, loosely defined as a drop in major indices of at least 10%. While volatility and corrections are unpleasant, they can motivate investors to focus less on QE (an extraordinary but cyclical policy response), more on longer term fundamental issues such as capital investment and labor productivity leading to higher sustainable economic growth rates.

Over the past several years, I wrote about the concept of a square root economy, during which we faced multiple years of structurally lower economic growth following the great recession. Six years ago many commentators assumed the recession would be followed by strong growth. Recessions are often caused by the need to correct cyclical excesses. So assuming the underlying trends are strong, it is not unreasonable to expect a strong bounce back. However, I believed then and continue to believe that the great recession was caused by significant structural issues of leverage, lack of long-term investment in infrastructure and education and an aging workforce. The headline-grabbing sub-prime mortgage issues and the behavior of banks, etc. were very important but they were and are symptoms of the structural issues.

Another concept I have embraced in recent years is the valuation of equity markets based on a very simple equation:

 

The impact of central bank policy was to reduce investor expectations of risk. If the economy began to sink again, the central banks through their infinite ability to create liquidity would refloat the ship. Therefore in our simple equation, a lower expectation of risk causes the valuation to rise. I strongly believe the impact of this is relatively short term. The reduction in risk expectations is a necessary condition to create growth, but it is not sufficient. We need politicians, corporations, investors and the general public to change policies, business plans, investment horizons and saving/spending habits to improve structural growth.

Perhaps we should not just focus on the whimsical or paradoxical nature of Buzz Lightyear’s catchphrase. Perhaps its greatest impact is its aspirational nature. If the extraordinary concept of reaching infinity is not enough, then I suggest we need to think beyond QE Infinity and focus on long-term sustainable growth. The transition from our focus on extraordinary monetary policy may be painful, but it will be worth it.

Disclosure

The views expressed are as of 10/13/14, may change as market or other conditions change, and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts are accurate.

This material may contain certain statements that may be deemed forward-looking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Securities products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC.

© 2014 Columbia Management Investment Distributors, Inc. All rights reserved.

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[description] => To infinity and beyond!” is the catchphrase of Buzz Lightyear, the popular character from Disney’s Toy Story franchise. The phrase is both whimsical and paradoxical. The character of Buzz was inspired by Apollo 11 astronaut Buzz Aldrin; but the phrase may be a tribute to Stanley Kubrick’s 2001: A Space Odyssey, in which the concept of “Jupiter and beyond the infinite” was introduced. [author] => Colin Moore [legacyinterface_firm_id] => 96 [published_on] => 2014-10-17 [digest_date] => 2014-10-17 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-17 16:19:54 [created_by] => 948 [modified_on] => 2014-10-17 16:21:13 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1719 [hits] => 0 ) [16] => stdClass Object ( [legacyinterface_commentary_id] => 1654 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14894 [apv_conversation_id] => [content_type] => market-commentary [title] => Pullback Perspective [slug] => lpl_101714a [fulltext] =>

This latest stock market pullback has provided an unwelcome reminder that stocks do not always go up in a straight line. Even within powerful bull markets such as this one, pullbacks of 510% have been quite common and do not mean the bull market is nearing an end. In this week’s commentary, we attempt to put the pullback into perspective. We look beyond this latest bout of volatility and share our thoughts on the current bull market, compare it with prior bull markets at this stage, and discuss why we do not think it’s coming to an end.

Pullbacks Don’t Mean the End of the Bull Market

Pullbacks such as this one, which has reached 5%, have been normal. Sometimes stocks get ahead of themselves. When they do, investor concerns can be magnified and profit taking might take stocks down more than might be justified by the fundamental news. We see this latest pullback as normal within the context of an ongoing and powerful bull market and do not see its causes (European and Chinese growth concerns, the rise of Islamic State militants, Ebola, the Russia-Ukraine conflict, etc.) as justifying something much bigger.

The S&P 500 has now experienced 19 pullbacks during this 5.5-year-old bull market, during which the index has risen by 182% (cumulative return of 217% including dividends). The 1990s bull market included 13 pullbacks; there were 12 during the 20022007 bull market. At an average of three to four pullbacks per year, we are in-line with history [Figure 1]. We understand the nervousness out there, but what we have just experienced looks pretty normal at this point.

When volatility has been so low for so long, normal volatility does not feel normal. Investors have become unaccustomed to what we would characterize as normal volatility. While most of the 5% drop came in a short period of time last week (October 6– 10), the level of volatility experienced last week is not at all uncommon within an ongoing economic expansion and bull market. Volatility tends to pick up as the business cycle passes its midpoint, which we believe it has. Reaching this stage just took longer than many had expected during the current cycle.

Also, keep in mind that the 335 drop in the Dow Jones Industrials that we experienced on Thursday, October 9, 2014, is not as dramatic as it once was. That loss was less than 2%, with the Dow near 17,000 when it occurred, compared with 34% losses associated with that number of points on the Dow earlier in the recovery.

These pullbacks do not mean the end of the bull market is near, nor does the fact that we have not had a 10% or more correction since 2011. In fact, most bull markets since World War II included only one correction of 10% or more, and the current bull has already had two (2010 and 2011). We do not believe the current economic and financial market backdrop has sufficiently deteriorated for the pullback to turn into a bear market, as we discuss below.

Why This Pullback Is Unlikely to Get Much Worse

So why do we think this pullback is unlikely to turn into a bear market? There are a number of reasons:

§  The economic backdrop in the United States remains healthy. Gross domestic product (GDP) is growing at above its long-term average, providing support for continued earnings growth; the U.S. labor market has created 2 million jobs over the past year; and the drop in oil prices may support stronger consumer spending.

§  Our favorite leading indicators, including the Conference Board’s Leading Economic Index (LEI), the Institute for Supply Management (ISM) Index, and the yield curve, suggest that the bull market may likely continue into 2015 and beyond, with a recession unlikely on the immediate horizon.

§  The European Central Bank (ECB) is likely to add a dose of monetary stimulus to spark growth in Europe, the source of much of the global growth fears that have driven recent stock market weakness. China stands ready to invigorate its economy as well.

§  Interest rates, and therefore borrowing costs for corporations, remain low. The Federal Reserve (Fed) is in no hurry to raise interest rates.

§  Valuations have become more attractive. Price-to-earnings ratios (PE) have not reached levels that suggest the end of the bull market is forthcoming, based on history. We view PEs, which have fallen about 0.5 points from their recent peak, as reasonable given growing earnings and low interest rates.

§  The S&P 500 is marginally above its 200-day moving average at 1905. Historically, this level has proven to be strong support. Although the index may dip slightly below this level in the near term, we expect the range around that level (19001910) to provide strong support for the index again and would not expect it to stay below that range for very long.

Bull Markets Don’t Die of Old Age

The current bull market is one of the most powerful ever at this stage, just over 5.5 years in [Figure 2]. Since March 9, 2009, when the current bull market began, the S&P 500 has risen 182% (total cumulative return of 217%), topping all other bull markets since World War II at this stage. The 1949 and 1982 bull markets were close, with gains of 170% and 163% (respectively) at this stage, but were not quite as strong.

So does that mean that this bull market is too old and should end? We don’t think so. Bull markets die of excesses, not old age, and we do not see the excesses that characterize an impending bear market. The labor markets are not strong enough yet to generate significant upward pressure on wages to drive inflation. U.S. factories have excess capacity. As a result, the Fed is unlikely to start hiking interest rates until the middle of 2015, and rate hikes are likely to be gradual. It will likely take numerous hikes to slow the U.S. economy enough to tip it into recession (and invert the yield curve), which is unlikely to come until at least 2016. We do not see stock valuations or broad investor sentiment as excessive. We expect this bull market to complete its sixth year in March 2015 and believe there is a strong likelihood that it continues well beyond that date.

Conclusion

We do not believe the volatility seen in recent weeks, which is in-line with historical trends, is an early signal of a recession or bear market. Nor do we think the age of this bull market means it should end, given the favorable economic backdrop, central bank support, and reasonable valuations. Although we will continue to watch our favorite leading indicators for warning signs of something bigger, we think this latest bout of volatility is nothing more than a normal, though unwelcome, interruption within a long-term bull market. We maintain our positive outlook for stocks for the remainder of 2014 and into 2015.

IMPORTANT DISCLOSURES

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

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

Stock investing involves risk including loss of principal.

Price-to-earnings ratio is a valuation ratio of a company’s current share price compared to its per-share earnings.

 

INDEX DESCRIPTIONS

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

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

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© LPL Financial

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This past week investors to a blow from a sharp selloff in the financial markets. I have spilled quite a bit of ink in recent months discussing the probabilities of such as corrective event as the Federal Reserve’s current liquidity operation came to a conclusion this month.

Now that the correction has occurred, at least to some degree, the question that must be answered is simply: “Is it over?”

That is the basis of this weekend’s reading list which is a compilation of reads that debate this point. The bulls remain wildly bullish, believing that this is simply a “dip” in the ongoing “bull market.” The more pessimistic crowd sees the opposite.

As I have stated previously, it is inherently important to consider both arguments to reduce the cognitive biases that lead to emotionally poor investment decisions.

Is the correction over? Maybe. Or this could be a “sucker’s rally” before a deeper decline. A big concern at the moment, as stated above, is the conclusion of the Federal Reserve’s ongoing liquidity intervention program. The liquidity pushed into the markets by the Fed has been the driver behind the markets unbridled advance since its inception in 2012. The same thing occurred in 2011, which led to a topping process as QE2 was coming to an end. 

SP500-2011-2014-101614

From yesterday:

"While no two periods are ever the same what is important is the current defense of 1850 level on the S&P 500 so far.  A rally from this level, which fails to attain a new high, suggests that the market will complete an important topping process in the months ahead."

I don’t have the answer, but this is what I will be “pondering” over the weekend.

1) 5 Reasons Why Stocks Are Falling by Steve Forbes via Forbes

  • The U.S. Senate
  • Misbehavior By The Fed
  • Profit Picture Is Getting Blurry
  • World Economies Are A Mess
  • World Security Is Worsening
  • The Yield Curve May Not Invert Prior to a Recession
  • Stock Prices Appear to Be Issuing Economic Warnings
  • The Signal of the Bond Markets Might Be a Precursor to Slowing Growth
  • The Signal of the Oil Markets Is Negative
  • Expanding Geopolitical Risks Raise Risks 
  • Growing Health Concerns Could Dent Economic Growth
  • The Growing Dominance of the  U.S. Could Have a Negative Twist    

He concludes with a bullish view:

“At any rate, trying to time the market is a fool’s game. Ride the storm. After 2016, the U.S. will experience a Reaganesque revival. Markets will go up before then in anticipation of a better era ahead.”

Also Read:  Could The Liquidity Crisis Be Back by Izabella Kaminska via FT


2) Does Wall Street Know Something We Don’t by Neil Irwin via NYT

“Things are looking better, that is, unless you turn your eye to Wall Street. There, the stock market’s main gauge, the Standard & Poor’s 500-stock index, fell 0.8 percent on Wednesday after a wild ride during the day. It is off 7.4 percent since mid-September.

Moreover, longer-term interest rates are down sharply, which normally signals pessimism in the bond market about the nation’s economic future. A measure of expected volatility hit its highest level since 2011 on Wednesday, signaling that more manic days could lie ahead.

This apparent contradiction — and how it is resolved — points to the basic question for the United States economy and for Federal Reserve policy makers right now. How powerful is that underlying economic strength?  And will the recent market volatility prove ultimately inconsequential, or does it presage harder times ahead for a nation still trying to muddle its way out of a downturn that technically ended more than five years ago?”

Also Read: It’s Beginning To Look A Lot Like 2011 via GaveKal Capital Blog


3) If The Bull Market Has A Savior, This Is It by Christopher Hyzy via MarketWatch

“Five years into an often uneven recovery, and with stocks more volatile, are the American economy and financial markets running low on gas?

No. In fact, the U.S. is in the early stages of an extended business cycle and a secular bull market for stocks that could last another two decades.

Compared with previous cycles, this new phase could be longer and more favorable to equities, the U.S. in general, and specific investment themes. Why? Because this is the beginning of a global recycling of growth. The gigantic scale of this transition should lead to a far longer business cycle than is typical, one centered on and driven by changes in the U.S. — including a manufacturing renaissance, coupled with greater energy independence and enhanced technological independence.”

Also Read:  Bulls May Be Losing Control Of The Market by Anthony Mirhaydari via CBS MoneyWatch


4) 7 Reasons A Recession Is More Likely Than You Think by Doug Kass via TheStreet.com

“I would argue that it is different this time and the risks of recession have increased.”

  • The Yield Curve May Not Invert Prior to a Recession
  • Stock Prices Appear to Be Issuing Economic Warnings
  • The Signal of the Bond Markets Might Be a Precursor to Slowing Growth
  • The Signal of the Oil Markets Is Negative
  • Expanding Geopolitical Risks Raise Risks
  • Growing Health Concerns Could Dent Economic Growth
  • The Growing Dominance of the U.S. Could Have a Negative Twist

Also Read:  The Easy Money Stock Market Is Over by Barry Ritholtz via Bloomberg


5) The Potential For 10-years Of Negative Returns by Shawn Langlois via MarketWatch

“At the same time, the number of hedging measures is mounting in the option pits. The CBOE put/call ratio just hit the fourth-highest level of all time at 1.53. Higher than it was during the Lehman Bros. implosion. Meaning, money is pouring into bearish equity bets. The temptation is to read that as a buy-the-fear signal. Think again.

Ryan Detrick, who always comes up with the goods, numbers-wise, found that average returns when that ratio tops 1.5, as it has this week, are rather dismal. Six months following the signal, the S&P has dropped 2.4%. That’s not the meltdown some doomsdayers are talking about — heck, stocks are down 6% since last month — but it’s still noteworthy.”

Also Read: Don’t Buy Into A Rebound Rally  by David Weidner via MarketWatch

Also Read: 10 Signs The Selling Is Over by Jeff Cox via CNBC

Also Read: What A Correction Feel’s Like by Jared Dillian via ZeroHedge


“Everyone has a plan until they get punched in the  face.” – Mike Tyson

Have a great weekend.

Lance Roberts

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of “The Lance Roberts Show,��?Chief editor of the X-Factor Investment Newsletter and the Streettalklive daily blog.
 

© STA Wealth Management

[description] => This past week investors to a blow from a sharp selloff in the financial markets. I have spilled quite a bit of ink in recent months discussing the probabilities of such as corrective event as the Federal Reserve’s current liquidity operation came to a conclusion this month. [author] => Lance Roberts [legacyinterface_firm_id] => 509 [published_on] => 2014-10-17 [digest_date] => 2014-10-17 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-17 16:31:51 [created_by] => 948 [modified_on] => 2014-10-17 16:32:18 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1721 [hits] => 0 ) [18] => stdClass Object ( [legacyinterface_commentary_id] => 1656 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14896 [apv_conversation_id] => [content_type] => market-commentary [title] => Special Report: Volatility Update [slug] => rbernstein_101714 [fulltext] =>

Broad financial market volatility has resurfaced and investors, as is typical, are running away.  Our August report entitled “Toward the Sound of Chaos” (insert link) showed that emotional investing rarely pays off because it leads to buying at peaks and selling at troughs which has historically been a sure path to underperformance.

