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Results 901–950
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Despite Recent Darkness, Long-Term Picture Brighter for Equities
A review of some of the data provides valuable perspective on the recent extreme market volatility. The recent weeks correction has taken US equities down about 18% from their April high. About 11% of that decline has come in the past three days. In comparison, when equity markets began to price in a double-dip recession last summer, US stocks fell 17%, a decline of virtually identical magnitude. Following sharp reversals of this sort, we have in the past seen the market quickly recover 33% to 50% or more of its losses.
Markets Enter Correction Territory as Economic Concerns Set In
Two weeks ago, we did not think that stocks were expensive. Now, with markets lower by
10%, stocks are pricing in a more negative scenario than we expect. To us, this suggests
that the present market could represent an opportunity to accelerate moves out of cash
and Treasuries and into risk assets.
Markets Will Look Past Debt Issues, But Not Yet
Over the past several months, stocks have been in a fairly narrow trading range, with strong earnings pushing prices higher and macro risks and the growth slowdown acting as counterweights. Once the debt and deficit pictures become more clear and once investors are able to price in the effects of the final deals, markets may be able to again focus on fundamentals. From an economic perspective, the US economy remains vulnerable, which is not a comfortable backdrop for risk assets, but we continue to believe that the probability of recession remains low and that economic data should improve.
US Fiscal Policy a Risk, But an Actual Default Is Unthinkable
Thanks to a new agreement to at least temporarily resolve the Greek debt crisis, some intermittent progress on the debate over raising the US debt ceiling, and strong corporate earnings results, stocks posted solid gains last week. Despite all of these debt-related risks, global indicators are not signaling a recession. One area of significant strength remains the corporate earnings landscape. We have also been seeing a rebound in industrial production and consumption. There are certainly areas of economic weakness and uncertainty remains high, but we expect to see stronger growth levels.
Amid Crosscurrents, the Positives Outweigh the Negatives
In addition to heightened levels of unease over the sovereign debt crisis in Europe and escalating noise over the debt ceiling in the United States, market volatility has been driven by uneven economic data. While the economy is in a recovery mode, it is important to remember that recoveries that occur in the aftermath of financial crises tend to be bumpy and slow. If we were in the midst of a normal recovery, real US GDP growth should have averaged around 6% over the last two years. It has averaged less than half of that. For the first half of 2011 will have expanded at a less-than-2% pace.
A Look at Our 10 Predictions for 2011
At the halfway point of the year, we thought it would be appropriate to look at the predictions we made at the beginning of 2011 to see where we stand. 1. US growth accelerates as US real GDP reaches a new all-time high. US real gross domestic product growth reached a new all-time high in the first quarter of 2011, so we have already gotten the second half of this correct. The first half will be dependent on the degree to which the US economy is able to accelerate in the second half of this year. 2. The US economy creates 2 million to 3 million jobs in 2011 as unemployment falls to 9%.
The True Size of the Budget Deficit
by Russ Koesterich of BlackRock,
While Washington debates raising the debt ceiling and cutting spending to achieve $1 to $2 trillion of savings over the next decade, it?s worth pointing out that these savings may never materialize because the existing official budget numbers are too optimistic across several fronts.
ETF Mythbusting: The Short Squeeze (Part 2)
by Noel Archard of BlackRock,
Today we?re going to use one of our own funds as a case study to address concerns about highly shorted ETFs and their potential susceptibility to a squeeze. First we?ll see if there have been any trading abnormalities during periods of significant inflows, and then we?ll walk through some scenarios to examine whether a significant redemption could cause a short squeeze. Part of the problem with testing the ETF short squeeze theory is that it hasn?t happened, and while no one can guarantee it can?t happen, we think it?s highly unlikely.
Thoughts on Rising Volatility
by Russ Koesterich of BlackRock,
In a recent mid-year update to our 2011 outlook, we noted how equity market volatility is likely to rise further in light of continued near-term weak economic growth. Already, spring?s unusually placid markets have given way to heightened volatility. The most recent cause has been anxiety over Greece, but investors are not at a loss for things to worry about. This is a sharp departure from just eight weeks ago. In April, the VIX Index, which measures implied volatility on S&P 500 options, the ?fear index? hit its lowest level since early 2007. Investors had a blindly optimistic world view.
