- January 7, 2013
- In 2013, Resolve to Follow the Money
During these first days of January, many adopt an “out with the old, in with the new,” approach to shed bad habits or extra pounds. Washington opted for its same ol’ strategy when averting the “fiscal cliff,” as the addictive nature of “can-kicking is a transatlantic sport,” according to The Economist. The magazine suggests that the deal made in the 11th hour is “disturbingly similar to the eurozone’s.” The short-term fix did “nothing to control the unsustainable path of ‘entitlement’ spending on pensions and health care … nothing to rationalize America’s hideously complex and distorted tax code... and virtually nothing to close America’s big structural budget deficit.”
In the end, politicians agreed to end the payroll tax cut and raise taxes on the top earners; altogether, tax increases will total $162 billion in 2013. According to a Bloomberg article, it’s the first time since 1990 a Republican leader agreed to a boost on tax rates. The legislation also represents the largest tax increase in two decades, says the Wall Street Journal.
One negative consequence resulting from the new bill is an immediate hit to Americans’ spending cash. International Strategy & Investment (ISI) anticipates that the impact will occur in the first quarter of this year, with real disposable personal income (income after taxes and inflation) decreasing by 3.8 percent, says ISI. In addition, “real consumer spending is likely to remain sluggish at 1.5 percent,” says ISI.
Avoiding the “fiscal cliff” initially calmed the market, with equities and gold beginning to rally before the ink was dry. On January 3, I appeared on Fox Business to discuss the impact on gold and whether the yellow metal had the strength to increase for the 13th year in a row. I said that the lack of fiscal austerity combined with monetary reflation would keep fueling gold throughout 2013.
However, the Federal Reserve poured a bucket of cold water on gold after its minutes were released, with some members documenting their wish to stop quantitative easing (QE) before the end of 2013. While this appears to be a negative for gold, keep in mind that the Fed has always been divided, but when opinions diverge, leadership prevails, says ISI’s Roberto Perli. Chairman Ben Bernanke, along with William Dudley and Janet Yellen, continue to hold the belief that more accommodation is required.
In addition, the conflicting comment was made in the context of the labor market, so if we see QE end by the middle of this year, “it will be because the economy is getting stronger, and that would be a bullish development,” says Perli.
Regardless, we are seeing developed countries’ central bankers adopting very unconventional monetary policies these days, and “the base case for investors must remain that, when the pressure is really on, the choice will be made for yet more easing and yet more bailouts,” says Christopher Wood from CLSA.
It’s likely that the latest round of easing by the Fed was because Bernanke anticipated a reduction in spending and wanted to offset the hit taken by the consumer due to the tax increases. And historically, during times of QE, money flows to riskier assets.
A few weeks ago, I showed how money was heading to emerging markets, and it’s worth repeating, as the trend has continued in the new year. Since QE3 began in September 2012, $37 billion has flowed into emerging markets. In total, during 2012, nearly $50 billion flowed into emerging markets, with three spikes occurring in January, February and December.
Back in April 2012, I suggested that if you apply the principle of mean reversion, history appeared to favor China’s H shares to land in the top half of emerging markets on an annual returns basis. With a new leadership in place and its economy improving, investors have begun to gain confidence in the Asian giant, and in response to the significant flows, equities in China began to outperform other emerging countries, ending the year as a top-half performer on the Periodic Table of Emerging Markets.
Resolve to Follow the Money
Is it part of your New Year’s resolution to improve your investment portfolio? To help you accomplish that task, join our Outlook Webcast on January 9 at 3 p.m. CT. Our team of experts will be discussing ways investors can find opportunity by following monetary and fiscal policies as well as seasonal and cyclical patterns occurring in global markets and natural resources.
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- December 17, 2012
- A Face-Off Between Passive and Active Investing
Exchange-traded funds continued to attract assets in 2012 while money has been exiting equity mutual funds. Still a majority of assets continue to be invested in actively managed products: As of the end of 2011, of the nearly $13 trillion invested in funds, index and exchange-traded funds comprise only about 8 percent, according to the Investment Company Institute.
As active investment managers who have experienced bull and bear markets, the financial industry’s deregulation and re-regulation, and the shifting needs of baby boomers, we are pleased that actively managed mutual funds continue to be the choice for a significant portion of portfolios.
The ETF industry has matured from its adolescent days, yet it continues to morph in puzzling ways that produce mediocre results. In my blog, I’ve discussed some eye-openers to help investors understand the risks of ETFs before putting their money in a product that might end up with unexpected outcomes.
Take the relatively new iShares MSCI Global Metals & Miners ETF (PICK), which began trading at the beginning of February 2012. The ETF is based on the MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index, which is a non-diversified basket of companies located in developed and emerging markets that are involved in producing or extracting metals or minerals. Its 10 largest holdings make up 50 percent of the index, which makes it a more concentrated, potentially more volatile, portfolio.