Volatility can destroy the best of financial plans.  Simply doing nothing can be a fine strategy in the face of short-term volatility, but the tension associated with market downdrafts makes both institutional and individual investors’ feel that doing nothing is not an alternative.  However, decisions made under duress are typically decisions that should not be made. 

Rather than getting caught up in the market’s gyrations, we prefer to examine fundamentals.  In that light, we encourage investors to consider the following points:

  1. Initial jobless claims, a very good leading indicator of the economy, recently hit a 14-year record low.  Employment might not be robust, but it continues to meaningfully improve.
  2. The 2014 budget deficit was just reported at 2.8% of GDP.  It wasn’t that long ago that people were comparing the US fiscal situation to Greece’s.  The recent budget data clearly demonstrate that such fear mongering was unjustified.
  3. Although deflation is the topic of the day, the Core Crude Material PPI just hit its highest rate since December 2011. That’s important because this measure of pricing is very highly correlated to profits growth, and the most recent reading suggests investors might be underestimating future profits growth.
  4. Many investors are concerned about growth outside the US as evidenced by the weakness in copper and other commodities.  However, smaller capitalization stocks usually have less exposure to non-US economies than do larger capitalization stocks.  Small stocks seem to have been indiscriminately sold, and there may be bargains within this group.
  5. Gasoline has become significantly cheaper.  That often happens when the economy is weakening because demand weakens, but employment continues to improve and demand is healthy.  Improving employment and lower gasoline prices seems very bullish to us.
  6. Interest rates have fallen as employment as improved.  The odds seem high that this mix will be good for housing and the associated multiplier effects.
  7. Tax revenues continue to increase.  That’s partially behind the smaller budget deficit, but it is also positive for municipal finance.
  8. Turmoil and uncertainty around the world seems constructive for our American Industrial Renaissance theme.  US-based industrials are likely to continue to gain market share.
  9. Volatility almost always signals a change in leadership.  Maybe there is more risk to the “disruptor” stocks than investors believe?
  10. The combination of a strong dollar and falling inflation expectations typically is a bad ..environment for gold, but a good one for financial assets.

It’s certainly true that the eventual outcome of the Ebola scare will not be known for some time, and that could weigh on the financial markets.  However, it seems hard to characterize the disease as a black swan when it is in the news every few minutes.

Follow the fundamentals, and remember RBA’s motto: Uncertainty = Opportunity®

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

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS

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

About Richard Bernstein Advisors:

Richard Bernstein Advisors LLC is an independent investment adviser.  RBA partners with several firms including Eaton Vance Corporation and First Trust Portfolios LP, and currently has $3.3 billion collectively under management and advisement as of July 31, 2014.  RBA acts as sub‐advisor for the Eaton Vance Richard Bernstein Equity Strategy Fund and the Eaton Vance Richard Bernstein All‐Asset Strategy Fund and also offers income and unique theme‐oriented unit trusts through First Trust. RBA is also the index provider for the First Trust RBA American Industrial RenaissanceTM ETF and the First Trust RBA Quality Income ETF. Additionally, RBA runs ETF asset allocation SMA portfolios at UBS and Merrill Lynch and on select RIA platforms.  

[description] => Volatility can destroy the best of financial plans. Simply doing nothing can be a fine strategy in the face of short-term volatility, but the tension associated with market downdrafts makes both institutional and individual investors’ feel that doing nothing is not an alternative. However, decisions made under duress are typically decisions that should not be made. [author] => Richard Bernstein [legacyinterface_firm_id] => 370 [published_on] => 2014-10-17 [digest_date] => 2014-10-17 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-17 16:35:02 [created_by] => 948 [modified_on] => 2014-10-17 16:35:13 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1722 [hits] => 0 ) [19] => stdClass Object ( [legacyinterface_commentary_id] => 1657 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14897 [apv_conversation_id] => [content_type] => market-commentary [title] => Why High Yield, Why Now [slug] => advisorshares_101714 [fulltext] =>

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

Here are some of the reasons we believe that the high yield bond market looks attractive at current levels:

  • MODERATE RISK:  With default being the primary risk for high yield bonds and bank loan investing, we see no systemic default spike on the horizon, as maturities have been largely pushed out to 2017 and beyond1, companies have maintained reasonable discipline through this cycle, and capital markets remain functional, with CLO issuance setting records and high yield new issues continuing to print.

The current projections are for default rates to remain at about half of their historical level through the next couple years.2

  • ATTRACTIVE SPREADS:  With much of the secondary high yield market having been indiscriminately sold, we are now back to spread levels of 527bps on the index.3  This compares to historical median spread levels of 519bps over the last nearly 30 years.4  So we are at median spread levels, but with a well below average default outlook.  While a portion of the index continues to trade at tight spreads to call prices, we are seeing plenty of bonds at 750 basis points, or more, over the 5-year Treasury, which is among the best we’ve seen when combined with overall risk outlook.
  • U.S. FOCUS:  Most high yield companies, and specifically our general area of focus in the mid-sized issuers, are largely domestically focused, which can serve to avoid some of the headwinds of a stronger U.S. dollar impacting exports and the conversion of foreign profits and weakening economic activity in other areas of the world, both of which we expect to be a drag on broad multinational companies and thus the major stock market averages.
  • ALPHA POTENTIAL:  The high yield and floating rate loan markets have dramatically expanded, now at $3 trillion, allowing active investors to work to create value through a variety of mechanisms, just like in a stock investing, including:
    • Industry exposure—Strategically allocating to an industry we see as undervalued.
    • Capital structure positioning—Secured or subordinate securities, taking advantage of what we see as the best risk/return potential within a company’s capital structure.
    • Yield-to-Call—“Cushion” bonds for which we expect a near-term call.
    • Avoiding negative convexity—Avoiding securities at large premiums over call prices.
  • VOLATILITY: Volatility can create a great entry point, as often the average retail investor sells on emotion rather than fundamentals, thus creating potential opportunities for active managers to put on positions at a discount in individual securities within their portfolios, but also potential opportunities for those investing in these funds.
  • APPEALING VALUE:  The high yield market provides what we see as attractive, tangible income to investors.  As we had mentioned, we are seeing plenty of opportunities at 750bps above the 5-year Treasury, which is now sub 1.5%, so if you theoretically could build a portfolio with a yield of 9%, and a default rate of 2%, with a recovery rate of 40% (the historical average)5, we are looking at a theoretical loss rate of 1.2% and a risk-adjusted yield of 7.8%.6  This compares to 1.5% on the 5-Year Treasury, 2.2% on the 10-Year Treasury, 2.89% on investment grade, and 1.99% on the municipal bonds.7  On a relative value, we believe the high yield market offers very compelling value.

1  Acciavatti, Peter D., Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li.  “Credit Strategy Weekly Update.”  J.P. Morgan, North American High Yield and Leveraged Loan Research.  October 3, 2014, p. 9.

2  Acciavatti, Peter D., Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li.  “Credit Strategy Weekly Update.”  J.P. Morgan, North American High Yield and Leveraged Loan Research.  October 3, 2014, p. 11.  As noted, the current default rate excludes the impact of TXU.

3  Index referenced is the Credit Suisse High Yield Index.  The Credit Suisse High Yield Index is designed to mirror the investible universe of the $US-denominated high yield debt market.  Data sourced from Credit Suisse, as of 10/14/14.

4  Historical spread data covers the period from 1/31/1986 to 9/30/2014.

5  The last 37 years of data have shown a recovery rate of 42.85%.  Blau, Jonathan, James Esposito, and Daniyal Khan. “2014 Leveraged Finance Outlook and 2013 Annual Review,” Credit Suisse Global Leveraged Finance. February 6, 2014, p. 217

6  HYPOTHETICAL ONLY.  These calculations assume that credit spreads remain constant and do not factor in any fees or expenses or changes in price movements for other reasons, including security fundamentals, etc. Actual results may be materially different.  Default rates based on projected trends but actual results may be materially different.

7  U.S. 5  and 10 Year Treasury Note is sourced from the U.S. Department of Treasury, Daily Treasury Curve Rates. Investment Grade yield to worst based on the Barclays Corporate Investment Grade Index, which consists of publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and the quality requirements (source Barclays Capital).  Municipal yield to worst based on the Barclays Municipal Bond Index, which covers the long-term, tax-exempt bond market (source Barclays Capital). All data as of 10/14/14.

© AdvisorShares

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[attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [start] => 780 ) [inputs:protected] => Array ( ) ) [post] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [cookie] => JInputCookie Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [files] => JInputFiles Object ( [decodedData:protected] => Array ( ) [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [env] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [request] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [start] => 780 [limitstart] => 780 [option] => com_legacyinterface [view] => commentaries [Itemid] => 616 ) [inputs:protected] => Array ( ) ) [server] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [HTTP_AUTHORIZATION] => [HTTP_USER_AGENT] => Mozilla/5.0 (Windows NT 6.1; WOW64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/33.0.1750.149 Safari/537.36 [HTTP_CACHE_CONTROL] => no-cache [HTTP_PRAGMA] => no-cache [HTTP_HOST] => ap.hubtech.tv [HTTP_ACCEPT] => text/html, image/gif, image/jpeg, *; q=.2, */*; q=.2 [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] => ap.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 165.117.232.82 [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] => 25694 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => start=780 [REQUEST_URI] => /?start=780 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1527229029.178 [REQUEST_TIME] => 1527229029 ) [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] => 1527229029 [session.timer.last] => 1527229029 [session.timer.now] => 1527229029 [session.client.browser] => Mozilla/5.0 (Windows NT 6.1; WOW64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/33.0.1750.149 Safari/537.36 [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 780 [filter_order] => published_on [filter_order_Dir] => desc ) ) ) ) [user] => JUser Object ( [isRoot:protected] => [id] => 0 [name] => [username] => [email] => [password] => [password_clear] => [block] => [sendEmail] => 0 [registerDate] => [lastvisitDate] => [activation] => [params] => [groups] => Array ( [0] => 9 ) [guest] => 1 [lastResetTime] => [resetCount] => [requireReset] => [_params:protected] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( ) ) [_authGroups:protected] => Array ( [0] => 1 ) [_authLevels:protected] => Array ( [0] => 1 [1] => 1 ) [_authActions:protected] => [_errorMsg:protected] => [_errors:protected] => Array ( ) [aid] => 0 ) ) ) [inputs:protected] => Array ( ) ) [jrequest] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) ) ) [env] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [request] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [start] => 780 [limitstart] => 780 [option] => com_legacyinterface [view] => commentaries [Itemid] => 616 ) [inputs:protected] => Array ( ) ) [server] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [HTTP_AUTHORIZATION] => [HTTP_USER_AGENT] => Mozilla/5.0 (Windows NT 6.1; WOW64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/33.0.1750.149 Safari/537.36 [HTTP_CACHE_CONTROL] => no-cache [HTTP_PRAGMA] => no-cache [HTTP_HOST] => ap.hubtech.tv [HTTP_ACCEPT] => text/html, image/gif, image/jpeg, *; q=.2, */*; q=.2 [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] => ap.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 165.117.232.82 [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] => 25694 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => start=780 [REQUEST_URI] => /?start=780 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1527229029.178 [REQUEST_TIME] => 1527229029 ) [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] => 1527229029 [session.timer.last] => 1527229029 [session.timer.now] => 1527229029 [session.client.browser] => Mozilla/5.0 (Windows NT 6.1; WOW64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/33.0.1750.149 Safari/537.36 [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 780 [filter_order] => published_on [filter_order_Dir] => desc ) ) ) ) [user] => JUser Object ( [isRoot:protected] => [id] => 0 [name] => [username] => [email] => [password] => [password_clear] => [block] => [sendEmail] => 0 [registerDate] => [lastvisitDate] => [activation] => [params] => [groups] => Array ( [0] => 9 ) [guest] => 1 [lastResetTime] => [resetCount] => [requireReset] => [_params:protected] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( ) ) [_authGroups:protected] => Array ( [0] => 1 ) [_authLevels:protected] => Array ( [0] => 1 [1] => 1 ) [_authActions:protected] => [_errorMsg:protected] => [_errors:protected] => Array ( ) [aid] => 0 ) ) ) [inputs:protected] => Array ( ) ) [jrequest] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) ) ) [files] => JInputFiles Object ( [decodedData:protected] => Array ( ) [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [env] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [request] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [start] => 780 [limitstart] => 780 [option] => com_legacyinterface [view] => commentaries [Itemid] => 616 ) [inputs:protected] => Array ( ) ) [server] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [HTTP_AUTHORIZATION] => [HTTP_USER_AGENT] => Mozilla/5.0 (Windows NT 6.1; WOW64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/33.0.1750.149 Safari/537.36 [HTTP_CACHE_CONTROL] => no-cache [HTTP_PRAGMA] => no-cache [HTTP_HOST] => ap.hubtech.tv [HTTP_ACCEPT] => text/html, image/gif, image/jpeg, *; q=.2, */*; q=.2 [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] => ap.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 165.117.232.82 [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] => 25694 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => start=780 [REQUEST_URI] => /?start=780 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1527229029.178 [REQUEST_TIME] => 1527229029 ) [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 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Even as stock prices have corrected in recent weeks with only 36% of stocks having positive performance over the last 200 days and the average stock 19% from its one year high, we are reminded that stock valuations are still stretched pretty much everywhere. In the charts below we show the trusty price to cash flow ratio for the median stock in the developed world regions and also in the EMs. We highlight that even in areas of the market that have underperformed dramatically over the last four years (namely EM and Europe) the price to cash flow ratio for the median stock is still quite elevated relative to history. 


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© GaveKal Capital

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As the US economy continues to show signs of strength and the US Federal Reserve (Fed) continues to wind down its quantitative easing (QE) program, one would think the US Treasury markets would start reflecting a potential rise in inflation, and the eventuality of Fed monetary policy tightening. However, there has been a bit of disconnect in terms of behavior on the long end of the Treasury yield curve. Roger Bayston, senior vice president, Franklin Templeton Fixed Income Group®, breaks down why US 10-year Treasury note and 30-year bond yields aren’t ticking higher this year. He shares his view of the timing of possible Fed policy moves in light of economic data.