ETF Mythbusting: The Short Squeeze (Part 1)
by Noel Archard of BlackRock,
I?m going to tackle the concerns raised in various articles and blogs that ETFs with high levels of short interest can cause a tremendous ?short squeeze? for either the ETF itself or for securities held by the ETF. This topic can be complex and there are a lot of moving parts, so I?d like to break it into two posts. Today I?m going to cover what a short squeeze is, and why it?s actually less likely to occur in an ETF than in a single stock. In my next post, we?ll use a specific ETF as a case study to try to show the effects of high short interest in different scenarios.
Monday Market Calls | European Banks & Germany
by Russ Koesterich of BlackRock,
This week, our attention first turns to European banks. Since February, the sector is down more than 15% versus a 3% drop for global developed markets. Back in February, our thesis was that European banks were not taking adequate account of the ultimate hit they were facing due to write downs on European sovereign debt. While we are still advocating a negative outlook for European banks, we believe that much of core Europe now appears very cheap, and is reflecting a lot of bad news. In particular, we continue to believe German equities look attractive for long-term investors.
Look For Improved Conditions in the Second Half of 2011
Last week the Fed elected to keep interest rates on hold. The central bank has downgraded its assessment of US economic growth. The Fed did, however, underscore that the factors causing the weakness were mostly temporary, highlighting higher fuel and food prices and disruptions from the natural disasters this year. We are not expecting to see any near-term changes in the Feds position and we think there is virtually no chance of a QE3. Conversely, given a slow recovery and a subdued inflation outlook we are not expecting to see higher interest rates until at least mid-2012.
Behind the Numbers: US Economic Activity & German PMI
by Russ Koesterich of BlackRock,
While many market watchers on Thursday focused on the higher-than-expected latest weekly domestic initial jobless claim data, we believe the key figures released Thursday were the Chicago Fed National Activity Index and Purchasing Managers Index (PMI) figures for Germany. The US initial jobless claim applications in the week ended June 18 increased 9,000 is clearly another sign of the decelerating recovery. Still, that the May Chicago Fed National Activity Index came in at -0.37, well below expectations of -0.05 but above April?s -0.56 reading, is especially important.
The Most Serious Risk to the Recovery: Oil Prices
by Russ Koesterich of BlackRock,
While we believe the recent economic slowdown represents a deceleration rather than a reversal of the global recovery, there are certain events that we believe could turn the current fragile recovery into a failed one. In particular, we believe investors should pay careful attention to events in the Middle East. Why? We believe that the most serious risk to the global economy is another spike in energy prices. While the events that began in Tunisia earlier this year were both unexpected and unprecedented, the world is now aware of the political fragility of large parts of the Middle East.
Investors Should Look Past Near-Term Risks
There is no shortage of things to worry about, an environment that has caused stocks to move in a sideways pattern for close to two months. Investor anxiety and market volatility levels will remain elevated for the time being. At some point, stock valuations will settle at a level where investors feel adequately compensated for the downside risks facing the market. We are retaining a constructive view toward the economy and the markets and we suspect such a valuation level is not too far away. Investors should view the current period of weakness as an opportunity to take on additional risk.
Update on The Case for Equities: The Slowing Recovery
by Russ Koesterich of BlackRock,
Last month, we described why we believe that over the long term, there?s a case for the outperformance of equities. But what does the slowing recovery mean for equities? While we have been arguing that the summer is likely to be characterized by higher volatility, we believe that absent a dramatic economic slowdown, equity markets still appear reasonable. The fact that equity valuations reflect much of the bad news should help cushion the near-term downside for stocks. And long-term, equities still appear to better reflect the world?s risks and worries than their pricier cousin, bonds.
Time to Float? The Investment Case for Floating Rate Notes
by Matt Tucker of BlackRock,
With QE2 winding down at the end of June, many analysts and investors are speculating that the end of the purchases may signal the beginning of a tightening cycle, creating concerns about rising interest rates. Since fixed rate bond prices decline when interest rates rise, this has prompted many investors to buy shorter duration securities to help protect their fixed income portfolios from rate increases. Another solution that investors may consider are floating rate notes (FRNs), which can help investors reduce their exposure to interest rate increases.