By comparison, as of November 30, 2012, the top 20 holdings in the Global Resources Fund (PSPFX) make up 43 percent of the overall portfolio.
In theory, one chooses a natural resources investment to gain access to the companies that stand to benefit from the world’s growing needs of natural resources. In addition, commodities offer portfolio diversification, as they have historically had a lower correlation to the overall market.
However, in a faceoff, PSPFX would steal the puck from PICK, as the Global Resources Fund has outperformed the ETF by nearly 13 percentage points since PICK’s inception in January 2012.
PSPFX also added significantly more return with less risk compared to the ETF over the same timeframe. The Global Resources Fund experienced an annualized standard deviation of 15.95 percent compared to the PICK ETF, which had an annualized standard deviation of 24.34 percent, according to Morningstar Direct.
You can also compare two gold equity investment vehicles. Although gold miners have had a challenging year, the Gold and Precious Metals Fund outperformed the Market Vectors Gold Miners ETF (GDX) by 400 basis points.
As I often remind investors during presentations, there is no free lunch on the commodities table—every investment comes at a cost or a risk. When it comes to emerging markets and commodities, there are inefficiencies that we believe give active managers an edge. In emerging markets, the capital markets are not as sophisticated as in developed markets and the information can be less uniform and straightforward. Managers who have an explicit and tacit knowledge of the country and its way of doing businesses are likely able to flush out the best opportunities. We believe it is worth paying a bit more in management fees to get the expertise needed for these specialized markets.
The Eastern European area is a good example of a nuanced market. While the presidential reelection of Vladimir Putin in Russia caused markets to stress over how he would lead the country, Turkish stocks have experienced substantial growth. U.S. Global Investors’ Eastern European Fund (EUROX) benefitted from its ability to invest in the entire area: Russian stocks make up only about 37 percent of the fund while Turkey comprises 17 percent of the fund. See the fund’s regional breakdown here.
We believe this is why we have significantly outperformed the Market Vectors Russia ETF year-to-date as of December 13, 2012:
Indexers often argue that active managers have periods of underperformance. Fellow Canadian Wayne Gretzky has been called the greatest hockey player ever, holding or sharing more than 60 records that he collected during his 20 seasons of playing in the National Hockey League. He holds the NHL record for the most hat tricks—achieving three goals in a single game more than 50 times—and when he retired, Gretzky was inducted into the Hockey Hall of Fame.
However, under asset management’s rigid standards for active managers, the “Great One” might be considered a loser, as his team won the Stanley Cup “only” four times.
From time to time, active managers underperform; yet, they have the opportunity to add alpha. ETFs, on the other hand, are built to only match the benchmark and are never expected to beat it.
While ETFs offer instant execution, liquidity and lower fees, certain passive investments may not get you where you want to go over the long-term. The “hat trick” equivalent that Global Resources, Gold and Precious Metals, and Eastern European Funds has been able to achieve this year against their respective ETF peers is more diversification, better historical performance and less volatility.
Outlook on Natural Resources
Learn what our investment team believes will drive gold and natural resources in the new year by joining our Outlook 2013 webcast. Sign up today and email us with your questions, so we make sure we cover what’s on your mind.
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- November 30, 2012
- Managing Volatility and Loving it
The stock market can be a volatile place, which is why I often remind investors to “anticipate before you participate.” To be profitable in investing over the long-term, I believe you must manage your short-term expectations.
Nassim Nicholas Taleb’s article in the Wall Street Journal, which was adapted from his new book, Antifragile: Things That Gain From Disorder, helps readers think differently about volatility. He argues that we “need things that gain from volatility, variability, stress and disorder.”
A few years ago, our entire investment team thought his work was so vital to asset management that we all read his best-selling book, The Black Swan: The Impact of the Highly Improbable. In this latest essay, he builds on the black swan theory to introduce us to his powerful concept of “antifragility.” Whereas the word “fragile” means something has a tendency to break, as in glass or ceramics, the opposite of fragile, which means durable or robust, doesn’t quite capture this idea.
Rather, antifragility describes things that thrive and improve with volatility, stressors and uncertainty. In a Library of Economics and Liberty podcast, Taleb used an example of mailing a box of champagne glasses. On the package, you write “fragile,” with the hope that the glasses would arrive at their destination unharmed. This is what he indicated as the “lower bound” of fragile.
The upper bound—the antifragile state—might mean that instead of 6 glasses delivered, 8 would arrive. Or the glasses would arrive stronger in some way, or it would be like Greek mythology’s Phoenix, where “you shoot it and it comes back,” he says.
One application of antifragility is what certain stresses do to our physical and mental well-being. In the podcast, Taleb says, “If you spend Christmas vacation in a space shuttle, you'll come back with diminished bone density.” Instead of giving your bones a rest, they actually become weaker when not used. But, with the right amount of stress, research shows the human body improves.