The current market consensus is for the Federal Reserve (Fed) to start raising its short-term benchmark interest rate (the federal funds rate) roughly in August of 2015. Our view is that if US economic growth continues at a more robust pace, and we see continued declines in the US unemployment rate, there’s a possibility we could see the Fed act even sooner than the market currently expects. We would expect gradual increases in the Fed funds rate once the Fed does start moving. If you believe the Treasury market should reflect economic activity and inflation rates, you can clearly see the disconnect amid the Fed’s ongoing quantitative easing (QE) programs. The 10-year Treasury note is currently yielding less than 2.5%,1 while real GDP in the second quarter of 2014 increased 4.6% (annual rate)2 and the market expectation for the third quarter is for an increase of 3% or better. Looking further out, the International Monetary Fund (IMF) recently raised its 2015 US GDP growth expectations to 3.1%3 while the Fed is a little less optimistic, with its latest forecast for growth of 2.6%–3% in 2015.4 Despite improvements in the economy, the shape of the Treasury yield curve has flattened since the start of the year. Longer-term Treasury rates have moved lower, while shorter rates have moved up, including Treasury notes along the two- to four-year part of the curve.

1014_YieldCurveFlatter

Positioning for the End of QE 

The most recent Fed communications continue to allow for flexibility in terms of how policymakers will approach the end of QE. The market seems to be anticipating that at the end of the Federal Open Market Committee (FOMC) meeting on October 29, 2014, the Fed will likely announce it will stop adding mortgage-backed securities to its portfolio. The Fed will own about $1.7 trillion of agency mortgages when it is finished with these purchases, representing about a third of the outstanding fixed-rate mortgage market of about $5.7 trillion.5 The Fed’s massive purchase program effectively replaced the role Fannie Mae and Freddie Mac historically have played in mortgage finance. Even when the Fed stops adding to its portfolio, it will likely continue to reinvest principal paydowns from the underlying amortizing residential loans. This means the Fed will likely continue playing a significant role in the market as it may end up buying between $10–$15 billion per month as a result of these paydowns. If and when the Fed does change course and decides to stop reinvesting principal paydowns, it will take quite some time before the giant mortgage portfolio amortizes away at prepayment rates. The $1.7 trillion portfolio would be approximately half of its size in about seven years’ time, so that would likely play out sometime after the year 2020.

Fed officials have been quick to state they do not expect to sell agency mortgage-backed security assets into the market, but we live in unconventional times in terms of central bank monetary activities, and actions are being taken that have not been previously done. In light of this, agency mortgage-backed securities have generally moved just as we might expect; they have risen when we have seen small periods of concern develop in the overall credit markets and then have declined when the credit-sensitive markets have performed better. We expect the trend could continue.

Connecting the Dots

At the moment, the Treasury market seems to be pricing in a lesser amount of tightening than the most current Fed “dots”—the graphical depiction of the forecasts of FOMC voting members for future Fed funds rates—depict. Fed officials are not generally experts at predicting forward economic activity; one would think that they might have a leg up in that pursuit, but that’s not necessarily the case. However, I do think it’s wise to pay attention to where they think short-term rates may go, as they do cast the actual votes on monetary policy actions.

When we analyze what we have heard from the Fed, along with the Franklin Templeton Fixed Income Group’s assessment of the economy, we see short-term rates as likely to adjust higher as we get closer to the time the Fed starts to act. The important issue for us is how that action translates into our strategies. For example, in our multi-sector strategies like Franklin Total Return Fund, we have had less interest rate exposure on the front part of the yield curve.

“A measured look at market shocks and changes in sentiment in the past couple of years seems to imply that the market has been able to find its source of liquidity.”- Roger Bayston

Bond Market Liquidity

I would like to touch on a topic that is currently on the minds of many investors—liquidity in the bond markets. As a result of both industry consolidation, as well as regulatory changes affecting the banking business, there are fewer bond dealers operating today than in the past, and the remaining dealers have reduced the capital they have committed to the bond-dealing business. Bond dealers have historically played a big role in matching buyers and sellers in the market, so the question has been posed about whether this is a great concern for bond investors, including us at Franklin Templeton. We do pay very close attention to these developments and would like to note some important points to bear in mind.

Baby boomers in the US have no doubt increased their allocations to fixed income as many have readjusted their portfolios heading into retirement. We have seen this not only in the retail funds business but in pension assets as well. Many private-defined benefit pension plans have moved to lock in their pension liabilities with matching long-duration, high-quality fixed income assets, leaving them less vulnerable to swings in asset markets. This is a source of demand for high-quality fixed income securities, and this may be a factor to consider when we think about shifting allocations between fixed income and other investment opportunities (in various asset classes) when this period of ultra-short low-interest rates changes.

Another factor to consider is how increased regulatory activity in banking and the de-risking of bank balance sheets has increased the amount of capital that banks are required to hold. Often this capital is in high-quality fixed income assets such as Treasury securities and agency mortgage-backed positions, and this is a trend that continues in Europe as well. On several occasions within the past couple of years, we have encountered market environments where sentiment has changed suddenly and large amounts of money have moved quickly. These situations have not caused major disruptions in terms of liquidity. A change in the credit cycle sentiment would be an important consideration to ponder, but a measured look at market shocks and changes in sentiment in the past couple of years seems to imply that the market has been able to find its source of liquidity.

Roger Bayston’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

What Are the Risks?

Franklin Total Return Fund

All investments involve risks, including possible loss of principal. Interest rate movements and mortgage prepayments will affect the fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in the fund adjust to a rise in interest rates, the fund’s share price may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The risks associated with higher-yielding, lower-rated securities (commonly called junk bonds) include higher risk of default and loss of principal. Investment in foreign securities also involves special risks, including currency fluctuations, and political and economic uncertainty. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio which may result in significant volatility and cause the fund to participate in losses (as well as enable gains) on an amount that exceeds the fund’s initial investment. The fund may not achieve the anticipated benefits, and may realize losses when a counterparty fails to perform as promised. These and other risks are described more fully in the fund’s prospectus.

Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN/342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
 
1. Source: US Treasury Department, as of October 8, 2014.
2. Source: US Bureau of Economic Analysis, September 26, 2014.
3. Source: IMF World Economic Outlook Database, October 2014. © by International Monetary Fund.
4. Source: US Federal Reserve, “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents,” September 2014.
5. Source: US Federal Reserve, Securities Industry and Financial Markets Association, as of June 2014.
 
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Bond investors are used to managing interest-rate risk and credit risk. But the financial crisis should have taught us that there are times when liquidity risk can be just as important to manage. Now is one of those times.

Why has liquidity become such a prevalent risk in today’s fixed-income markets?

Simply put: there’s a lot less of it. Stricter regulations that require banks to hold more capital against losses have prodded them into slashing inventories of assets such as corporate bonds. This leaves the banks unable to play the part of willing buyer when investors want to sell.

These liquidity dynamics likely magnified recent sell-offs in high-yield bonds and bank loans. It’s unclear how quickly interest rates will rise in anticipation of tighter Federal Reserve policy next year. But rise they probably will, and any drift upward could intensify selling pressure. In a worst case scenario, today’s trot to the exit could turn into a mad dash—and we doubt that everyone would fit through the door.

The good news is that liquidity risk is manageable—and can even offer attractive opportunities, given the right time horizon. When liquidity dries up in one sector, it can be plentiful in another. If managed properly, it can be an additional source of returns.

Here are five things investors can do to stay afloat:

1) Broaden your horizons with a multi-sector mind-set. Liquidity is episodic and can affect different sectors in different ways. Consequently, segregating one’s allocations into single-sector funds—high yield, emerging markets and so on—can be dangerous; if liquidity dries up in one sector, investors can quickly find themselves trapped. In our view, a holistic and dynamic multi-sector approach that lets investors tap into a broad universe of fixed-income assets offers better protection should liquidity in a specific sector dry up (Display).

2) Don’t skimp on cash and don’t overlook derivatives. Holding too much cash has been a losing proposition for investment returns these past six years, thanks to the Federal Reserve’s successful campaign to drive down the risk-free interest rate. But cash can come in awfully handy when it comes to meeting redemptions in low-liquidity environments. That’s why US mutual funds were allocating 9% of their portfolios to cash on average through August, according to Morningstar. Investors were much less prepared when the global financial crisis hit: the average cash allocation in December of 2008 was just 1.6%. To offset the potential performance drag of cash, investors can potentially improve returns by tapping the derivatives market to get exposure to “synthetic” securities. The liquid derivatives market also gives investors access to additional pools of liquidity.

3) In today’s market, look for “hands-on” trading expertise. Historically, traders at asset management firms mostly executed orders. But as banks have retreated from the bond-trading business, the responsibilities of buy-side traders have grown. The best traders are adept at finding sources of liquidity and making the most of opportunities caused by its ebb and flow. Investment managers who have embraced a more active role for traders stand a better chance, in our view, of managing liquidity risk effectively.

4) Be flexible with your investment horizons. This is especially important when low liquidity makes the trading environment so inflexible. When liquidity is plentiful, it’s easy to exit trades that have achieved their objectives. But in today’s fixed-income markets, investors shouldn’t assume liquidity will be there when needed. That’s why we think it pays to dig deeply into every possible investment. Multiple time horizons, including “holding to maturity,” should be considered when analyzing bonds. And if holding a particular bond to maturity doesn’t look attractive in today’s environment, investors might want to reconsider the security altogether.

5) Consider selective investments in private credit. File this one under the “silver lining” tab: the forces that have been reducing liquidity—increased regulation and stricter capital requirements—are also unlocking attractive opportunities in private credit. As banks originate fewer residential and commercial mortgages and lend less to mid-size companies, asset managers are filling the void. Yields on many private credit assets are on average considerably higher than those on more traditional bonds. The reason, of course, is simple: these investments are not as liquid. But as we’ve seen, liquidity isn’t what it used to be throughout the fixed-income market. In our view, investors with long time horizons may want to consider taking advantage of these “illiquidity premiums.”

We believe that these prudent steps can help investors navigate a less liquid market.

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.

Douglas J. Peebles is Chief Investment Officer and Head of Fixed Income at AllianceBernstein (NYSE:AB).

© AllianceBernstein

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Francis Gannon, Co-Chief Investment Officer and Managing Director of Royce & Associates, offers five statistics we think every investor should know about U.S. small-caps in the current volatile investment environment.

1 – The Russell 2000 Index is now seeing its biggest correction since 2011.

As of October 13, the Russell 2000 was down 12.9% from its 2014 high on July 3. While we have seen a number of corrections in recent times, we have not seen a double-digit correction for almost two years and we have not seen greater than 12% in more than three. The third quarter of 2014, moreover, saw the first negative quarter for the small-cap index in the last nine.

Is this worrying? No. To paraphrase Warren Buffet, we should look at market fluctuations as our friend, not our enemy.

As long-term investors looking for value and high-quality companies, we see the correction as an opportunity to find great businesses at attractive prices.

2 – Half of the companies in the Russell 2000 were down 20% or more through the end of September.

A close look inside the small-cap index reveals that 49% of its constituents are currently down at least 20% from their respective 52-week highs. More than one in 10—11%—are off more than 30% over the last 12 months. To us, this shows the correction has been rotational—in other words, it has been going on, quietly, for a long time.

This is in part attributable to fears over the global economy, with a particular focus on Europe, China, and even Japan. However, one could also call it the "Janet Yellen Correction." After first broaching the topic in May, the Fed Chair called the small-cap market "stretched" in July, thus highlighting for investors how rich many small-cap valuations were.

Since then, of course, they have come down. In early October, the Russell 2000 was trading at 17 times earnings. That is still expensive, but our deep dive into the index suggests that many high-quality small-cap stocks still look undervalued.

One metric that we think is particularly revealing of quality is ROIC—return on invested capital. Interestingly, the highest quality small-cap companies within the Russell 2000, as measured by ROIC, were trading at a discount to the highest quality large-cap companies at the end of September, while companies with the lowest ROIC accounted for virtually the entire small-cap premium (see the chart below).

The upshot is that the small-cap space currently boasts plenty of quality companies—and many look attractively priced to us.

Median LTMEV/EBITDA2 by ROIC Quartile as of 9/30/14

1 Last 12 Months
2 Enterprise value/earnings before interest, taxes, depreciation, and amortization Return on Invested Capital is calculated by dividing a company’s past 12 months of operating income (earnings before interest and taxes) by its average invested capital (total equity, less cash and cash equivalents, plus total debt, minority interest, and preferred stock). The portfolio calculation is a simple weighted average that excludes all non-equity securities, investment companies, and securities in the Financials sector with the exceptions of the asset management & custody banks and insurance brokers sub-industries. The portfolio calculation also eliminates outliers by applying the inter-quartile method of outlier removal.
Source: Russell Investment Group and Bloomberg

3 – A quarter of small-cap companies make no money.

Amazingly, 25% of companies in the Russell 2000 are currently non-earners (of those 25%, 40% are in the Health Care sector). They make no money at all.

This tells us two things. One, the index as a whole might not be as expensive as it looks because it includes such a large number of companies currently earning nothing.

Second, and much more important in our view, is the idea that small-cap investors need to really understand what they own. Active management can make an enormous difference in the small-cap space, more so we think than in other asset classes.

We see quality as paramount both to mitigating risk and achieving above-average long-term returns.

4 – The Russell 2000 has never returned between 6% and 16% in a calendar year.

This is a surprising statistic given that the average return of the index since inception was 11.8% through September 30, 2014. To have never delivered anything close to the most recent average annual total return since inception says a lot to us about the volatility of the index. We believe that after five years of mostly low volatility we are likely to see much more going forward, which has historically been good for active managers.

5 – Small-caps are rarely down when the S&P 500 has a positive year.

Since its inception in 1979, the Russell 2000 has delivered a negative calendar-year return when the S&P 500 has had a positive year only five times.

From the beginning of the small-cap correction that began in early July, the spread between large-cap and small-cap has grown wider. (Year-to-date through September 30, 2014, the Russell 2000 was down 7.4% compared to respective gains of 8.3% and 8.0% for the S&P 500 and Russell 1000.)

Small-caps may rally and end up enjoying positive results for the year. However, it is interesting to note that every time the Russell 2000 has been negative for the year and the S&P 500 positive, small-caps have outperformed the following year.

Important Disclosure Information

Francis Gannon is a Co-Chief Investment Officer and Managing Director of Royce & Associates. His thoughts in this piece concerning the stock market are solely his own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future. The historical performance data and trends outlined are presented for illustrative purposes only and are not necessarily indicative of future market movements.

Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell© is a trademark of Russell Investment Group. The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell 1000 index is an index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 index. The S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor's based on market size, liquidity, and industry grouping, among other factors. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

© The Royce Funds

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When markets get temporarily unruly as they have recently, it tends to drive folks like us to go back and prove to ourselves once again that each and every part of our existing portfolios (the stocks and the hedge positions we own) is as valid to us as it was when we bought it.  And, with many stocks on our watch list getting closer to being viable additions to the mix as their prices drop, we are essentially scouring our investable universe to see if we can either improve our upside potential, strengthen our defenses, or both.  It is a rigorous process, always.