Russ Koesterich Reviews ?This Time is Different: Eight Centuries of Financial Folly?
by Russ Koesterich of BlackRock,
The recent recession has been, and will continue to be, very different from the typical post-World War II recessions. Since there are so few recent examples to guide us, it?s important not to draw conclusions about the current recovery just by examining the last 50 years or so. Taking a longer-term perspective is key and that?s precisely what economists Carmen Reinhart and Kenneth Rogoff do. While the book came out in 2009, it is especially relevant to today?s investors as it helps put the effects of the recent credit crisis in the right historical context: a very long-term one.
Market Correction Presents Potential Buying Opportunity
A key difference between the 2010 correction and what we are seeing now, however, is the degree of the downturn. So far, equity markets have fallen only about half as much as they did last year. This comparison, of course, leads to the question of how much further the current correction will run. In our view, the answer will be largely determined by the degree to which the economy will either accelerate or decelerate, and while the current economic data continues to be weak, we are expecting to see a rebound in the third quarter of this year.
Tax Gain Harvesting: Don?t Forget about 0% on Cap Gains and Qualified Dividends
by Kevin Feldman of BlackRock,
When it comes to paying taxes on your investments, it doesn?t get much better than zero. Near the end of each year, we tend to talk a lot about tax lost harvesting. It?s a popular use of ETFs, where an investor sells an underperforming stock or fund at a loss, buys an ETF with a similar exposure and risk profile, and holds the ETF for the 30 day ?wash sale? period during which they?re prohibited from re-purchasing the original security in order to claim the loss for tax purposes. The strategy is designed to capture the capital loss and possibly lower taxes for the year.
Behind the Numbers: The Latest from the Federal Reserve
by Russ Koesterich of BlackRock,
On Wednesday, the Federal Reserve Board released its latest Beige Book report, which provided more color on the recent slowdown and indicated the recovery is likely to be anemic and uneven. According to the report, which is a summary of anecdotal information from each Federal Reserve Bank on its district?s current economic conditions, ?economic activity generally continued to expand since the last report,? though it did slow somewhat in four of the 12 districts. In particular, ?some slowing in the pace of growth? was noted in the New York, Philadelphia, Atlanta, and Chicago districts.
Monday Market Calls | US Retailers and Emerging Market Bonds
by Russ Koesterich of BlackRock,
Call #1: Maintain Underweight US Retailers. Last week, the main monthly gauge for manufacturing activity and May?s non-farm payroll report both came in weaker-than-expected and both confirmed that the economy is experiencing a dramatic slowdown. Call #2: Neutral Emerging Market Bonds. The other implication of a slower global economy is that bonds should do better relative to stocks. Given what appears to be a case of extreme over valuation, we would still advocate a negative view on US Treasuries, but we are now changing our view of emerging market bonds from negative to a neutral stance.
Disappointing Data Should Be Temporary, But Ultimately All Depends On Jobs
A stream of increasingly disappointing economic data helped accelerate the multi-week correction in stocks. The most recent high-profile evidence pointing to a slowdown in growth came in Fridays jobs report for May. For the month, total nonfarm payrolls grew 54,000 (consensus expectations were for over 150,000). Additionally, the unemployment rate unexpectedly rose to 9.1%. There has clearly been a soft patch in economic performance this spring, and as such, the employment growth rate is slowing rather than accelerating. In addition the ISM Manufacturing Index for May dropped sharply.
ETF Mythbusting ? Synthetic ETF Considerations
by Noel Archard of BlackRock,
With headlines like ?ETFs: The Next Financial Time Bomb?? I myself would be alarmed about the safety of investing in ETFs, if I didn?t understand that there?s more to the story. The FSB?s April report, entitled ?Potential financial stability issues arising from recent trends in Exchange Traded Funds? focused on two risks. First, the risks associated with the structure of ?synthetic ETFs?; and second, the use of a practice called securities lending in ETFs. For the sake of pithiness, I?m going to tackle the former issue here and the latter in another post, which you?ll see published shortly.
What?s Gold Really Worth?
by Kevin Feldman of BlackRock,
Determining an exact value for gold isn?t easy?but the pressure to do so is diminished by the fact that gold shouldn?t be a short-term investment. The drop in silver?s price earlier this month suggested that some major market players had decided that silver had risen far above a reasonable valuation. In the aftermath, some writers argued that the price drop of about 27% for the week of May 2nd was a reasonable correction. Since some investors still link gold and silver some market observers and gold investors wondered if gold, down about 4 percent last week, was also due to plummet.
