Friday, March 16, 2012
5 Facts Your Broker Won't Tell You
Many investors rely on brokers and the financial media for advice on investments. This is unfortunate, because much of the advice from these sources is demonstrably wrong and harmful to financial health. Here are five investment facts your broker will never tell you:
1. Index investments are growing. By some estimates, $2.3 trillion is invested in passive funds and exchange-traded funds. What do these investors know that your broker is keeping from you?
2. Index funds have higher expected returns. According to an article by Christopher Philips in the Journal of Indexing, index fund investors can expect to outperform a majority of higher-cost actively managed funds over similar time periods. The evidence is quite compelling. Every report prepared by Standard & Poors comparing index to actively managed funds over the past 10 years found that, during a five year market cycle, a majority of active funds in most categories failed to outperform indexes. Is your time horizon longer than five years? If so, why is your broker recommending higher cost actively managed funds that are likely to underperform comparable index funds?
3. Index funds are more tax efficient. It's not the returns of a fund that should be your sole concern. It's how much of those returns you keep, after taxes. Philips notes the typical actively managed fund distributes a whopping 50 percent of its annual price appreciation in the form of capital gains, creating tax liability for holders of its shares. In stark contrast, index funds distribute an estimated minuscule 0.5 percent as long-term gains. Turnover in a portfolio creates taxable gains. Actively managed funds have much higher turnover than index funds because actively managed funds chase returns. Index funds sell only when necessary to track the index.
4. Indexing works in both highly efficient and less efficient markets. When you mention indexing to brokers, it is much like advocating a vegetarian diet at a cattlemen's convention. The reaction can range from outrageous to simply mistaken. Brokers love to tell you how indexing might have some benefit in highly efficient markets like the U.S. government bond market. In contrast, they will note that in less efficient markets, like small-cap U.S. and high yield bond funds, active managers strut their stuff and outperform. The data is to the contrary, but don't expect them to show it to you. Philips looked at 15 years of data as of December 31, 2011. Active managers in both small-cap U.S. equity and high-yield U.S. bond funds underperformed significantly.
5. Index funds outperform in bull and bear markets. You may have heard this statement (or some variant): In bear markets, active fund managers shine because they can shift assets in and out of the market and minimize losses. It's bunk. Phillips calculated the percentage of active managers who outperformed the market during various bull and bear markets. He found that in four of the seven bear markets since January 1973, the average actively managed mutual fund underperformed the index. It's worse in bull markets. Active fund managers underperformed in seven of the eight bull markets examined.
If you knew these facts, you would not invest in actively managed funds. Now you know.
Crude's Slick Ride
Mark Newton, Greywolf Execution Partners, discusses whether a pullback in oil would signal more trouble ahead.
Chart of the Day - Penske Automotive Group (PAG)
The "Chart of the Day" is Penske Automotive Group (PAG), which showed up on Wednesday's Barchart "All Time High" list. Penske on Wednesday posted a new all-time high of $25.15 and closed up 2.83%. TrendSpotter has been Long since Jan 17 at $21.11. In recent news on the stock, Penske on Feb 15 reported Q4 EPS from continuing operations at 47 cents, above the consensus of 40 cents. Sterne Agee on March 14 reiterated its Buy rating and raised it target for Penske to $29 from $24. Gabelli on Feb 16 said that Penske shares should be bought on weakness and reiterated its Buy rating. Penske Automotive Group, with a market cap of $2.1 billion, is an operator of franchised automobile and light truck dealerships and related businesses.
Thursday, March 15, 2012
How Commodities Predict Market Movement
Copper is more than the main ingredient in wire and gold is more than what we wear on our fingers and around our necks. These commodities, along with others like oil and grains, are used by investors to gauge the health and short-term direction of the market, but how does it work? What do commodity prices tell us that we can use as traders?
Gold
Gold is the best-known commodity because it appeals to investors and non-investors alike. Consumers may not think of gold as an investible product, but the story of gold is actually complicated. Not only does it serve as a commodity, but also as a currency. In the latter part of 2011 and into 2012, it has taken on the behavior of a stock often mirroring the overall market.
Traditionally, gold tends to move in the direction opposite the market. Investors use gold as a market hedge, dumping money into the commodity when the market is trending lower. In times when it is acting like a commodity, investors watch gold closely. When they see money pouring into GLD, the ETF that tracks the performance of gold or gold futures markets, they believe that a market downturn may close at hand.
Copper
Copper doesn't have the allure of gold since it's a base metal used largely for industrial purposes, but that doesn't change the fact that investors watch it closely for hints of the overall market sentiment. Because Copper is an industrial metal, investors use it as a way to gauge the health of the manufacturing and housing sectors of the world's economies.
Investors also use Copper as a way to gauge trader sentiment. When copper is rising, some see that as investors having an appetite for risky assets, since Copper is known as a volatile commodity. When copper loses value, it may indicate that investors are selling risky assets and a market correction may be imminent.
Oil
If gold is the best-known commodity, oil isn't far behind. Oil, and the way it is priced and traded, become talking points around water coolers and on the news, particularly when the price of gas is rising; but savvy investors know that oil has a big effect on the stock market.
Since somebody's win is always somebody else's loss, oil can only go up so much before stocks begin to feel the pinch. The Wall Street Journal reports that the recent oil rally has caused transportation stocks to come under pressure and this will cause consumers to stop spending, if the rally continues. As oil rallies, those not invested in oil and energy stocks quickly become defensive.
Not That Simple
If investors could look at the performance of these commodities and gauge the movement of the market, then everybody would be rich, so it must not be that simple. In fact, many experts believe that other factors, such as ETFs, have an artificial impact on the price of commodities. The SPDR Gold ETF has a market cap of $60 billion and holds gold in its London vault equal to the value of the fund. With this amount of gold out of circulation, that may drive the price of gold up.
In 2008, oil speculators were blamed en masse for the run-up of oil prices, but others claim that with the massive amounts of money pouring into commodity markets, such as oil, a few large investors making predictions about the future direction of a commodity could artificially move the price. All of these factors combine to make analyzing moves in commodities an educated guess that can only be used in combination with other factors.
The Bottom LineAlthough commodities may not move based strictly on supply and demand, investors use their price movements to gauge the overall sentiment of the market and make short-term decisions of where the market may go. Start watching these commodities and see if they predict the market corrections that are sure to come.
Foreclosures Hit Record High – Up 28%
from WealthCycles:
The housing market comprises the asset base of the banking and financial system. When home prices fall, the loss is not marked-to-market price, as the hit to lenders is taken when the foreclosure process is completed.
With the new year comes the annual promises of a housing recovery. As we reported on the 2012 outlook here, prices have continued falling. Institutions had better be ready to take some of the hit from their mélange of non-performing loans or continue to extend and pretend, delaying final write-down of loss.
Banks had better be ready, because according to the latest from Lender Processing Services, foreclosures have risen to an all-time high for the month of January, up 28%!
Oil, Alternatives, and Nuclear Weapons – An Interview with Marc Faber
by James Stafford, OilPrice.com:
Marc Faber: I think there is a risk that oil prices will go much higher. At the same time, the bullish consensus on oil is now at one of the most elevated levels it’s ever been. In other words, from a contrarian point of view, you shouldn’t buy oil right now.
I think it may go down somewhat. In general, if trouble breaks out in the Middle East, or if there is a war, I think the price of oil could go much higher.
OilPrice.com: What are your 3-5 year projections for oil prices?
Subscribe to:
Posts (Atom)