Streettalklive.com 2014

Streettalklive.com 2014

That’s why we owe a special thanks to Lance Roberts and his crew at Streettalklive.com for posting a classic chart on investor emotions in a recent newsletter.  This is one that many financial advisors and their clients are familiar with.  I don’t know who originally created it, but it has been used by scores of professionals to make a very simple point: markets are cyclical, so is human emotion, and if you can appreciate how they are really joined at the hip, it will make investing a less stressful process.  It also makes this week’s blog a very straightforward message: we believe (as I suspect Mr. Roberts does) that the global stock markets are sending an increasingly strong signal that we are in the vicinity of the Anxiety-Denial stage.  As we have suggested in recent commentaries (both public on our blog and private to our clients), recognizing this is half the battle in transitioning our portfolios from a bull market “tilt” to a bear market “tilt” and, as a probable next step, to a stronger and stronger bear market “tilt.”  This is an evolving story and not something that is likely to be resolved any time soon.  For now, we are making you aware that we are aware of it, and that this layman’s view of the stock market and investor psychology has been a key to our past successes in rough markets.  To be continued.

IN THE MEANTIME, WE WOULD TRULY APPRECIATE YOUR OPINION ON WHERE YOU THINK WE ARE ON THIS CHART.  JUST VISIT WWW.HEDGEDINVESTING.COM, AND IN THE “HOW DID YOU HEAR ABOUT US FIELD” ENTER YOUR OPINION. 

IF WE SEE A TREND IN THE RESPONSES, WE WILL DISCUSS IT IN AN UPCOMING BLOG POST. WHILE YOU ARE AT THAT SITE, YOU CAN ALSO DOWNLOAD ONE OF OUR POPULAR INVESTMENT RESEARCH PAPERS.

© Sundgarden Investment Research

[description] => When markets get temporarily unruly as they have recently, it tends to drive folks like us to go back and prove to ourselves once again that each and every part of our existing portfolios (the stocks and the hedge positions we own) is as valid to us as it was when we bought it. And, with many stocks on our watch list getting closer to being viable additions to the mix as their prices drop, we are essentially scouring our investable universe to see if we can either improve our upside potential, strengthen our defenses, or both. It is a rigorous process, always. [author] => Robert Isbitts [legacyinterface_firm_id] => 402 [published_on] => 2014-10-19 [digest_date] => 2014-10-19 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-19 15:29:43 [created_by] => 948 [modified_on] => 2014-10-19 15:29:54 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1724 [hits] => 0 ) [5] => stdClass Object ( [legacyinterface_commentary_id] => 1659 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 0 [apv_conversation_id] => [content_type] => market-commentary [title] => [slug] => -2 [fulltext] =>

The market’s correction has many scratching their heads

In “The Tipping Point,” Malcolm Gladwell tries to describe the evolution of modest notions to megatrends. How and when does the accumulation of small impressions come to change larger perceptions? What makes for that dramatic moment when everything seems to change all at once? While Gladwell offers some clues on how these transitions come about, they remain a matter of some mystery.

From one perspective, the market movements of the past two weeks are based on an understandable accumulation of impressions. Economic performance across the world is very uneven: the United States and the United Kingdom are doing well while China transitions to slower growth and Europe struggles. Geopolitical uncertainty surrounding Russia and the Middle East is a source of concern. Central banks have been challenged to set appropriate policy, creating uncertainty for investors. 

But from another perspective, the corrections and volatility we’ve witnessed recently are somewhat mysterious. None of the factors noted above are new; they’ve all been discussed at some length for many months. Until two weeks ago, markets seemed to acknowledge and accept the risks to the outlook, choosing nonetheless to focus on its many positive aspects. 

 

If there is a tipping point for the market’s retreat, it might be the minutes of the September Federal Open Market Committee meeting, which were released on October 8. The narrative reflected a heightened sense of concern about global risks; some may have taken this citation as an indication that policy-makers had grown darker on the outlook. 

Viewed through a darker lens, all incoming news seemed to suggest the worst. A single month’s decline in retail sales was taken as a major warning sign, while robust year-over-year spending gains were ignored. Falling energy prices were seen as reflecting economic weakness, not as a boost to consumers in advance of the holidays. In the minds of the markets, Mario Draghi’s effort to revive the eurozone economy is now depicted as futile, not fruitful. Ebola morphed from an isolated pathogen to something which might be broadly contagious to commerce. 


Associated with this wholesale re-evaluation of economic prospects was a significant shift in expectations for the Federal Reserve. This is a surprising development, given the dearth of economic data received since its last meeting. And among the data we have received is a very strong employment report. 

 

The abrupt change of psychology made for a dizzying decline. Computer trading was blamed for making the problem worse: there was a “flash crash” in the market for 10-year U.S. Treasury bonds on Wednesday morning. Yields collapsed by 15 basis points in less than five minutes, only to regain most of that distance in the next five. Others cited the lack of liquidity in markets (discussed in our July 25 commentary) as another impediment to stability. 

There were certainly some technical things going on, but one ignores market signals at one’s own peril. It could well be that asset values were a bit stretched relative to fundamentals and needed to be reset, but I’ll leave it to my partners in our Asset Management group to comment on that. Fundamentally, here is our take on things.

  • We do not anticipate making any changes to our forecasts unless the correction persists and creates a feedback loop on economic activity. It is worth noting that equity values are still considerably higher than they were two, three and four years ago. Much of the wealth created remains in place and serves as a strong backdrop for spending and credit. The sheer momentum of job creation is also a powerful tailwind for the United States.

  • One Fed president came out this week with a call to extend quantitative easing, but we think it is premature to contemplate a change of strategy. Our call on the timing of an initial interest rate increase has not wavered for some time: September 2015 remains our most-likely case. Falling inflation, perhaps more than labor market slack, will support accommodation for some time to come.

  • We will continue to watch the eurozone closely. Results of the European Central Bank’s bank asset quality review (AQR) will be released on October 26, and we’ll analyze them carefully. Our international team will also focus on the European Commission’s debate over the French and Italian budgets and the evolving posture of Germany toward economic stimulus.

Being an economist at times like this is frustrating. Clients become more anxious for answers at the same time that standard modes of analysis are less useful. The best tonic for all would be swift stabilization and (dare we say it?) a rapid restoration of lost value. If the rout continues, though, I might contemplate a long vacation.

The Russian Bear Market 

Among the geopolitical uncertainties cited as contributing to the recent market correction, Russia’s aggression in Ukraine stands toward the top of the list. Ben Trinder, our analyst following the situation, reports.

Over the past couple of months, the Russian ruble has been in free-fall. The currency recently traded above 40 to the U.S. dollar for the first time, prompting central bank intervention, a shift in the targeted trading corridor and fears of capital controls. The last time Russia was under this much market pressure was 1998, an era which resulted in a sovereign debt default. 

This begs the question: will history repeat? How long can Russia survive the ongoing standoff with Ukraine and its associated repercussions before it is in real financial distress? The answer: quite a while. For while there are some modest similarities between today’s conditions and those of 15 years ago, differences dominate. 

A quick re-cap of what happened in the late ‘90s helps provide perspective. After the breakup of the Soviet Union, Russia became saddled with huge debts from the former USSR. At the same time, the economy was transitioning from the communist era to that of a free market. Tax collection was weak, government revenue was low and the price of Russia’s main export (oil) was falling, forcing the current and fiscal accounts into deficit. 

Toward the end of 1997, the Asian crisis erupted, prompting a speculative attack on the ruble. The Central Bank of Russia (CBR) defended its currency by using its foreign reserves to intervene in markets; 23% of total reserves were spent in the last quarter of 1997 alone. Interest rates were hiked to 150% in June 1998 in an attempt to stem capital outflows. 

Unfortunately, investors were spooked beyond the point of reassurance. By August 1998, the Moscow Exchange (MICEX) stock index had lost more than 70% of its value. Investors realized Russia’s fundamentals were poor and believed a devaluation of the ruble and default was imminent. By mid-August 1998, both events had come to pass. 

There are some parallels between today’s situation and that of 16 years ago, but many more important distinctions. Vladimir Putin’s incursions into Ukraine have led to a civil war in that country, and Western sanctions against Russian corporates were imposed as punishment. This has had the same effect of shifting investor sentiment as the Asian Crisis did. Capital has been heading out of the economy; worryingly, the exodus includes many domestic investors who have lost confidence in their own country. 

 


The CBR has once again been utilizing its reserves to support the ruble; they are down US$60 billion so far this year. But Russian reserves, buoyed by massive oil revenues, are 57 times bigger now than they were during the previous crisis. There is plenty of dry powder at hand. 

The fall in Russian stock prices has been much less pronounced than it was in 1998; the MICEX is down just 7.8% down year-to-date at this writing. The CBR has raised the one- week repo rate twice this year – to 7.5% in April and then to 8% in July – to help steady inflationary pressures (a by-product of the falling currency). This is a far cry from the 1998 experience. 

So it appears that Putin and friends have the depth to hold out for some time. The hardest question is where will the crisis go from here? The falling oil price adds another twist to the story. The new budget assumed a price of more than $100 per barrel, and with the price currently below $90, revisions to spending in the coming months are highly likely. Should pressure start building on the budget, sentiment toward Russia could rapidly sour further. Therefore, if oil prices remain low for an extended period, we may see a quicker Russian pullback than previously expected. 

Ultimately, though, it’s very unlikely Russia will experience a crisis of the same magnitude seen at the end of the last century. Interestingly, Russia’s current challenge stems from trying to rebuild the same Soviet spirit whose demise created such problems not long ago. That is an irony that Tolstoy would have appreciated. 

The U.S. Federal Budget Deficit: Healthier but Not Healthy 

The federal government’s 2014 fiscal year ended September 30, and it brought good news: the federal budget deficit is significantly smaller compared with 2013. Although this is a legitimate reason for celebration, we should be mindful of the durability of this improvement and recognize that long-term challenges remain unresolved. 

The U.S. federal budget deficit declined to $483 billion in fiscal year 2014, down $197 billion from the gap registered in fiscal year 2013 and the smallest deficit in six years. The budget deficit is 2.8% of gross domestic product (GDP), which is meaningfully smaller than the 10.2% mark of 2009. 

The Congressional Budget Office (CBO) estimates that the budget deficit is likely to shrink slightly in 2015 but widen thereafter in absolute terms and begin to climb again as a percentage of GDP from 2019. Consequently, publicly held debt is estimated to touch nearly 80% of GDP by 2024. 

 

The nearly steady federal budget deficit as a percent of GDP in the next few years is a welcome development, as it implies reduced pressure on interest rates as the Federal Reserve contemplates normalizing monetary policy. 

Long-term implications of a persistent and widening deficit are the central concern. An extended period of deficits and growing national debt eventually reduces private-sector investment and erodes productivity and the nation’s standard of living. 

This gloomy prognosis is preventable only if federal government expenditures are contained in the future. Of the major components of government outlays, health care spending is the largest and fastest-growing item. There is encouraging news on the health care front. Growth of health care costs stabilized in the last few years after exceeding inflation by a large margin for an extended period. The key question is what factors brought about the decline in Medicare costs and whether it is sustainable. 

Containing health care costs is critical to putting the federal budget on a sustainable path. Some combination of natural forces and legislation will be needed to achieve this outcome. 

Speaking of legislation, the upcoming election on November 4 may shift control of the Senate, but we will continue to have a divided government. At times in the past, power- sharing has paved the way to compromise, but few are expecting much legislative movement next year. 

Pulling the strands together, it has been well-known for several years that the federal budget’s trajectory is unfavorable and short-term Band-Aids are inadequate. It remains to be seen if the new Congress will take this opportunity to address the challenge while there is room to navigate.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

© Northern Trust

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The market’s correction has many scratching their heads

In “The Tipping Point,” Malcolm Gladwell tries to describe the evolution of modest notions to megatrends. How and when does the accumulation of small impressions come to change larger perceptions? What makes for that dramatic moment when everything seems to change all at once? While Gladwell offers some clues on how these transitions come about, they remain a matter of some mystery.

From one perspective, the market movements of the past two weeks are based on an understandable accumulation of impressions. Economic performance across the world is very uneven: the United States and the United Kingdom are doing well while China transitions to slower growth and Europe struggles. Geopolitical uncertainty surrounding Russia and the Middle East is a source of concern. Central banks have been challenged to set appropriate policy, creating uncertainty for investors. 

But from another perspective, the corrections and volatility we’ve witnessed recently are somewhat mysterious. None of the factors noted above are new; they’ve all been discussed at some length for many months. Until two weeks ago, markets seemed to acknowledge and accept the risks to the outlook, choosing nonetheless to focus on its many positive aspects. 

 

If there is a tipping point for the market’s retreat, it might be the minutes of the September Federal Open Market Committee meeting, which were released on October 8. The narrative reflected a heightened sense of concern about global risks; some may have taken this citation as an indication that policy-makers had grown darker on the outlook. 

Viewed through a darker lens, all incoming news seemed to suggest the worst. A single month’s decline in retail sales was taken as a major warning sign, while robust year-over-year spending gains were ignored. Falling energy prices were seen as reflecting economic weakness, not as a boost to consumers in advance of the holidays. In the minds of the markets, Mario Draghi’s effort to revive the eurozone economy is now depicted as futile, not fruitful. Ebola morphed from an isolated pathogen to something which might be broadly contagious to commerce. 


Associated with this wholesale re-evaluation of economic prospects was a significant shift in expectations for the Federal Reserve. This is a surprising development, given the dearth of economic data received since its last meeting. And among the data we have received is a very strong employment report. 

 

The abrupt change of psychology made for a dizzying decline. Computer trading was blamed for making the problem worse: there was a “flash crash” in the market for 10-year U.S. Treasury bonds on Wednesday morning. Yields collapsed by 15 basis points in less than five minutes, only to regain most of that distance in the next five. Others cited the lack of liquidity in markets (discussed in our July 25 commentary) as another impediment to stability. 

There were certainly some technical things going on, but one ignores market signals at one’s own peril. It could well be that asset values were a bit stretched relative to fundamentals and needed to be reset, but I’ll leave it to my partners in our Asset Management group to comment on that. Fundamentally, here is our take on things.

  • We do not anticipate making any changes to our forecasts unless the correction persists and creates a feedback loop on economic activity. It is worth noting that equity values are still considerably higher than they were two, three and four years ago. Much of the wealth created remains in place and serves as a strong backdrop for spending and credit. The sheer momentum of job creation is also a powerful tailwind for the United States.

  • One Fed president came out this week with a call to extend quantitative easing, but we think it is premature to contemplate a change of strategy. Our call on the timing of an initial interest rate increase has not wavered for some time: September 2015 remains our most-likely case. Falling inflation, perhaps more than labor market slack, will support accommodation for some time to come.

  • We will continue to watch the eurozone closely. Results of the European Central Bank’s bank asset quality review (AQR) will be released on October 26, and we’ll analyze them carefully. Our international team will also focus on the European Commission’s debate over the French and Italian budgets and the evolving posture of Germany toward economic stimulus.

Being an economist at times like this is frustrating. Clients become more anxious for answers at the same time that standard modes of analysis are less useful. The best tonic for all would be swift stabilization and (dare we say it?) a rapid restoration of lost value. If the rout continues, though, I might contemplate a long vacation.