Overweight Healthcare and Exiting Australia
by Russ Koesterich of BlackRock,
This week, our attention turns to the recent slowdown in the global economy and what it means for investors. Over the past month, both equity and commodity markets have staged a modest retreat. One potential cause of the slowdown is the lagged impact of higher commodity prices, which have historically acted as a drag on growth. Late last year, we advocated an overweight to Australian equities, which we then reiterated in early April. Since the initial call, iShares MSCI Australia Index Fund (EWA) has gained around 6.5%. We are now changing our view to neutral for a number of reasons.
Positive Forces Should Win Out, But It Will Take Some Time
Economic data has continued to come in on the weak side, which caused stock prices to slide yet again last week. In our opinion, some of the recent weakness in economic data can be attributed to temporary factors such as the spike in oil prices, the natural disasters in Japan and flooding in the Southern United States. In any case, however, the soft patch in the economy has dented the pace of economic acceleration and we expect to see some continued signs of weakness in the weeks ahead, including perhaps in this Fridays labor market report for May.
The Case for Equities
by Russ Koesterich of BlackRock,
With global equity markets up over 100% from their 2009 lows, many investors are questioning whether it is time to lower their strategic allocation to stocks. While there are no shortages of risks facing global equity markets, overall we find that most markets are fairly valued and arguably already reflecting some of the risks ? particularly higher inflation and interest rates ? that are likely to challenge the global economy. We believe that over the long term, equities are still likely to produce higher nominal (inflation-adjusted) and real returns than other financial assets.
In Good Company ? Institutional ETF Usage Trends
by Kevin Feldman of BlackRock,
More institutional investors are making ETFs part of their portfolio strategy, and that?s good news for retail investors. With many innovations, institutional investors are often the first in. Later the retail investors follow. ETFs, however, have shown a slightly different pattern. After 1993, when the first ETF was introduced in this country, ETFs were primarily of interest to institutional investors. At first, their main use was as a place to hold cash before investing in a new asset class, but institutions soon began using them for other purposes, such as tactical allocations and hedges.
Risks Are Rising, but the Long-Term View Remains Positive
The recently weaker tone in equity markets can be attributed to a broad slowdown in economic data. A longer-term retrospective view shows that the pace of economic growth has been gradually fading over the past several months. Some of the decline can be explained by seasonal factors or factors that may prove to be temporary. In any case, however, at this juncture it appears that the recovery or acceleration phase of the business cycle may be ending. We believe the economy is now shifting into an expansion mode, and the question will become how long that expansion will last.
The Federal Debt Ceiling and Treasuries
by Russ Koesterich of BlackRock,
The federal government is limited by law as to the amount of debt it can issue. Currently the debt ceiling is 14.3 trillion, an amount that was exceeded last Monday. Fortunately, the government can operate and pay its obligations through various accounting mechanisms. These mechanisms will allow the government to continue to function and avoid defaulting on its existing debt through early August, after which point the government could theoretically default on its Treasury obligations, something that has never happened in US history and would obviously be catastrophic for financial markets.
What?s Eating You? Global Inflation and Your Portfolio
by Matt Tucker of BlackRock,
Headlines have been filled with news about inflation, from rising commodity, precious metals and gas prices to higher prints of the consumer price index. Traditionally investors have looked to US real estate, commodities and US TIPS to help protect against inflation. As news of rising foreign inflation reaches the US, investors may now be asking if they need to think this in the context of their portfolios. Is global inflation different than US inflation? Could investing in assets that help protect against global inflation increase a portfolio?s efficiency? Am I missing an opportunity?
Cause or Effect: ETF Trading Volume Impact on Volatility (and Vice Versa)
by Noel Archard of BlackRock,
If you read Russ Koesterich?s blog post from Monday, May 12th, you already have an idea of what has been going on with the price of silver. The commodity was up over 150% over the prior 12 months before going through a downward correction and shedding 30% of value. Our iShares Silver Trust (SLV) became a focal point during the course of the week as volatility spiked, and the usual questions popped up about how people use ETFs, and whether or not ETF trading volume is caused by price volatility, or if it?s in fact a contributor to the volatility.