In the WSJ, he explains this concept has applications not only in our physical lives, but also in our socioeconomic life. To that end, he lists five policy rules so that we can “establish antifragility as a principle.” Taleb writes:
“Modernity has been obsessed with comfort and cosmetic stability, but by making ourselves too comfortable and eliminating all volatility from our lives, we do to our bodies and souls what Mr. Greenspan did to the U.S. economy: We make them fragile. We must instead learn to gain from disorder.”
I believe investors too have been obsessed with seeking stable investments and exiting out of equity funds, making our portfolios potentially more fragile. Taleb brings to light a valid idea that many investment managers have understood for years: In global markets, one can gain from volatility.
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- November 27, 2012
- Making Sense of the Market
When I appeared on Canada’s Business News Network last week, Randy Cass challenged my thinking that it’s the best time of the year for stocks. Rather than focusing on short-term factors that may be impacting the markets, I prefer following bigger historical patterns, such as the fact that the timeframe between November and January has resulted in the largest gains for the S&P 500 Index.
Take another cycle that we track here at U.S. Global Investors: the presidential cycle. In March 2009, President Barack Obama injected $700 billion dollars into the economy. We’ve also seen three rounds of quantitative easing in the U.S. You can see the result of this easing below, as the performance of the S&P over the last four years under Obama has been one of the best over the past 50 years of any president, defying the odds of what people thought about the market.
I concluded by saying, “When you take a look at this quarter and you go back over the last 100 years of data points, mathematically it favors a rising market even in a looming difficulty taking place with the fiscal cliff.”
We also discussed investors’ selling of stocks, China’s improving HSBC Manufacturing Purchasing Managers Index (PMI) data, the possibility of Greece exiting the eurozone, and a weakening of Europe’s currency. Watch the clip now.
By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The HSBC China Purchasing Managers’ Index (PMI) is a composite indicator designed to provide an overall view of activity in the manufacturing sector and acts as a leading indicator for the whole economy. The PMI is based on new orders, output, employment, suppliers’ delivery times, stock of items purchased.
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- November 12, 2012
- A Portrait of Two Presidents
Last Friday, President Obama addressed the two topics that have been on many equity investors’ minds since election night: the economy and the dreaded “fiscal cliff.” In his speech, he delivered his familiar plan to combine spending cuts with increasing revenue by raising taxes on the wealthiest Americans. That’s “how we did it in the 1990s, when Bill Clinton was president,” says the president.
Clinton’s legacy was forged under a very different global scenario. He took the reigns just after the end of the Cold War in 1991. As the Soviet Union collapsed, we saw the very beginnings of globalization, with the world opening up to capitalist markets. There were lower labor costs around the world, so companies outsourced, encouraging global growth.
With lower military costs, the U.S. was benefitting from a “peace dividend,” allowing President Clinton to reallocate the spending from military purposes to domestic reforms. He deregulated the telecommunications industry, which helped unleash the Internet.
The confluence of global events combined with policymaking that encouraged business expansion and job creation helped Bill Clinton to be able to boast “the lowest unemployment rate in modern times, the lowest inflation in 30 years, the highest home ownership in the country's history, dropping crime rates in many places, and reduced welfare rolls,” according to the White House’s biography of the former leader.
Clinton also declared that “’the era of big government is over.’ He sought legislation to upgrade education, to protect jobs of parents who must care for sick children, to restrict handgun sales, and to strengthen environmental rules,” says the White House.
Over the past four years, we have not seen the same sort of government policies from Washington. The concern from business owners lately has been an issue that I’ve expressed over several months. When questioning whether an Obama win was a negative for equities, Credit Suisse pointed out that there was apprehension around a less business-friendly environment of “big government financed by taxation, more regulation etc.,” such as the additional cost incurred because of Obamacare.
To increase government revenue, it’s proposed that the top tax rates on dividends would increase from 15 percent to 39.6 percent for those earning more than $200,000 a year. He also wants to increase the tax rate on capital gains from 15 percent to 20 percent.
If this happens, Credit Suisse estimates that these tax increases would take about 5 percent off of the fair value of the S&P 500 Index, as “a third of the U.S. equity market is owned by individual investors who earn more than $200K a year.” Rather than reinvesting dividends and capital gains back into the stock market, these investors will be instead handing the money to the government.
Credit Suisse believes that even if a Mitt Romney administration would have been more business-friendly, there are two aspects to a reelection of Obama that equity investors might want to consider: 1) an Obama win means the Federal Reserve will continue to pursue its current policy and 2) a “fiscal cliff” compromise should be easier with an Obama victory compared to “a narrow Republican victory.”
The upcoming debate over the “fiscal cliff” is a new chance for the newly reelected president to show leadership, reach across the partisan table and work out a bipartisan solution. I believe a resolution to this important issue will be positive for markets.
As Credit Suisse says, “It is worth remembering that Clinton was able to do a deal with the Republicans in his second term (with a Republican House and Senate) after the lack of compromise in his first term led to a government shut-down.”
John Derrick, Director of Research, contributed to this commentary.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
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