The Russian Bear Market 

Among the geopolitical uncertainties cited as contributing to the recent market correction, Russia’s aggression in Ukraine stands toward the top of the list. Ben Trinder, our analyst following the situation, reports.

Over the past couple of months, the Russian ruble has been in free-fall. The currency recently traded above 40 to the U.S. dollar for the first time, prompting central bank intervention, a shift in the targeted trading corridor and fears of capital controls. The last time Russia was under this much market pressure was 1998, an era which resulted in a sovereign debt default. 

This begs the question: will history repeat? How long can Russia survive the ongoing standoff with Ukraine and its associated repercussions before it is in real financial distress? The answer: quite a while. For while there are some modest similarities between today’s conditions and those of 15 years ago, differences dominate. 

A quick re-cap of what happened in the late ‘90s helps provide perspective. After the breakup of the Soviet Union, Russia became saddled with huge debts from the former USSR. At the same time, the economy was transitioning from the communist era to that of a free market. Tax collection was weak, government revenue was low and the price of Russia’s main export (oil) was falling, forcing the current and fiscal accounts into deficit. 

Toward the end of 1997, the Asian crisis erupted, prompting a speculative attack on the ruble. The Central Bank of Russia (CBR) defended its currency by using its foreign reserves to intervene in markets; 23% of total reserves were spent in the last quarter of 1997 alone. Interest rates were hiked to 150% in June 1998 in an attempt to stem capital outflows. 

Unfortunately, investors were spooked beyond the point of reassurance. By August 1998, the Moscow Exchange (MICEX) stock index had lost more than 70% of its value. Investors realized Russia’s fundamentals were poor and believed a devaluation of the ruble and default was imminent. By mid-August 1998, both events had come to pass. 

There are some parallels between today’s situation and that of 16 years ago, but many more important distinctions. Vladimir Putin’s incursions into Ukraine have led to a civil war in that country, and Western sanctions against Russian corporates were imposed as punishment. This has had the same effect of shifting investor sentiment as the Asian Crisis did. Capital has been heading out of the economy; worryingly, the exodus includes many domestic investors who have lost confidence in their own country. 

 


The CBR has once again been utilizing its reserves to support the ruble; they are down US$60 billion so far this year. But Russian reserves, buoyed by massive oil revenues, are 57 times bigger now than they were during the previous crisis. There is plenty of dry powder at hand. 

The fall in Russian stock prices has been much less pronounced than it was in 1998; the MICEX is down just 7.8% down year-to-date at this writing. The CBR has raised the one- week repo rate twice this year – to 7.5% in April and then to 8% in July – to help steady inflationary pressures (a by-product of the falling currency). This is a far cry from the 1998 experience. 

So it appears that Putin and friends have the depth to hold out for some time. The hardest question is where will the crisis go from here? The falling oil price adds another twist to the story. The new budget assumed a price of more than $100 per barrel, and with the price currently below $90, revisions to spending in the coming months are highly likely. Should pressure start building on the budget, sentiment toward Russia could rapidly sour further. Therefore, if oil prices remain low for an extended period, we may see a quicker Russian pullback than previously expected. 

Ultimately, though, it’s very unlikely Russia will experience a crisis of the same magnitude seen at the end of the last century. Interestingly, Russia’s current challenge stems from trying to rebuild the same Soviet spirit whose demise created such problems not long ago. That is an irony that Tolstoy would have appreciated. 

The U.S. Federal Budget Deficit: Healthier but Not Healthy 

The federal government’s 2014 fiscal year ended September 30, and it brought good news: the federal budget deficit is significantly smaller compared with 2013. Although this is a legitimate reason for celebration, we should be mindful of the durability of this improvement and recognize that long-term challenges remain unresolved. 

The U.S. federal budget deficit declined to $483 billion in fiscal year 2014, down $197 billion from the gap registered in fiscal year 2013 and the smallest deficit in six years. The budget deficit is 2.8% of gross domestic product (GDP), which is meaningfully smaller than the 10.2% mark of 2009. 

The Congressional Budget Office (CBO) estimates that the budget deficit is likely to shrink slightly in 2015 but widen thereafter in absolute terms and begin to climb again as a percentage of GDP from 2019. Consequently, publicly held debt is estimated to touch nearly 80% of GDP by 2024. 

 

The nearly steady federal budget deficit as a percent of GDP in the next few years is a welcome development, as it implies reduced pressure on interest rates as the Federal Reserve contemplates normalizing monetary policy. 

Long-term implications of a persistent and widening deficit are the central concern. An extended period of deficits and growing national debt eventually reduces private-sector investment and erodes productivity and the nation’s standard of living. 

This gloomy prognosis is preventable only if federal government expenditures are contained in the future. Of the major components of government outlays, health care spending is the largest and fastest-growing item. There is encouraging news on the health care front. Growth of health care costs stabilized in the last few years after exceeding inflation by a large margin for an extended period. The key question is what factors brought about the decline in Medicare costs and whether it is sustainable. 

Containing health care costs is critical to putting the federal budget on a sustainable path. Some combination of natural forces and legislation will be needed to achieve this outcome. 

Speaking of legislation, the upcoming election on November 4 may shift control of the Senate, but we will continue to have a divided government. At times in the past, power- sharing has paved the way to compromise, but few are expecting much legislative movement next year. 

Pulling the strands together, it has been well-known for several years that the federal budget’s trajectory is unfavorable and short-term Band-Aids are inadequate. It remains to be seen if the new Congress will take this opportunity to address the challenge while there is room to navigate.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

© Northern Trust

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The United States is doing better than it has in years. Jobs growth is up, unemployment is down, our manufacturing sector carries the rest of the world on its shoulders like a wounded soldier and the World Economic Forum named the U.S. the third-most competitive nation, our highest ranking since before the recession.

As heretical as it sounds, there’s a downside to America’s success, and that’s a stronger dollar. For the 12-month period, our currency has seen a 1.1-standard deviation move, which has put pressure on two commodities that we consider our lifeblood at U.S. Global Investors: gold and oil.

It's worth noting that we’ve been here before. In October 2011, a similar correction occurred in energy, commodities and resources stocks based on European and Chinese growth fears. But international economic stimulus measures helped raise market confidence, and many of the companies we now own within these sectors benefited. Between October 2011 and January 2012, Anadarko Petroleum rose 58 percent; Canadian Natural Resources, 20 percent; Devon Energy, 15 percent; Cimarex Energy, 15 percent; Peyto Exploration & Development, 15 percent; and Suncor Energy, 10 percent.

Granted, we face new challenges this year that have caused market jitters—Ebola and ISIS, just to name a couple. But we’re confident that once the dollar begins to revert to the mean, a rally in energy and resources stocks might soon follow. Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), notes that he’s been nibbling on cheap stocks ahead of a potential rally, one that, he hopes, mimics what we saw in late 2011 and early 2012.

A repeat of last year's abnormally frigid winter, though unpleasant, might help heat up some of the sectors and companies that have underperformed lately.

September Was the Cruelest Month

On the left side of the chart below, you can see 45 years’ worth of data that show fairly subdued fluctuations in gold prices in relation to the dollar. On the right side, by contrast, you can see that the strong dollar pushed bullion prices down 6 percent in September, historically gold’s strongest month. This move is unusual also because gold has had a monthly standard deviation of ±5.5 percent based on the last 10 years’ worth of data.

Strong-contrast-in-2014-gold-and-dollar-changes-vs-historic-averages
click to enlarge

Here’s another way of looking at it. On October 3, bullion fell below $1,200 to prices we haven’t seen since 2010, but it quickly rebounded to the $1,240 range as the dollar index receded from its peak the same day.

A-Strong-US-Dollar-Keeps-Gold-and-Oil-Prices-Low
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There’s no need to worry just yet. This isn’t 2013, when the metal gave back 28 percent. And despite the correction, would it surprise you to learn that gold has actually outperformed several of the major stock indices this year?

Gold-is-Outperforming-All-but-the-SP-500-Index
click to enlarge

As for gold stocks, there’s no denying the facts: With few exceptions, they’ve been taken to the woodshed. September was demonstrably cruel. Based on the last five years’ worth of data, the NYSE Arca Gold BUGS Index has had a monthly standard deviation of ±9.4, but last month it plunged 20 percent. We haven’t seen such a one-month dip since April 2013. This volatility exemplifies why we always advocate for no more than a 10 percent combined allocation to gold and gold stocks in investor portfolios.

Oil’s slump is a little more complicated to explain.
Since the end of World War II, black gold has been priced in U.S. greenbacks. This means that when our currency fluctuates as dramatically as it has recently, it affects every other nation’s consumption of crude. Oil, then, has become much more expensive lately for the slowing European and Asian markets. Weaker purchasing power equals less overseas oil demand equals even lower prices.

What some people are calling the American energy renaissance has also led to lower oil prices. Spurred by more efficient extraction techniques such as fracking, the U.S. has been producing over 8.5 million barrels a day, the highest domestic production level since 1986. We’re awash in the stuff, with supply outpacing demand. Whereas the rest of the world has flat-lined in terms of oil production, the U.S. has zoomed to 30-year highs.

In a way, American shale oil has become a victim of its own success.

Domestic-Crude-Oil-Production-Riding-Sharply-as-the-Rest-of-the-World-Has-Flat-Lined
click to enlarge

At the end of next month, members of the Organization of the Petroleum Exporting Countries (OPEC) are scheduled to meet in Vienna. As Brian speculated during our most recent webcast, it would be surprising if we didn’t see another production cut. With Brent oil for November delivery at $83 a barrel, a four-year low, many oil-rich countries, including Iran, Iraq, Venezuela and Saudi Arabia, will have a hard time balancing their books. Venezuela, in fact, has been clamoring for an emergency meeting ahe ad of November to make a plea for production cuts.      

Producer-country-budget-breakeven-prices
click to enlarge

Although not an OPEC member, Russia, once the world’s largest producer of crude, is being squeezed by plunging oil prices on the left, international sanctions on the right. This might prompt President Vladimir Putin to scale back the country’s presence in Ukraine and delay a multibillion-dollar revamp of its armed forces. When the upgrade was approved in 2011, GDP growth was expected to hold at 6 percent. But now as a result of the sanctions and dropping oil prices, Russia faces a dismally flat 0.5 percent.

Volatility Has Returned

The current all-in sustaining cost to produce one ounce of gold is hovering between $1,000 and $1,200. With the price of bullion where it is, many miners can barely break even. Production has been down 10 percent because it’s become costlier to excavate. As I told Kitco News’ Daniela Cambone, we will probably start seeing supply shrinkage in North and South America and Africa.

 

The same could happen to oil production. Extraction of shale oil here in the U.S. costs companies between $50 and $100 a barrel, with producers able to break even at around $80 to $85. If prices slide even further, drillers might be forced to trim their capital budgets or even shelve new projects.

Michael Levi of the Council on Foreign Relations told NPR’s Audie Cornish that a decrease in drilling could hurt certain commodities:

[I]f prices fall far enough for long enough, you’ll see a pullback in drilling. And shale drilling uses a lot of manufactured goods—20 percent of what people spend on a well is steel, 10 percent is cement, so less drilling means less manufacturing in those sectors.

At the same time, Levi places oil prices in a long-term context, reminding listeners that we’ve become accustomed to unusually high prices for the last three years.

"People were starting to believe that this was permanent, and they were wrong,” he said. “So the big news is that volatility is back.”

On this note, be sure to visit our interactive and perennially popular Periodic Table of Commodities, which you can modify to view gold and oil’s performance going back ten years.

A Penny Saved Is a Billion Dollars To Spend and Invest

With fresh volatility in oil production comes the fear that the most price-sensitive states will be hurt the most. Exceptionally vulnerable states include Oklahoma, Wyoming and North Dakota. Texas, the nation’s leading oil producer—one of the world’s top producers, in fact—is diversified well enough to not feel the pain as much.

What’s bad for oil producers, though, turns out to be good for American consumers, who are already benefiting from lower gasoline prices. According to AAA’s Daily Fuel Gauge Report, the national average for a gallon of gas is $3.16, down more than 6 percent from $3.35 a year ago.

As a result, American consumers are looking at huge savings—$40 billion this year alone. According to Deutsche Bank’s Joe LaVogna, every penny that’s saved at the pump equates to a billion dollars in household energy consumption that can be put back into the economy in other ways.         

every-one-cent-change-in-gas-prices-impacts-consumptions-by-1-billion
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I like to think of this as an unexpected and very welcome tax break. Automobile sales are already up from 2009. Lower gas prices might encourage some families to spring for that Suburban instead of a Prius.

Vehicle-Sales-in-the-US-Have-Accelerated-Steadily-Since-2009
click to enlarge

Klondex Turning Heads and Profits

As I said earlier, gold stocks have been hurting lately. One mining company that’s managed to not only survive in this uncertain climate but actually thrive is Klondex Mines which has complete ownership and control of the Fire Creek Project and Midas Mine, both in Nevada.

The chart below, based on our own research, shows Klondex’s relative strength to its peers and why we find the company so attractive in the long term. The y-axis indicates profit margin, the x-axis, enterprise value. The size of the spheres represents the amount of revenue generated by each one of these companies in the second quarter of 2014, Klondex’s first quarter of full commercial production.

Klondex-mines-looks-attractive-against-peers-in-second-quarter
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What the chart conveys is that, in relation to its peers, Klondex has a significantly higher profit margin than companies with a market cap two to three times its size.

“This is going to be very positive for Klondex shareholders as we go into the year-end,” portfolio manager Ralph Aldis said during our webcast. “The third quarter should be another great quarter, and that’s when people will say, ‘Hey, that second quarter report wasn’t a fluke.’ They’re going to start buying the stock and get it moving.”

Indeed, Klondex has managed to stay above the Market Vectors Junior Gold Miners ETF for the 12-month period, delivering a positive return of 7 percent versus the ETF’s -7.5 percent.

Klondex-Mines-Outperforms-the-market-Vectors-Junior-Gold-Miners-ETF
click to enlarge

On numerous occasions I’ve written about our research on the typical lifecycle of a mine, most recently in my whitepaper “Managing Expectations: Anticipate Before You Participate in the Market.” Below you can see the relationship between a mine’s lifecycle and the company’s share price.  

Life-cycle-of-a-mine
click to enlarge

As experts in mining stocks, it’s imperative for us to know which production stage the mine is in to manage our exposure to the company.
In the case of Klondex, its price action mimics the movements in share price based on the chart above, confirming our research.

Klondex-Mine-Moves-in-Tandem-with-Mine-Life-Cycle
click to enlarge

It also supports the benefits of active management.

“When you buy an indexed fund, you’re basically just buying the market capitalization of those companies,” Ralph said. “You’re not getting the benefit of active management where we go out, meet the company’s management team and know its history. We’re familiar with the lifecycle of the mine in question, the money, the burn rate and the minerals the company is involved in.”