Central Banks and Gold: Still Net Buyers
by Kevin Feldman of BlackRock,
There are a number of reasons why gold and silver don?t move in concert, but one notable reason is the purchasing of gold by central banks. In 2010, for the first time in 20 years, the world?s central banks bought more gold than they sold, perhaps a reflection of anxieties following the global economic crisis and a sense of gold?s historical reputation as a repository of value. Over the past three years, Europe?s central banks really haven?t sold any gold at all; between December 2010 and February 2011, they collectively sold a whopping .2 tons of their gold, according to a recent report.
Europe and Volatility
by Russ Koesterich of BlackRock,
The news in Europe continues to be mixed. On the plus side, the core countries in Europe continue to post strong economic growth. We had more evidence of that this week with solid GDP results from both Germany and France. The problem of course remains the periphery, particularly Greece. Greek debt was downgraded again and markets are now convinced that Greece will need to restructure. US market volatility has been its lowest since 2007, with the VIX Index ? which measures implied volatility on S&P 500 options ? hitting a four year low of below 15 in April. We believe this is too low.
The End of QE2 Should Be a Non-Event for Investors
Stock markets were flat-to-down last week as economic data continued to be mixed. In other markets, commodity prices continued to fall and the US dollar moved higher. While we do not believe that the long-term secular uptrend in commodity prices has ended, we do think that the cooling effect could be in place for some time, which will hopefully be a positive for both economic growth and stocks. Data suggests that the global economy has slowed recently, but we believe that it is still in the midst of transitioning from recovery to self-sustaining expansion.
End of Debate | Research Shows ETF Usage Growing
by Kevin Feldman of BlackRock,
It?s time to end the debate about whether adoption of exchange-traded funds is on the rise. According to new reports from kasina and Cerulli Associates, advisors? use of ETFs is growing. In a March 2011 survey from kasina and Horsesmouth?s FA Vision, a service providing data about advisors, about three-fourths of advisors said they use ETFs in their client portfolios and more than half (56%) said their usage of ETFs increased in the past year. The results are based on 768 responses from advisors across channels and Hari Krishnaswami, FA Vision Product Manager, shared them with us.
Despite Economic Soft Patch, Bull Market Should Persist
Stocks fell last week amid a great deal of economic crosscurrents. The major story in the headlines is, of course, the death of Osama bin Laden. While the news can be viewed as beneficial from an overall perspective of improving the mood of the general public (which could have a positive impact on investor confidence), it is unlikely to have any meaningful impact on the economic or financial outlook. In our view, issues such as corporate earnings trends and economic data releases are almost certain to overshadow the impact of bin Ladens death.
Equities Continue Their March Despite Rising Risks
Last week featured a rash of economic and earnings news as well as Federal Reserve Chairman Ben Bernankes historic press conference. All told, investors interpreted last weeks events positively, which helped stocks climb higher yet again. For the week, the Dow Jones Industrial Average climbed 2.4% to 12,811, the S&P 500 Index advanced 2.0% to 1,364 and the Nasdaq Composite climbed 1.9% to 2,874. With last weeks gains, several stock indices reached new all-time highs, while the S&P 500 Index reached its highest level since before the credit crisis erupted in the summer of 2008.
Near-Term Turbulence Wont Upset Positive Equity Backdrop
Equities remain in the broad trading ranges they have been tracing for months, but made a strong move to the top of those ranges this past week. The big news event in the US was the S&P downgrade of the US outlook, causing investors to focus on the possibility of the US government losing its AAA rating, and making it likely the budget problems will become the preeminent issue in the 2012 campaign. The looming debt ceiling vote is the proverbial bargaining chip in the middle of the chasm between the two parties on deficit reduction.
Higher Energy Prices Continue to Constrain Market Gain
It has been a while since we have experienced two consecutive weeks without market gains. Given recent higher energy prices and some softening of economic data, however, that now has indeed come to pass. Over the last several weeks, expectations for first-quarter economic growth have been ratcheted down. Several areas of the economy have been pointing to slowing growth, including a softening of business spending on equipment and software, a slower-than-expected rise in inventories, weakening trade data and contracting construction activity for both the residential and nonresidential sectors.