I couldn’t have said it better myself.

Speaking of Active Management…

Last week, I expressed my concerns about how the European Union is handling (or not handling) its fiscal and monetary mess. Because the EU is such an important region for the global economy, investors have become impatient with the bickering that’s stalled any clear solution to its slowdown.

This week I’ve been in Italy meeting with other global business leaders, while U.S. Global’s Director of Research John Derrick has been visiting and assessing Greek and Turkish companies such as Tsakos Energy Navigation, Jumbo, Turk Telecom and Turkcell.

Watch for our firsthand accounts of and insights on the European situation next week.

Index Summary

  • Major market indices finished lower this week.  The Dow Jones Industrial Average fell 0.99 percent. The S&P 500 Stock Index dropped 1.02 percent, while the Nasdaq Composite declined 0.42 percent. The Russell 2000 small capitalization index rose 2.75 percent this week.
  • The Hang Seng Composite declined 0.61 percent; Taiwan fell 5.06 percent while the KOSPI lost 1.78 percent.
  • The 10-year Treasury bond yield fell 373 basis points to 2.20 percent.

Domestic Equity Market

The S&P 500 index declined for a fourth straight week and set a new year-to-date low.  Equity market weakness centered on global growth concerns, Ebola fears, and policy inaction by global central banks.  However, the S&P 500 staged an impressive intraday turnaround on Wednesday that helped fuel positive gains in Friday’s trading.  Additionally, the market fell below its 200-day moving average, more than 9 percent off its recent September all-time high, but managed to recoup some of the losses as it neared the 200-day moving average, setting a positive tone for next week’s trading.

S&P 500 Economic Sectors
click to enlarge

Strengths

  • The Industrials sector, mainly transportation, outperformed in volatile trading. CSX Corp. was the top performer in the S&P 500 on the week, up 13.09 percent following a better-than-expected earnings report. United Rentals was another top gainer, up over 10.17 percent in the period. 
  • The utilities sector continued to do well as gas utilities and pipeline stocks outperformed. Plains GP and Targa Resources benefited from a strong sector rebound, which ended the week higher by 1.45 percent.
  • Positive September retail auto sales and building permits all beat expectations midweek, which helped fuel a positive turnaround for the oversold cyclical sectors of the S&P 500.

Weaknesses

  • Technology was the worst performing sector this week, mainly on weak news flow from the semiconductor industry and a weak third-quarter earnings report from Netflix.
  • Health care also underperformed as defensive sectors lagged in the late week rally. Also with the AbbVie-Shire deal in question, many hedge funds likely unwound tactical positions, which may have increased volatility within the sector. 
  • Netflix was the worst performer in the S&P 500 this week, falling by 21.01 percent. This was caused by a shortfall in subscriber growth, despite beating revenue and earnings forecasts, pushing the stock down to May 2014 levels.

Opportunities

  • The Fed remains accommodative and other global central banks even more so, and rumors this week on a possible delay of the end of quantitative easing furthered this thought process. This could help provide a strong momentum for equities.
  • Consumer Price Index and existing home sales numbers will be released next week, with both expected to be positive from last month’s results.
  • Even though the equity market dropped below the 200-day moving average, the S&P 500 has not fallen more than 10 percent from its peak in September, and made a meaningful recovery by the end of this week.

Threats

  • Market volatility was extremely high this week with Wednesday’s trading opening down more than 3 percent before recovering 2 percent later in the day. These high swings could prove detrimental for an immediate market recovery.    
  • Even though there is a potential for positive economic news releases, the Empire State Manufacturing Survey came in 20 percent lower than the prior period and 15 percent lower than expected. Poor results for future economic indicators could hurt the market.
  • With Ebola, active military conflict, and European recession fears, global markets remain somewhat tenuous which could result in excessive volatility.
The Economy and Bond Market

The two-year Treasury yield fell sharply to near-August lows of 0.24 percent by midweek before recovering to 0.37 percent by Friday’s close. The main driver of the decline was a global slowdown fear and a stronger dollar posing a potential risk to the U.S. economy. The 10-year bond fell Wednesday to the lowest level since June 2013.

10-Year-Treasury-Yield
click to enlarge

Strengths

  • Treasury yields recovered along with the broader equity market towards the end of the week after falling to new lows on Wednesday.
  • The National Federation of Independent Business (NFIB) posted better-than-expected Small Business Optimism Index numbers, highlighting the resilience of the American economy in spite of fears of a global slowdown and the Ebola outbreak.
  • Initial jobless claims continue to drop, fueling the notion of a continuously growing U.S. economy. Claims, in fact, are at their lowest number since 2000.

Weaknesses

  • The U.S. dollar had its second down week since early July, ending at 0.80 percent versus the top ten major global currencies.
  • The Empire State Manufacturing Survey was dramatically lower than expected, down more than 20 percent from last month and more than 15 percent worse than expected. This might not bode well for the growth trajectory and the end of quantitative easing (QE) at the end of this month.
  • U.S. five-year notes fell 7.29 percent this week, furthering doubts about the global economy and the measures being taken to improve growth.

Opportunities

  • With two-year Treasuries dropping this week, investors might reach further down the yield curve to secure higher returns.
  • New home sales data is scheduled to be released next week. Although this number is expecting to be worse than the previously released data, it could be overlooked given the recent lower mortgage rates. 
  • With key global central banks back into easy policy mode and inflation trending lower in many parts of the world, the path of least resistance for bond yields likely remains flat to down.

Threats

  • Federal Reserve Chairwoman Janet Yellen discussed income inequality in a speech, with many speculating that the Fed could push out the next rate hike or continue its QE program to enhance economic growth.
  • The U.S. bond yields fell sharply this week to lows unseen in more than a year. If they remain low, it could signal a recession. 
  • Geopolitical unrest in Ukraine, Iraq and Syria, Greece’s shaky economy and now Ebola fears have heightened investors’ anxiety.

 

Gold Market

For the week, spot gold closed at $1,238.54 up $15.45 per ounce, or 1.26 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 0.21 percent. The U.S. Trade-Weighted Dollar Index fell 0.70 percent for the week.

DateEventSurveyActualPrior
Oct 15 Germany CPI YoY 0.8% 0.8% 0.8%
Oct 15 US PPI Final Demand YoY 1.8% 1.6% 1.8%
Oct 16 Eurozone CPI Core YoY 0.7% 0.8% 0.7%
Oct 16 US Initial Jobless Claims 290K 264K 287K
Oct 17 US Housing Starts 1008K 1017K 956K
Oct 20 China Retail Sales YoY 11.7% -- 11.8%
Oct 22 US CPI YoY 1.6% -- 1.7%
Oct 22 HSBC China Manufacturing PMI 50.2 -- 50.2
Oct 23 US Initial Jobless Claims 284K -- 264K
Oct 24 US New Home Sales 470K -- 504K

Strengths

  • Standing at just over $2 billion in August, gold imports in India surged 450 percent year-over-year in September to reach $3.75 billion. India’s trade deficit widened the most in 18 months as a result. The surge in demand was triggered by the festival season in the country.
  • Concern over global growth peaked this week causing a selloff in global equities and spurring gold purchases. The precious metal’s appeal as a safe haven rewarded gold investors this week.
  • According to Bloomberg, gold traders are the most bullish they’ve been in 10 weeks. Seventeen out of 27 traders hold a bullish outlook on gold, citing global growth fears as justification.

Weaknesses

  • Platinum declined to a level below gold for the first time since April 2013 this week. The precious metal is widely used for automotive catalytic converters. With roughly 50 percent of usage related to industrial production, fears of a global growth slowdown are weighing on platinum.
  • Senior gold-producing companies are cutting costs amid declining bullion prices. However, despite cost-cutting, third-quarter earnings are expected to decline by 27 percent. Silver producers are estimated to report a 33-percent decline in earnings per share due to falling silver prices.
  • The U.S. 5-year breakeven inflation rate reached its lowest point since 2011 on Wednesday. Deflationary fears appear to have peaked however, as yields have shown a significant bounce to the upside since Thursday. As global growth slowdown fears seem overplayed, and the European Central Bank (ECB) prepares for its asset-backed purchasing program, it seems likely that inflation will rebound.

Five-Year-Breakeven-Inflation-Rate-Reveals-Deflation-Fears
click to enlarge

Opportunities

  • Despite the bounce in gold prices this week, silver remains subdued. The relative lag of silver to gold is unusual, implying silver prices may rally soon if gold stays positive.
  • The Market Vectors Global Junior Gold Miners Index will now allow larger index companies to qualify for the index. The buffer zone used in the index methodology has been expanded to include companies ranking between 75 and 100 percent of the eligible universe, as opposed to the current range of 80 and 100 percent.
  • The ECB announced this week that it will begin its asset-backed purchasing program within days in order to respond to declining global growth. Stimulus out of the eurozone should help relieve the deflationary pressures permeating through the region and consequentially the rest of the world.

Threats

  • Switzerland’s National Bank is moving to block the motion that would require it to hold at least 20 percent of its assets in gold. The “Save our Swiss Gold” initiative should be voted down according to the Swiss Federal Council, as well as both houses of parliament.
  • Barclays stated in a report that it expects the gold rally to be short-lived. It argues that macroeconomic headwinds will outweigh the increased demand from gold in India, leading to an overall decline in gold prices in the future.
  • Natixis Commodities Research set a gold price forecast for $1,170 per ounce in 2015. On top of the predication for a decline in the price of gold, Natixis expects the current outflows out of gold exchange-traded products (ETPs) to continue into the new year.
Energy and Natural Resources Market

Incremental-Oil-Demand-Through-2019
click to enlarge

Strengths

  • Iron and steel stocks outperformed this week, bouncing back from recent declines. Specifically, Fortescue Metals Group rallied on opportunities in the merger and acquisition (M&A) space as well as on expectations for stronger fundamentals. The Bloomberg World Iron and Steel Index and Fortescue were up 0.93 percent and 5.52 percent, respectively.
  • Silver stocks, along with other precious metals climbed back this week. The Global X Silver Miners ETF closed up 2.27 percent this week. Among the outperformers in the silver space, Silver Wheaton was up 0.41 percent on the week.
  • Paper and forest product stocks had a productive week, as they tend to outperform in a strong dollar environment. Western Forest Products was up 3.90 percent this week.

Weaknesses

  • Oil refining stocks were down again for the fourth-straight week. The S&P Oil & Gas Refining and Marketing Index fell 3.2 percent this week.
  • With the global growth scare fueling more volatility in the commodity space, small cap stocks underperformed this week. The S&P/TSX Venture Composite Index fell 2.06 percent this week.
  • Base metals underperformed as poor economic data from Europe and China continue to negatively influence global growth outlooks. The S&P/TSX Capped Diversified Metals and Mining Index was down 2.01 percent this week.

Opportunities

  • Although the decline in oil prices has weighed on producers, many are shrugging off the effects as simply an overreaction to short-term oversupply. In fact, Baker Hughes Inc. stated that oil would have to fall much more, to $75 a barrel and stay there for an extended period of time, before energy companies had to consider cutting back spending. Likewise, Schlumberger said it still holds its long-term view on earnings.
  • Schlumberger proved to have a strong quarter as the company saw growth in reservoir production, increased international margins in almost every region and an increase in its buybacks to $1.5 billion. The company maintained its long-term outlook outlined in June, which reported and expected earnings per share of between $9 and $10.
  • Anadarko Petroleum and other partner companies are investing $2.2 billion next year to drill wells in Ghana’s Jubilee and Tweneboa-Enyenra-Ntomme oil fields. The projects should prove productive for the company.

Threats

  • The lower oil prices have increased the probability that the Colombian government will have to sell down part of Ecopetrol. The government is concerned the budget could be short of the Ministry of Finance’s projections for 2015, which could have repercussions for the tax and royalty regimes in the country.
  • Saudi Arabia is assumed to be content with the current depressed level of oil prices. The world’s largest oil exporter is determined to maintain its global market capitalization and will continue to produce in order to do so. Inaction from Saudi Arabia serves as a headwind for the oil-sensitive space of the energy sector.
Emerging Markets

Strengths

  • Easing geopolitical tensions in Eastern Europe boosted Ukrainian stocks this week. Oversold conditions in Ukraine had been extreme in the months of August and September. However, stocks rallied this week as Russia’s Putin and Ukraine’s Poroshenko met on Friday to discuss the terms of a gas deal between the two countries.
  • South African materials stocks rallied with precious metals this week. Global diversified and precious metals and minerals stocks had been depressed recently amid global growth and deflation scares. The bounce in metals and mining companies boosted the FTSE/JSE Africa All Shares Index this week, causing it to rise 1.58 percent.
  • Indonesia was the best performing Asian market this week, as local investors turned buyers on Friday after president-elect Joko Widodo met with opposition leader Prabowo Subianto ahead of presidential inauguration on October 20 for the first time since the July election.

Weaknesses

  • Global growth scares couple with falling oil prices led Middle Eastern stocks to underperform this week. Qatar, United Arab Emirates, and Egypt were down 6.43, 6.09 and 10.03 percent respectively.
  • Concerns over the stability of the Greek financial system spiked this weak as Greek equities and bonds declined substantially. Yields on 10-year Greek government bonds rose roughly 150 basis points this week to over 8 percent, the highest levels since January. The Athens Stock Exchange Index reached a 52-week low this week and closed down 7.27 percent.
  • Taiwan was the worst performing Asian market this week, as Intel’s quarterly report revealed a third-quarter overbuild in notebook computer shipments by Taiwanese makers which may lead to a correction in the fourth quarter orders.  UBS also lowered its year-end index target for Taiwan.

Opportunities

  • This week will mark the second week in a row that the dollar has depreciated. The falling dollar has alleviated many of the pressures facing commodity sensitive emerging markets. If the trend continues, we can safely expect more tailwinds for emerging markets and their currencies.
  • European stocks rebounded on Friday as the European Central Bank announced it will start buying assets within days. Recent growth and deflation scares have spurred the ECB to be more proactive. The provided stimulus should boost European growth and fuel import demand, which should be good for emerging markets.
  • Upgrade demand is set to gradually replace first-home demand as the primary driver for the Chinese housing market in the next 10 years, as the country’s first “only-child” generation, a boomer demographic, reaches 35-45 years of age when their first mortgage is paid off.  Looser government policies aimed at promoting higher mortgage adoption for this credit-worthier group, given China’s overall underutilization of mortgages compared with developed countries, should bode well for the property and banking sectors.

Home-Upgrade-Demand-from-Chinas-first-only-child-generation-may-be-unleashed-by-looser-mortgage-policy
click to enlarge

Threats

  • The Chinese government’s recent push to promote breastfeeding through education programs and such initiatives as adding more lactation rooms in public buildings could further dampen investor sentiment towards infant formula makers.
  • Saudi Arabia, the world’s largest oil exporter, is keeping production steady in order to preserve global market share. In doing so, the country is preventing any stimulation for oil prices. If oil prices remain depressed, oil leveraged emerging markets will continue to suffer.
  • Despite the positive turnaround in global equities on Friday, market behavior this week highlighted the extent to which investors are concerned about a deflationary, low-growth environment. The U.S. government’s 5-year breakeven inflation rate fell to its lowest level since 2011 this week. If deflationary pressures persist and global growth declines, clearly all markets will face serious problems.

Leaders and Laggards

The tables show the weekly, monthly and quarterly performance statistics of major equity and commodity market benchmarks of our family of funds.

Weekly Performance
IndexCloseWeekly
Change($)
Weekly
Change(%)
DJIA 16,380.41 -163.69 -0.99%
S&P 500 1,886.76 -19.37 -1.02%
S&P Energy 606.90 -6.83 -1.11%
S&P Basic Materials 293.66 +1.98 +0.68%
Nasdaq 4,258.44 -17.80 -0.42%
Russell 2000 1,082.33 +29.00 +2.75%
Hang Seng Composite Index 3,160.27 -19.25 -0.61%
Korean KOSPI Index 1,940.92 -35.24 -1.78%
S&P/TSX Canadian Gold Index 162.66 +0.06 +0.04%
XAU 77.08 -0.18 -0.23%
Gold Futures 1,238.90 +15.60 +1.28%
Oil Futures 82.97 -2.55 -2.98%
Natural Gas Futures 3.76 -0.10 -2.51%
10-Yr Treasury Bond 2.20 -0.09 -3.73%

Monthly Performance
IndexCloseMonthly
Change($)
Monthly
Change(%)
DJIA 16,380.41 -776.44 -4.53%
S&P 500 1,886.76 -114.81 -5.74%
S&P Energy 606.90 -81.18 -11.80%
S&P Basic Materials 293.66 -22.87 -7.23%
Nasdaq 4,258.44 -303.75 -6.66%
Russell 2000 1,082.33 -71.57 -6.20%
Hang Seng Composite Index 3,160.27 -332.01 -14.83%
Korean KOSPI Index 1,940.92 -108.49 -5.29%
S&P/TSX Canadian Gold Index 162.66 -17.15 -9.54%
XAU 77.08 -13.35 -14.76%
Gold Futures 1,238.90 +14.80 +1.21%
Oil Futures 82.97 -11.01 -11.72%
Natural Gas Futures 3.76 -0.25 -6.18%
10-Yr Treasury Bond 2.20 -0.43 -16.22%

Quarterly Performance
IndexCloseQuarterly
Change($)
Quarterly
Change(%)
DJIA 16,380.41 -596.40 -3.51%
S&P 500 1,886.76 -71.36 -3.64%
S&P Energy 606.90 -112.97 -15.69%
S&P Basic Materials 293.66 -19.51 -6.23%
Nasdaq 4,258.44 -105.01 -2.41%
Russell 2000 1,082.33 -51.28 -4.52%
Hang Seng Composite Index 3,160.27 -78.56 -2.43%
Korean KOSPI Index 1,940.92 -79.98 -3.96%
S&P/TSX Canadian Gold Index 162.66 -39.07 -19.37%
XAU 77.08 -25.37 -24.76%
Gold Futures 1,238.90 -81.50 -6.17%
Oil Futures 82.97 -20.78 -20.03%
Natural Gas Futures 3.76 -0.20 -5.09%
10-Yr Treasury Bond 2.20 -0.25 -10.26%

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Anadarko Petroleum Corp.: Global Resources Fund, 2.11%
Canadian Natural Resources Ltd: Global Resources Fund, 1.59%
Devon Energy Corp.: Global Resources Fund, 1.82%
Cimarex Energy Co.: Global Resources Fund, 1.80%
Peyto Exploration & Development Corp.: Global Resources Fund, 1.31%
Suncor Energy, Inc.: Global Resources Fund, 2.13%
Klondex Mines Ltd: Gold and Precious Metals Fund, 7.76%; World Precious Minerals Fund, 7.51%; Global Resources Fund, 1.22%
Argonaut Gold: 0.0%
Alamos Gold, Inc.: World Precious Minerals Fund, 0.04%
Primero Mining Corp.: Gold and Precious Metals Fund, 0.05%; World Precious Minerals Fund, 0.02%
AuRico Gold, Inc.: Gold and Precious Metals Fund, 1.85%; World Precious Minerals Fund, 0.41%
B2Gold Corp.: 0.0%
Detour Gold: 0.0%
Market Vectors Junior Gold Miners ETF: Gold and Precious Metals Fund, 0.16%; World Precious Minerals Fund, 0.17%
Tsakos Energy Navigation:
Jumbo SA: Emerging Europe Fund, 1.79%
Turk Telecom: 0.0%
Turkcell: Emerging Europe Fund, 1.79%
CSX Corp.: 0.0%
United Rentals, Inc.: All American Equity Fund, 1.92%; Holmes Macro Trends Fund, 2.23%
Plains GP Holdings LP: Global Resources Fund, 1.44%
Targa Resources Corp.: Global Resources Fund, 0.99%
Netflix: 0.0%
AbbVie: 0.0%
Shire: 0.0%
Fortescue Metals Group Ltd: Global Resources Fund, 1.68%
Global X Silver Miners ETF: Gold and Precious Metals Fund, 0.01%; World Precious Minerals Fund, 0.01%
Silver Wheaton Corp.: Gold and Precious Metals Fund, 1.10%; World Precious Minerals Fund, 0.35%
Western Forest Products, Inc.: Global Resources Fund, 0.83%
Baker Hughes, Inc.: 0.0%
Schlumberger Ltd: All American Equity Fund, 1.75%; Holmes Macro Trends Fund, 1.84%
Ecopetrol SA: 0.0%

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Was that the bottom? Nearly everyone is trying to time the market, so the financial media will focus on remaining risk versus signals of a bottom.

We have a little economic news next week, but plenty of earnings reports. Despite the news flow, the market reaction itself will be the main theme.

I expect the question of the week to be: Is the stock market correction over?

Prior Theme Recap

In my last WTWA I predicted that we would be asking whether corporate earnings strength could reverse the stock market decline. That was definitely the right question, but the answer is still in doubt. For most of the week it seemed like a resounding “No”, but buy Friday’s close losses had been trimmed. The issue remains in doubt.

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

Financial news is basically reactive – and usually not helpful for investors. For the first part of last week it was all about the reasons for the biggest market decline in three years. I was keeping a collection of links, but they are all very similar. Even some of the finest journalists were tasked with “reporting on the correction.” This produced disappointing stories with a laundry list of well-known problems from around the world. (For an explanation, see Josh Brown below).

There is never a discussion about which of these facts might already be reflected in market prices, nor the suggestion about the need for investors to look forward. Even the best sources cater to losing market timing.

The news flow this week will include plenty of corporate earnings reports. Once again these will be more important than the official economic data. In this context I anticipate more attention to the market rather than to the data. In particular, expect constant repetition of these questions:

Was that the bottom? Is the correction really over?

Here are some key takes on the potential for a market bottom:

Doug Short’s charts are worth more than 1000 words! Here is the story of the week. See the full post for longer term data, context and analysis of past drawdowns over the last few years.

dshort market week

Some attribute the Wednesday rebound to comments from St. Louis Fed President Bullard that the last cut in QE3 perhaps should be delayed because of continuing low inflation expectations. Here is a blog from an anonymous twenty-something that explains this viewpoint, which is implied in some mainstream sources as well.

Jim Cramer shifted positions during the week. He began by unveiling a list of ten tests for finding the bottom. By Friday he concluded that there had been enough progress on each to create an “investable bottom.”

The ECRI reports that global growth is weakening and that they made this prediction in July in one of their proprietary reports.

Brian Gilmartin does not typically engage in bottom calling, but he does note the increase in forward earnings estimates, suggesting that “Wednesday’s low could be the end…of this correction.” Brian’s work is always interesting, but especially so during earnings season. He covers many specific companies, and he does it well.

Dana Lyons notes the volume spike in inverse ETFs, but warns that it might be part of a “bottoming process.”

tumblr_ndl7ggaVJN1smq3o4o1_1280

Josh Brown covers all of the bases with his post on “correction Twitter.” I especially like his point #4, with the laundry list of correction causes.

Before turning to my own conclusions, 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

There was not much news. The US economic picture remains solid, while China is a bit weaker and Europe at near-recession levels.

  • Jobless claims remain strong. The 264,000 report was the lowest in 14 years. (Eddy Elfenbein).
  • European car sales up 6.4%. (Geoffrey Smith at Fortune)
  • The early earnings reports have been good. 68% have beaten on earnings and 63% on sales (FactSet’sEarnings Insight).
  • Putin sees problems for the global economy if oil is $80/barrel. (Tomas Hirst at BI). Why is this good news? Unwinding the reciprocal Ukraine sanctions is the single largest current market factor. My guess is at least 10%. The first step is recognition by the participants.
  • Rail traffic remains close to all-time highs. Todd Sullivan has the story. He also provides charts and analysis of other economic indicators. Good stuff.
  • Plunging oil prices create stimulus. We often hear that the cure for high energy prices is high prices. The process works both ways. Citigroup estimates a $1.1 trillion stimulus impact.
  • Housing starts and building permits moved higher. Calculated Risk reports it as an ‘OK’ report. Much of the gain is still coming from multi-family construction. Here is the chart showing that comparison:

StartsSept2014

  • Industrial production beat expectations. See Eddy Elfenbein for charts and analysis of the acceleration in this series.

The Bad
Most of the bad news was not about the economy. It was about the stock market reaction.

  • Oil geopolitics. The story has many cross-currents, but the path to progress is challenging. Startfor (via GEI) has a great report.
  • Forward earnings guidance has been weaker. FactSet analyzed the conference calls to see what factors have been cited:

FactSet Forward Guidance Q314

  • Builder confidence decreased to 54, missing expectations of 59. Still positive, but disappointing. Calculated Risk has the complete story.
  • The Beige Book showed little increase in economic growth. I always enjoy the detailed analysis from GEI.
  • Retail sales declined even more than expected, 0.3%, the worst economic news of the week. So far there did not seem to be a pickup from lower fuel prices. Calculated Risk has comparisons including the core and year-over-year data. Here is the long-term chart:

RetailSept2014

The Ugly

This week’s ugly news is the continuing Ebola story. The need for treatment in West Africa and international issues are now both commanding attention. It is a sad commentary that the story got traction only when there were cases in the US. I have been writing about this for months, noting that the economic effects are still relatively modest overall, but include concentrated effects in some sectors. Some astute observers (including Jim Cramer) have attributed plenty of selling to Ebola fears. One morning there was a nine-handle decline in the pre-market SPU’s (S&P futures) based on the announcement of one additional US case. I track this story closely, so I am just hitting the highlights here:

  • Cuba is cooperating, sending 460 doctors to West Africa.
  • It has become the biggest story on the campaign trail, with arguments rapidly falling to the lowest common denominator.
  • Inside the beltway politics also looms. Health leaders disagree on how much spending commitments have affected progress toward the best treatments.
  • Cam Hui provides perspective on the market effects. Hint: More modest than most think, including a provocative comparison.
  • Did bureaucracy at the WHO contribute to the crisis? (Jason Gale and John Lauerman at Bloomberg).
  • Ebola is even scarier than you think, according to these five myths. The “airborne” point is especially worrisome.
  • Your risk is greater in driving home from the airport than flying on a plane with one of the Ebola nurses.
  • Airline stocks remain under pressure. Perception is more important than reality.

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.

No award this week, although I see plenty of good candidates deserving sharp analysis and refutation.

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.

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

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 also is working on methods to improve performance from low-volatility stocks. 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.”

A continuing strength of Barry Ritholtz’s blog, The Big Picture, is the embrace of a wide variety of viewpoints. This week he highlighted an article from the Cleveland Fed on labor market slack, assuring that many more people would see it. This is wonkish stuff, but very important. Labor market slack is the reason that Chair Yellen gives for relaxing the prior unemployment guideline for the start of tightening rates. If you want to forecast the Fed, you need to understand this argument. The conclusion has the normal couching of the research, but suggests that “the unemployment rate has reached its long-run level.”

The Week Ahead

We have a more normal week for economic data and events.

The “A List” includes the following:

  • Initial jobless claims (Th). The best concurrent news on employment trends.
  • New home sales (F). Better housing growth would be an encouraging economic sign.
  • Leading indicators (Th). Despite some changes in the series, it remains a popular forecasting tool. Hale Stewart illustrates and concludes that the economy is in “decent shape.”

The “B List” includes the following:

  • CPI (W). No sign of inflation so far, so interest is secondary.
  • Existing home sales (T). Less direct economic relevance than new sales and construction, but still a useful indicator.
  • Chinese economic data (T). This includes GDP, industrial production, and retail sales.

The speech calendar is greatly reduced in front of the upcoming FOMC meeting.

The big stories of the week should come from corporate earnings announcements.

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 has continued the bearish call initiated three weeks ago. Most sectors have a negative rating and the broad market ETFs are all negative. The Felix trading accounts were completely invested inverse ETFs and some Latin American ETFs. Since Felix uses a three-week time horizon, the recent move has been timely. Felix does not anticipate tops and bottoms, but waits for evidence of a change.

90% of British retail forex traders lost money. This is in line with most results I see, despite the advertisements that make it all seem so busy. You really need to have a well-tested system if you intend to do short-term trading.

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” issummarized here.

Whenever there is a market decline, we are bombarded with “explanations” and predictions of disaster. To keep perspective I wrote a section last week covering these three points:

  • What is not happening;
  • Factors most often linked to major market moves; and
  • The best strategy for the current market.

If you missed this section last week, I urge you to check out the Investor Section of last week’s WTWA.

I also wrote a section about value investing last week.

If you are a value investor, it is up to you to determine what your investments are worth. If your methods are sound and the market disagrees, then you can use volatility to add more to your most attractive holdings. If you have made a mistake in your choices, you need to re-evaluate and move on. Price is what you pay; value is what you get.

I decided that I could make this point better and with a little humor in Why Investors Must Understand Value(with an apology to Mr. Buffett).

We continue to use market volatility to pick up stocks on our shopping list. We do this because we also sell positions when they reach our (constantly updated) price targets. Being a long-term investor does not require you to “buy and hold.” Taking advantage of what the market is giving you is always a good strategy.

Other Advice

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

Please read and enjoy the piece from Henry Blodget at Business Insider on 16 meaningless phrases that will make you seem smart on CNBC. This is one of the reasons that we use TIVO and mute while watching! If you are a regular viewer of financial TV, you will recognize all of these. The “easy money has been made” is a good example. Henry says that it implies “wise, prudent caution and that you bought or recommended the stock a long time ago.” You can waffle between further upside and the potential for risk. The other fifteen are nearly as good.