U.S. Budget Watch: Much Ado About Nothing
by Russ Koesterich of BlackRock,
Friday Congress and the White House agreed to cut $39 billion in federal spending to avoid a shutdown. The agreement would fund the government for the remainder of the fiscal year, which ends on September 30th. In other words, after weeks of partisan debate, Congress and the White House were able to reach an agreement on 1% of the federal budget. What remains to be settled are three more serious and contentious issues: the imminent breach of the federal debt ceiling, the 2012 budget, and the long-term solvency of the three main entitlement programs Social Security, Medicare, and Medicaid.
Despite Near-Term Risks, Stocks Remain Resilient
The preponderance of the economic and market-related news skewed to the negative last week, with an additional earthquake in Japan, rising oil prices, an interest rate hike by the European Central Bank (ECB), escalating debt problems in Europe and increasing noise about the since-averted potential federal government shutdown. Despite this backdrop, however, US equities remained resilient and were roughly flat for the week, with the Dow Jones Industrial Average up marginally to 12,380, the S&P 500 Index down 0.3% to 1,328 and the Nasdaq Composite down 0.3% to 2,780.
Using EWJ to Access Japan ? A Price Discovery Case Study
by Noel Archard of BlackRock,
Is EWJ a perfect proxy for Japan? I?d go out on a limb and say it?s one of the closest proxies available for U.S. investors. It gives U.S. investors the opportunity to invest in a diversified basket of Japanese securities during U.S. market hours, and it gives the investment world a vehicle to price new information into the securities even when they are closed for trading on their local exchange ? that?s about as close as you can get. At the end of the day, EWJ worked exactly how we?d expect it to work in a tumultuous market, and that?s what counts in our book.
Mega Caps and Russia
by Russ Koesterich of BlackRock,
While we remain underweight emerging markets in general, one emerging market is looking particularly cheap. While we would be concerned about having a long-term overweight to Russia given that country?s political situation, from a short-term perspective the market looks interesting. We first mentioned Russia as a possible play in early February ? since then the benchmark index is up nearly 7%, but Russia still looks cheap trading for less than 6x earnings. Also unlike China or India, which are negatively impacted by higher oil prices, Russia is a natural beneficiary of the spike in crude.
Labor Trends Signal Economic Shift to Self-Sustaining Mode
Although markets contended with some downside risks last week, including higher commodity prices and ongoing debt issues in Europe, stocks managed to post further gains as they continued to bounce back from their recent market correction. In economic news, one of the highlights last week was the March employment report that was released on Friday. For some time now, leading labor market indicators, including jobless claims, profit trends and lending standards have been pointing in a positive direction, and we are finally also seeing impressive growth figures in private sector jobs creation.
Monday Market Calls
by Russ Koesterich of BlackRock,
As Europe continues to muddle along, much of the bad news has been discounted in with the exception of the banks, which are likely to continue to remain under pressure. S&P cut Portugal?s rating two notches as its parliament rejected the government?s new austerity measures, prompting Prime Minister Jose Socrates to resign. Meanwhile Moody?s downgraded 30 small Spanish banks with mostly negative outlook following the earlier sovereign debt rating downgrade. However, despite the banking issues, Spain has been able to continue financing its debts.
Equities on the Rise Despite Geopolitical Risks
Risk assets (and equities in particular) powered to a strong week of gains, with the Dow Jones Industrial Average climbing 3.1% to 12,221, the S&P 500 Index advancing 2.7% to 1,314 and the Nasdaq Composite rising 3.8% to 2,743. Although a number of near-term risks remain (particularly related to the unpredictability of escalating unrest in the Middle East), we maintain our view that equity markets are likely to continue their longterm trend of outperformance.
iShares Bi-Weekly Strategy Update
by Russ Koesterich of BlackRock,
Last week, world equity markets suffered their sharpest correction since August of 2010. Unrest in the Middle East and sovereign debt issues in Europe are contributing to the spike in volatility, but last week?s sell-off was primarily driven by the earthquake in Japan and related concerns over the safety of its nuclear power plants. The events in Japan are unlikely to detract from global growth, or change the market dynamics favoring equities. In fact given the recent flight to safety and accompanying drop in nominal bond yields, we reiterate our preference for equities over bonds.
Results 901–950
of 1,011 found.