Ignoring the commentary noise is also a theme from Carl Richards at the NYT. See the great sketch! He quotes one of our favorites, Art Cashin, who accurately reflects the pulse of the market:

Of course, it’s led to some entertaining headlines and predictions. I think my favorite might be from theveteran trader Art Cashin, who told CNBC last week that “the S&P 500 index needs to stay above the 1,950 level to avoid further declines.”
After hearing that comment, a friend sent me his own explanation. Unless the market doesn’t go down, it will go down. If it stays up, it will not have gone down. Unless it goes down later, which will only happen if it doesn’t stay up.
Such precise predictions are a part of the noisy industry of forecasters and gurus that’s grown up around investing. Sometimes, they get it right, at least temporarily. The S&P 500 did indeed fall below 1,950 and is around 1,900 as of this writing. But it would only need a 3 percent gain to be back above that level again, which could happen in just a couple of days.

David Rosenberg (via Business Insider) has earned respect through willingness to change his opinions along with the evidence. His Tuesday note described a problem in market-timing, an excessive focus on the trees rather than the forest.

Prof. Robert Shiller’s CAPE ratio is the foundation of many bearish arguments. Jason Zweig eschews the usual media approach of trying to coax him to predict a crash. Instead, he produces a balanced explanation of how Shiller uses his own method. For his own portfolio he is still 50% in stocks, something I have frequently reported before. He does not find current readings to be extreme, and even muses about whether something might have changed. He likes health care and industrials.

25iq covers a dozen lessons learned from Guy Spier. It is a great read with good sources. Here is one example:

1.”The entire pursuit of value investing requires you to see where the crowd is wrong so that you can profit from their misperceptions.”  A value investor seeks to find a significant gap between the expectations of the market (price) and what is likely to occur (value). To find that gap the value investor must find instances where the crowd is wrong. Michael Mauboussin writes: “the ability to properly read market expectations and anticipate expectations revisions is the springboard for superior returns – long-term returns above an appropriate benchmark. Stock prices express the collective expectations of investors, and changes in these expectations determine your investment success.”
Value investing is buying assets for substantially less than they are worth and, says Seth Klarman “holding them until more of their value is realized.” Klarman describes the value investing process as “buy at a bargain and wait.”  It is critical that the value investor not try to time the market but rather make the market their servant. The market will inevitably give the gift of profit to the value investor, but the specific timing is unknowable in advance. If there is a single reason people do not “get” value investing it is this point. The idea of giving up on trying to time the market is just too hard for some people to conceive. For these people, timing markets is a hammer and everything looks like a nail. That you can determine an asset is mispriced now relative to intrinsic value does not mean you can time when the asset will rise to a price that is at or above its intrinsic value. So value investors wait, rather than try to time markets.

Here are the fifteen most-hated stocks based upon short interest. (Philip Van Doorn at MarketWatch) I am not recommending short selling, but you might want to do some extra research if you own any of these.

And here are some stock ideas from Ben Levisohn at Barron’s, who notes that the selling has been indiscriminate.

If you are stuck in gold, you might consult us about our gold bug methadone treatment. If you are out of the market completely, you might want to reconsider your approach. The current economic cycle is in the fifth inning. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. You can get our report package with a simple email request to main at newarc dot com. Also check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

I do not have a short-term market call. For the longer term, the headline risk is well-known and the potential for solutions are not newsworthy. This provides opportunity.

In WTWA I often share conclusions in an effort to be timely. Some of these eventually get a separate article and other spark a useful discussion in the comments. In that spirit, here are a few thoughts from last week:

  • I am amazed by Cramer’s list of problems. When he first produced it (Monday), I suggested to our team that these things were far from solution. By Friday it had all changed. I also dislike the combination of market data and fundamentals. People need to decide whether to trade or to invest.
  • Early week selling did not relate to data, despite the popular stories. No one cares about the Empire Index and a lower PPI is basically good. If you just looked at the retail sales data, the worst news of the week, you would find it disappointing, but not a disaster. It would be amusing to tell a group of “experts” in advance what the data will be for the day or the week and then let them guess the market result.
  • The Schlumberger conference call (transcript helpfully available on Seeking Alpha, a great resource for those watching earnings) provided helpful fresh information on global energy supply and demand providing an upbeat forecast. The selling in energy stocks has been indiscriminate, even though some (refiners?) may benefit from lower prices.
  • GE’s report also showed strength in several relevant sectors. These are not “one-off” companies, so I am paying some attention.
  • And finally, it is a continuing mistake to interpret every market move in terms of the Fed. The remaining QE is small. The exact timing of the end is of little consequence. Do not expect any more QE. The key Fed policy is the pace of interest rate increases and forward guidance. Whether the market likes it or not, that will remain “data dependent.”

© New Arc Investments

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After 27 months, SPX experienced its first 10% correction this week.

As we have detailed many times, this was an exceptionally long and uncorrected rise. Since its last 10% correction in mid 2012, SPX has risen an exceptional 59%.

Bulls will contend that the 2003-07 market was completely devoid of 10% corrections. This is misleading. That bull market struggled to break-even into the third quarter every year. It was a slow grind higher, completely unlike the pace of the past two years.

The big question is whether the correction is over and stocks will now rally into year end.

There were several indications that this week produced a wash out low. The most impressive of these is breadth.

SPX breadth became more washed out than at any time since the 2011 lows. By mid-week, just 40% of SPX stocks were trading above their 200-dma. Throughout the 2003-07 bull market, that level marked significant lows (lower panel). It also marked lows in 2010, 2011 and 2012 (green arrows).



The one caveat is that this is how bear markets begin (red shading). Even so, the initial low in 2007 was followed by a bounce to retest the prior high. A bear market without a bounce higher first would seem to be very unlikely.

The same breadth wash out occurred for the market leading Nasdaq. This week, just 20% of Nasdaq stocks were above their 200-dma, equivalent to lows in 2004 and 2011 (green lines). The only other times it was lower was during bear markets. Just looking at the percent of stocks above their 50-dma (middle panel), stocks were similarly oversold at least 10 other times in the past 10 years and each one resulted in a move higher over the next month.



Note, the move was net higher, but that doesn't mean that the ultimate low was in.  2011 is one example were the initial low was undercut. The same occurred in early 2008 before a strong bounce that ultimately led straight to a bear market.

There was a deterioration in participation at the September high, as fewer stocks remained in an uptrend while the indices moved up. That negative divergence has now been reset. The lows this week may be undercut in the weeks ahead, but the odds suggest net upside into year end, even if the overall market is ultimately heading into a bear market.

Volatility also spiked this week to 3 year highs. In a bull market, those spikes usually correspond to relative lows. There might be higher volatility ahead, but history suggests that volatility first subsides before spiking to a higher high: examples are both 2007-08 and 2010-11.



Volatility earlier this year reached historically low proportions (read further here). That led many to conclude that volatility would remain subdued for a multi-year period. 2004-07 and the 1990s were cited examples. This was flatly wrong. The spike in volatility this week was exactly the same pattern seen in both of those prior bull markets. Shown below are the 1990s.



Both 1994 and 1996 are similar to today. Both times, volatility spikes became more frequent and the advance in SPX became choppier; the prior years, like 2013, had been an uninterrupted and low volatility rise. Current markets may well be setting up for more volatility and greater undulation than most market participants expect. Nonetheless, the main point is the initial spike in volatility likely aligns with a relative low in SPX.

There are two more elements that we like to see at a low.

The first is for sentiment to become bearish. The evidence is very mixed, and for good reason. US equities were at all time highs less than a month ago, and time is an important element in washing out sentiment. The last wash out in sentiment occurred in 2012 and followed a pullback that was equal to the current one but lasted more than twice as long (chart from Charlie Bilello).



Fund managers have reduced their equity exposure in the past month but it is not at levels associated with a major low in the market. Fund managers are 34% overweight equities after reaching record high exposure this summer. A washout low would be under 20%; in 2012, funds were underweight equities (green shading; data from BAML; for more on this, read further here).



Among the weekly sentiment surveys, Investors Intelligence has the longest history. As we have pointed out before, investment advisors have been more bullish for longer than any period since 1987. Sentiment is only just beginning to move lower; if the past is a guide, it will take at least one month to become washed out (below 1.4x the number of bulls to bears).



But, the sentiment evidence is mixed. Last week, we showed that the Daily Sentiment Indicator was at a low (post). This week, NAAIM reached a low where only 10% of active investment advisors are net long. Put/call ratios (total and equity-only) have spiked to levels associated with near lows in SPX.



Equity fund flows are inconclusive. On the one hand, outflows over the past several weeks reached a minor extreme (squares). On the other hand, for a 10% fall, the outflows were small relative to February and August this year. And, stunningly, flows this week were positive (circle). In other words, investors were buying into weakness. Look closely and you can see that also happened in August 2013 and August 2014 on the way to the ultimate lower low in SPX (chart from SentimentTrader).



There's no clean conclusion from sentiment. One way to reconcile the differences is this: a temporary low in SPX has been reached but that it is part of a larger correction that will continue after a bounce higher. We have been discussing this scenario over the past several weeks: the A wave (down) completed this week, the B wave (up) is now underway and a C wave (down) will follow. That would allow sentiment (and asset allocations) to reach durable lows. It also implies a longer correction than what investors have become accustomed to (time).

Neither the breadth nor the volatility studies shown above would be in conflict with a retest of this week's low in the week(s) ahead.

The last element of a durable low is a loss of downward momentum. Into a low, momentum normally bottoms before price. That means the fall is rapid, then decelerates and bases. As an example, below is the 17% fall in mid-2010 compared to the current fall. Some sort of basing should ideally take place before the next move higher (chart from McClellan).



In the chart above, the rally within the green box is the B wave after which  the C wave completes the decline. In 2010, that phase of the correction lasted about one month.

Which bring us to the current market. The decline accelerated Monday thru Wednesday. The momentum low was on Wednesday, the same day as the price low. Even the more minor declines in the past 18 months showed a separation of momentum and the low in price (lines in the upper panel).



In comparison, during the 2011-12 period when SPX last dropped by 10%, the lows showed decelerating momentum in either or both RSI (top panel) or MACD (bottom). Price chopped at the low as momentum dissipated.



The same was true after corrections of 10% or more in 2009-10.



The weekly pattern is the same. The lows after 10% corrections since 2010 have created a divergence in momentum each time. One possibility is that SPX moves up this week before moving lower; since January 2009, SPX has dropped 4 weeks in a row 6 times; on 5 of those it moved up the following week. The one exception was in May 2011 but most of the weekly declines in that stretch were very minor.



SPX had closed last week on its 200-dma for the first time in two years. The pattern has been for SPX to bounce on the first touch of the 200-dma without losing more than ~2% (more on this pattern here). This week was one of those few times in the past 20 years that the closing low was 2% below the 200-dma. What happened next in similar cases?

Perhaps the most relevant comparison is from July 1996. Recall that 1995 and 2013 are the only years when the 200-dma was not visited at least once. When the 1995 streak ended, SPX made a long pierce, bounced, returned below the 200-dma, based and then moved higher.  That process took several weeks. Note in particular the hammer candle; the same candle formation occurred this past week. Note also the loss of downward momentum at the low in price.



Although the streaks above the 200-dma were much shorter, the breaks lower in 2005 are also relevant. Both times, price oscillated near the 200-dma, working off the downward momentum and shaking off longs before moving higher.



In none of these cases was the break of the 200-dma on its own significant. In each, the trend ultimately resumed higher. We will be looking specifically at the MACD and the slope of the 13-ema (arrow in the lower panel in the two charts above). A crossover in both will provide confirmation that the downtrend has likely ended.

Trend, as you would expect, is unattractive. None of the indices in the US or abroad are above their 50-dma or their 13-ema. In the US, 7 of 9 SPX sectors are also in short and intermediate downtrends. Again, on strength, we will be looking at crossovers in the MACD and 13-ema to confirm that the downtrend has ended.

The bounce in SPY at the end of the week retraced 38% of the fall from the September high. It also stopped below the August pivot low. Above 189-90, there is the potential to run all the way to the 196 area: that would be a 62% retracement, weekly R2 as well as the current 50-dma. That would be a typical B wave.



Much attention was paid to the relative strength in RUT this week. More than anything, that had to do with the large fall in the prior week that broke what had been support for one year; this week's gain retraced only a portion of that fall. RUT also landed on a long term support line, and bounced. It remains in a downtrend, especially so long as it is under the key 1080-90 level (blue line). Note how downward momentum and basing has not yet taken place as it did at prior lows (circles).



NDX both broke a long trend line and undercut the August low. This was the first time that a prior pivot low was decisively broken in two years. That signifies a change in market character. Friday's bounce ended under both of these key levels. Note also the yawning MACD and declining 13-ema (bottom panels; circles). We will be watching these as a confirmation of trend continuation or reversal.



Seasonality this coming week is neutral. There is no consistent pattern of gains or loses overall or in years (like this one) where an election is two weeks away. The election is likely to be a positive influence the week after: more often than not, stocks rise into an election, something to keep in mind on weakness this week (chart from Stock Almanac).



In summary, breadth and volatility measures are consistent with a low in price, but sentiment and momentum are not. We think the market is likely to work on forming a base, and a B wave higher followed by a C wave lower could be part of that. We are very cognizant that the November-January time period is typically the strongest of the year and believe, at least for the time being, that the current weakness is part of a long overdue correction as opposed to the beginning to a more serious bear market. 

Our weekly summary table follows.


© The Fat Pitch

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  • Inflation expectations have fallen sharply in recent weeks, driven by European disinflation, lower energy prices, and overall growth concerns.
  • The persistence of low inflation expectations may intensify the “lower for longer” theme via lower growth expectations and delays to potential Federal Reserve (Fed) interest rate hikes.

Inflation expectations have dropped sharply and helped to drive bond strength in recent weeks. All else equal, lower inflation, or the expectation of lower future inflation, helps boost bond prices as inflation risks fades. Market-implied inflation expectations, as measured by Treasury Inflation-Protected Securities (TIPS), declined to one of the lowest levels of the past five years [Figure 1].

A number of factors have worked to push U.S. inflation expectations lower, but the dominant driver has been disinflation in Europe. Eurozone annualized consumer prices are rising only 0.3%, the slowest pace since the end of the Great Recession of 2007–2009. Many countries, Italy being one, are experiencing outright deflation with local prices registering year-over-year declines.

Additional drivers of lower inflation expectations include:

  • Weak economic data in Europe. Aside from lower prices, Europe is flirting with its third recession of the past six years, raising fears about global economic growth.
  • Global unrest. Conflict in the Middle East, protests in Hong Kong, simmering tensions in Ukraine, and concerns over the spread of the Ebola virus are being viewed as potential disrupters to global economic growth.
  • Lower energy prices. Related to weaker growth expectations, the notable decline in oil prices since the end of June 2014 may reduce a key consumer expenditure.

In the bond market, the decline in oil prices may be having an outsized impact. TIPS’ inflation compensation is based on the increase in the overall Consumer Price Index (CPI), of which energy prices represent a significant component. Historically, oil price changes and implied inflation on TIPS have been closely correlated [F